Selling your business to an Employee Ownership Trust is looking even more attractive after the budget – but that’s not the only reason business owners and their advisers should be talking about it.
Employee Buyouts (EBOs) have been growing in popularity over the last few years.
Tax changes announced in the 2020 budget probably make an EBO even more attractive – but that is not the only reason to consider and EBO. And organisations should be wary of pursuing an EBO solely for the tax benefits that it can bring.
In the March 2020 budget it was announced that Entrepreneurs’ Relief will be changed. Previously, business owners who qualified for this relief paid only 10% tax on any capital gains that they made (such as on the sale of shares) up to a lifetime limit of £10m. It was announced in the latest budget that although Entrepreneurs’ Relief will remain, the lifetime limit will be reduced to £1m. This is still a substantial benefit, but it does mean that any gains above this will be taxed at full capital gains tax (CGT) rates – typically 20%.
An exception to this is the sale of a majority of shares into a qualifying Employee Ownership Trust (EOT); such a sale is free from CGT. The sale of a business into an EOT is not without restrictions and may not suit everyone, but as other options start to attract a higher rate of CGT, it is likely to start getting more than a second look from many. For advisers working with business owners, it is an option they need to be able to assess and understand.
The tax advantages of selling into an EOT are not restricted to capital gains tax for the exiting owner; going forwards the employees can each be paid a bonus of up to £3600 free of income tax (national insurance contributions still apply). However, with high profile businesses such as Richer Sounds and Aardman Animations making the move into employee ownership in the last twelve months, it is clear that the tax reliefs are not the only reason that an employee buyout is appealing to business owners, there are other advantages at play here too:
Independence and Legacy
The continuing independence of their business is important to many owners looking at succession, and there can be concerns about this with a trade sale. Where a business has a unique culture and ethos, there might be a wish to protect this too. Sale to an EOT can secure independence and embed the culture and values of an organisation for future generations.
Control of the process
The sale of a business to an employee ownership trust gives the exiting owner a control over the process that they could not expect in a sale to a third party, or even in a management buyout. They are able to ensure that the things about the business that are important to it, and to them, are protected going forwards. Most EBOs are vendor financed, with a deferred consideration paid back over a number of years following completion and as such the parties can determine a fair price, based on what the business can afford, not what a buyer is prepared to pay
Protect interests of employees
Business owners can be concerned about what a trade sale might mean for their employees, who in many cases are the people who have helped them build the business. The price that a third party is prepared to pay for the business is often based on cost savings they will be able to make and employees can be the losers in that equation. By comparison, an employee ownership trust, as the majority owner of a business, must act in the best interests of the employees and will often have employees amongst its trustees.
Secure succession for the long term
Sale to an employee ownership trust provides a succession solution that lasts beyond this generation, where a management buyout can simply pass the succession “problem” on to the next. In addition to securing the future ownership of the business, sale to an EOT can also provide a valuable separation between ownership succession and management succession; meaning that in future the business can concentrate on finding the best leadership talent, rather than someone to lead the business who also has the funds to buy out the existing owners, as these are not always one and the same.
High performing, productive and innovative businesses
There is now a very convincing body of independent research evidencing the high performance of employee owned businesses. Employee owned businesses in the UK tend to have more engaged and participative employees, they are more productive, more innovative and they outperform their competitors. An ownership structure alone cannot provide all these benefits, but with commitment to achieving them, passing ownership to employees provides the right conditions for these behaviours to thrive.
Pursuing an EBO solely for the tax benefits can be problematic; it can leave you with a structure that does not suit the business or the stakeholders within the business. However, if some of the other benefits outlined above are of interest to an organisation, the tax advantages of an EBO versus an alternative exit might make employee ownership an option worth further investigation. Employee Ownership is not going to be right for everyone, but it is going to become even more important than ever that business owners looking at succession are aware that it is an option that is available to them.
Baxendale Employee Ownership is a specialist adviser on employee ownership in all its forms, including employee ownership trusts. We have been helping businesses transition into employee ownership for over twenty years and have advised over 100 businesses. We are an employee owed business ourselves, owned by a trust since 1983.