Are Employee Ownership Trusts the answer to the succession crisis?

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Guest blog by Ewan Regan, Senior Associate, Anderson Strathern

There is one area of the Scottish economy that is quietly booming. Amidst talk of the succession crisis with the ‘silver tsunami’ of business owners who reach retirement age and want to exit their business, an increasing number have found a solution that fits their aspirations perfectly. Many business owners are now considering a sale to an Employee Ownership Trust (EOT).   There are many reasons a sale to a trade buyer is not attractive, a management buyout isn’t desirable or feasible, and in some cases, despite being a good going concern, there just isn’t a buyer. A sale to the employees may be the ideal answer.

The EOT was introduced as part of the Finance Act in 2014 as a specific vehicle to encourage more businesses to consider employee ownership.  Business owners who sell a controlling interest in a company to an EOT may qualify for exemption from Capital Gains Tax for the transaction.  It’s a significant saving. There are benefits for employees, too.  Employees in companies that are majority owned by an EOT can be paid an annual bonus, tax free up to £3600.

There are other benefits too. Employee owned businesses tend to outperform conventionally structured companies on just about every business metric. Companies owned by employees are likely to be more productive, with happier staff and customers than their peers.  Innovation levels are higher and wastage is reduced.  It’s easy to see why the structure appeals.

Increasingly, a sale to an EOT is becoming the first option on the list of potential succession solutions for the business owner considering retirement.  The advantages are clear.  The owner will achieve a fair price for the business.  The seller can dictate the pace of their own exit, not something over which they would have much control in the event of a trade sale.  They will also have a fair degree of influence over how the company looks post-ownership transfer.  Indeed, it’s possible to incorporate certain stipulations into the legal documentation. For example, the vendor can insist the business will retain the company name or include guidance on the composition of the company board.

From a legal standpoint, an employee ownership transaction is often a smoother, more collaborative deal.  The parties involved tend to be working towards a shared vision.  This contrasts starkly with a trade sale where the buyer and the seller strive to attain the best deal for themselves.  This can often become quite adversarial.

There remains a lack of awareness and knowledge about employee ownership and the importance of receiving the appropriate expert advice is critical to achieving a positive outcome. Anderson Strathern has a wealth of experience of advising on succession options, and in advising on EOT transactions, including recent deals for Safedem and Exmos.  It’s not an option that will fit with every business. It’s interesting to note that of our clients who have taken this path, every single one is confident they made the right choice.  A properly constructed sale to an EOT can fit well with the aspirations of the company owner, inspire and incentivise the employees, and provides a stable platform for the future growth of the business. It’s certainly an option to explore.

For further information on Employee Ownership Trusts contact Ewan Regan on 0131 625 7202.

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