“So, you’re telling me I can sell my business without needing to find a buyer, without needing to haggle over the valuation and the terms, and I won’t pay any tax? What’s the catch?!”
Here at The Peloton we completely understand that, if something seems too good to be true, it probably is. While we firmly believe that EOTs are a fantastic way to sell your business, we would be lying if we said there were no potential drawbacks. In this article we aim to explore why the relief is so generous, both to reassure you that this isn’t just some dodgy tax wease, and so that if you do decide to press ahead you do so fully aware of the pros and the cons.
Why is the Relief so Generous?
If anyone has claim to being the “Father of EOTs” it would be Graeme Nuttall. In his July 2012 report for the Department for Business, Innovation & Skill, following the global economic crisis. This report, as well as subsequent responses and commentary, have outlined various arguments in favour of tax breaks to incentivise employee ownership:
- Economic – Nuttall laid out the evidence that employee ownership aids growth and that such firms show more resilience during economic downturns.
- Patriotic – By definition, employee-owned companies tend to distribute a higher percentage of their profits to staff than non-employee-owned companies. This, in turn, tends to ensure profits remain in the UK, with UK workers, spending their money on UK goods and services, rather than being siphoned off to foreign investors.
- Succession – A worrying percentage of business owners have no plan for retirement. In highly specialised industries there isn’t always a ready third-party buyer. EOTs offer a means by which the business can continue to trade, even if the founder steps away.
- Employee Satisfaction – In any given weekday, many of us spend more time at work than with our families. Employee-owned companies tend to report better job satisfaction and levels of staff well-being. This is good in and of itself, but also takes some burden off the NHS where 13.8% of local health spending is allocated toward mental health.
What are the Downsides?
In addition to all the points above, the Government recognised that there were challenges dissuading business owners from considering trust buy-outs. These include:
- Perceived Complexity– Most people understand the concept of someone buying their business. Using a trust to facilitate a deferred pay-out is definitely more complicated and historically put people off.
- Risk – With a third-party sale, business owners get most if not all of the money on day one. Which a trust buyout, where the purchase price is part funded from the future profits of the business, business owners need to wait to get paid. If the business were to collapse in the meantime, there is a risk that the owner doesn’t get paid.
How can The Peloton help?
Here at The Peloton we are EOT specialists. On the complexity point, we aim to make the whole process as simple and straightforward as possible. On the risk point, we work with business owners to de-risk the deal. Whether that’s taking out insurance policies, agreeing on flexible repayment terms, or helping to pick a sensible senior management team in who you have confidence. While the risk can never be reduced to nil, it can certainly be mitigated.
After reading this article we hope you have a better idea of why the Government are offering such generous tax breaks to incentivise employee ownership. They have good economic and political reasons to want to increase the employee ownership sector. Tax breaks are the tool they use to get people interested in the idea and to compensate them for some of the drawbacks.
If you’d like to learn more about how EOTs work, whether it could be a good fit for your business, or anything else business sale related, please don’t hesitate to get in touch at email@example.com or call us on 01326 660022.