They say a picture’s worth a thousand words. In this article we aim clarify the structure of an EOT is a visual way which, hopefully, makes it easier to understand.
Business Structure pre and post EOT
Before selling to an EOT this is a typical company structure:
There might be multiple shareholders, perhaps a husband and wife or two business partners. Fundamentally though, if you scroll up far enough, the company will be owned by an individual or individuals.
After selling to an EOT the structure will be as follows:
The business owner sells a majority stake to a “trustee company.” This company will hold shares in the trading company on trust for the beneficiaries, namely the employees. The former business owner(s) can remain a minority shareholder if they choose to.
Sources of Funding
There are three main ways in which the business owner gets paid:
All three sources are received completely tax-free in the hands of the business owner.
Borrowing money from a bank to fund the purchase is rare but can make sense where the business owner, for whatever reason, is keen to get their hands on the cash as quickly as possible. The downside is that obtaining unsecured debt from a bank tends to be an involved process and the fees can be significant.
Being able to extract the cash held within the business tax-free, as opposed to paying high rates of income tax at dividend rates, is a huge benefit of selling to an EOT. This is likely to be relevant where the trading company has accumulated significant cash reserves over many years.
Payment from the future profits of the business is by far the most common way in which Founders are paid. In effect, you’re selling the company but continue to receive the profits for a period of time until you’ve received full market value.
How Can We Help
The Peloton are EOT specialists. We have helped numerous clients to sell into employee ownership and are, ourselves, an employee-owned accounting firm. If you’d like to learn more about how EOTs work, about whether it might be an effective way to secure your retirement, or if you have any questions whatsoever, please don’t hesitate to get in touch! Our Head of Tax Oliver Twentyman is always open to a conversation. Email him on email@example.com or give us a ring at 01326 660022.