Employee Ownership Trusts – Power to The People!
We could be set to deliver a ‘very British Coup’ in terms of company ownership in the form of the Employee Ownership Trust (EOT).
EOTs were introduced in the 2014 Finance Act as a spur for wider share ownership and a new way for entrepreneurs to plan exits and succession, without having to take a leap in the dark in putting their business, their ‘pride and joy’, in the hands of new owners.
Culturally this is no small change for British mid-market business. But in Western Europe intergenerational businesses with deep local roots are an integral part of the fabric of the business world.
EOTs are an indirect form of share ownership whereby a trust holds the controlling stake in a company on behalf of its employees. The EOT must benefit all employees equally and must control at least 51% of the shares.
How it works is straightforward. The company establishes the EOT. The company is independently valued and the owner/s sell their shares to the EOT. The EOT pays for the shares from reserves and out of future profits. Very importantly, these payments are free of Capital Gains Tax. Before this, a comparable trust mechanism meant a painful ‘dry’ Capital Tax payable by the entrepreneur at the time of sale.
Have no fear, the M&A market is not going to face collapse. There are always going to be entrepreneurs that see the gains of making a lucrative sale to a third party as the impetus to take the risks necessary to build a successful business. But for some entrepreneurs who are content to realise value over time and keep the essential ingredients of the business firmly in place, EOTs have a lot to offer.
Praetura Commercial Finance in the ETO Driving Seat
At Praetura Commercial Finance we are well versed in EOTs and have been helping businesses in the North West navigate this relatively new road.
Raised Floor Solutions (RFS), based in Skelmersdale, Lancashire, was established in 2003 as a specialist composite flooring contractor. RFS is the leading approved supplier and installer of Kingspan Multideck products with a 10% share of the composite UK floor decking market.
Raised Floor Solutions (RFS) was seeking to adopt an employee owned model to ‘future proof’ the business and the jobs within it.
Graham Hewitt, Co-founder and Managing Director of RFS, said: “Last year we received several approaches from competitors and private equity firms keen to buy the business. As attractive as those offers were, they highlighted how important it was for us to ensure that, whatever happened in the future, the business ethic would continue, and our staff would be well looked after.”
Praetura Commercial Finance was invited to provide a £2,500,000 funding line, enabling the shareholders of RFS Group, the parent company of Raised Floor Solutions, to transfer a 51% majority shareholding of the business to an Employee Ownership Trust (EOT) set up for the benefit of current and future employees.
Graham continued: “An Employee Ownership Trust can be viewed as a direct alternative to a management buyout but you are involving all of your employees rather than a select few in the future of the business. The revolving facility delivered by Praetura Commercial Finance is an ideal structure in that it moves in line with the growth of the business, without the need to renegotiate terms. It also offers flexibility, without the ties and covenants of a traditional fixed term bank loan.”
If you would like to explore the EOT route for yourself, please call me on 0161 302 6310 for a confidential exploratory chat, or email email@example.com