Employee ownership is becoming an ever-increasing popular option, with more than 1 in 10 corporate transactions going through on this basis, and it’s easy to see why. No tax payable on the sale by the vendor, and employees are entitled to a bonus of up to £3.6k pa tax free. The whole process is largely stress-free with complete control over the timing of the transaction and a total absence of lawyers looking to score points over one another. Full value can be acquired by the vendor so long as the business model supports the valuation. And lastly, the reward for employees, once ‘financial freedom’ has been achieved, can be significant and a powerful tool to engage the team.
Transferring ownership to your employees is becoming an ever increasingly popular choice when considering your exit options. With the ability to obtain full value for your shares and not pay any tax on the gains, it’s hardly surprising.

What is an employee ownership trust?
Employee ownership trusts exist to allow business owners to sell their company to their team at full market value, tax-free. They have existed since 2014 as part of a Government drive to encourage business owners to embrace employee ownership. The owner sells to their team, by means of an employee-ownership trust, in exchange for a deferred consideration.

How is the business owner paid?
In three ways:
1. Deferred Consideration
Despite selling their shares, the business owner continues to be paid from the profits of the business until they have been paid in full.
2. Reserves
Many business owners choose not to take everything out of their company each year as dividends. If there is money left in the company at the point of sale, this can be extracted tax-free as an upfront payment.
3. Borrowing
The trust can borrow money from specialist lenders to pay the business owner. Due to the fees involved though this tends to be rare unless the business has a very high valuation.

What are the Tax benefits?
The main tax advantage is the ability to sell without incurring any capital gains tax. Typically, in the sale of a £1 million company, the owner would expect to pay at minimum £100,000. Selling to an EOT can, therefore, result in more money for the seller.
The second tax advantage is the ability of the company to pay each employee up to £3,600 tax-free each year. This provides a competitive advantage relative to non-employee-owned business as it allows them to more cheaply remunerate, incentivise and retain staff.

What are the benefits of employee ownership
There is a fundamental difference between working in a business and owning a business. Studies indicate that employee-ownership increases staff retention, helps drive growth, ups productivity and creates a stronger working culture.
Frequently Asked Questions
Yes, unless they specifically opt out or unless the company puts in place an optional probationary period of up to 1 year.
When selling to a third party, significant sums of money can be lost in Capital Gains Tax (anywhere from 10% – 20% of the total sale price). When selling to an EOT, there is no Capital Gains Tax whatsoever.
Yes, the vendor can continue to work as a director, employee or both receiving a market salary and annual profit share.
Absolutely, The Peloton have a great deal of experience valuing businesses of all sizes.
Yes, with lower fees and no CGT.
Yes, this is a complex area with accounting, commercial and legal considerations. Engaging with advisors you trust to guide you through this process is a crucial first step in any EOT project.
Yes, HMRC sign off on the sale and the valuation giving you reassurance that everything has been done correctly.
Employee Ownership Trusts are structures which allow employees to own the business in which they work. The trust holds share on behalf of whoever happens to be an employee at the time. So, if someone joins the company, they automatically become beneficiaries of the trust. If someone leaves the company, they automatically cease to be beneficiaries of the trust.
While no vendor can be 100% sure, they can increase the odds by carrying out detailed modelling at the outset and having a clear business strategy in place. With good leadership, clear targets and financial accountability, the business has everything it needs to be successful. The vendor can continue to act as a Director and Trustee until the loan is repaid, exercising their influence to ensure the ship remains on course.
The owner values the business. They agree on the terms of sale, e.g. over how many years the price should be paid. The team and brought onside, the key management group identified, and cultural conversations about what it means to be employee owned take place. The sale goes through and the performance of the company is then closely monitored to ensure everything is on track to pay back the debt as agreed.
Typically around six months. The aim is to allow sufficient breathing space that the transition can take place alongside day to day business. We have, however, seen projects complete in as little as 2 months. In other instances, people have been planning EOT transitions for years, waiting for the value to reach a certain level and building reserves to fund a large initial payment.
It depends on the size of the company, the complexity of the share structure, number of employees, etc. The cost is, however, always less than with a traditional third party sale often by as much as half.
This is optional. Interest is almost always charged if the company have fallen behind on payments. Absent that, some vendors choose to charge some interest to encourage an early repayment of the debt.
Absolutely! It’s impossible to answer questions such as, “is this affordable” or, “how quickly can I be repaid” without carrying out forecasting in advance.
Typically it is paid monthly with a true up each year. It can, however, be paid on whatever schedule best suits the vendor provided the company have sufficient cash.
Get in touch! The Peloton are an employee owned firm of Chartered Accountants and Tax Advisors. Having been through the process ourselves, as well as having helped numerous clients, we’re perfectly placed to help you decide if this could be the right decision for you.
Evidence shows that, when employees have a meaningful stake in the business they work, this has a number of benefits. Employee retention tends to increase, as does company growth, profitability and resilience. Employee-owned businesses also tend to be nicer places to work with evidence suggesting they such structures are positively correlated with employee wellbeing.
Financially, employees will share in the profits of the business. The first £3,600 per employee, per year will be tax free. Non-financially employees get to work in a business they own, where they have a real voice and influence: such companies tend to be much nicer places to work.
You have to wait longer to be paid in full. Additionally, if you are in an industry where trade buyers are paying way over the odds for companies such as yours you might not be able to secure a similar price in an EOT sale.
With a third party trade sale you would get a significant sum of money on the day of sale. With EOT sales you typically have to wait longer to receive payment in full. As such there is a risk that, if business performance worsens, it may take a long time to be paid off or, in a worst case scenario, you pay not be fully paid. This is why preparing a robust financial plan pre-sale, and carrying out work to identify a suitable management team is so important.
The role is similar to that of shareholders. The trustees are there to ensure the directors of the company are running the business effectively in the best interests of all employees. They will have input into how the profit of the company should be apportioned amongst employees and other significant decisions such as whether to open a new office, whether to sell part of the business, etc.
An employee who joins will become a beneficiary. An employee who leaves will cease to be a beneficiary. This happens automatically, there is no need to sign forms or the like.
Support could include sourcing independent trustees, providing support to the new trustees/directors as they enter their new roles, management accounts to ensure debt repayment is on track, etc. The day of sale is the end of one chapter but the beginning of another – The Peloton are committed to ensuring the any business we take into employee ownership has all the tools to succeed.
This will vary person to person. Ideally it would be when the price is right, when a strong management team is in place and with a suitable transitionary period post-sale. Sales normally happen at the point a Founder is looking to retire or take a step back in the next 2-8 years.
When the price is right, when the management team are in place and when the Founder is emotionally ready to relinquish some control over a company they pay formerly have owned 100%.
Principally through the future profits of the business in the form of an IOU. The team promise to continue working hard to drive the business forward and it is agreed that, until the Founder has been paid in full, a percentage of the businesses future profits continue to be paid to the Founder – even if they retire or step away. The Founder can also extract any reserves built up in the company and it is possible to secure an upfront payment by means of third party financing.
Almost anyone can be a trustee. Typically though the former owner will sit on the trust, at least until the debt is repaid. You will also typically have representation from the employees and often an independent trustee as well. The composition of the trust board is a key consideration when going through a transition to employee ownership.
Anyone who owns a trading company where at least 60% of the employees are not currently significant shareholders in the company. In other words, the vast majority of businesses. Even businesses operating as a sole trade could consider selling to an EOT as it is possible to incorporate pre-sale.
The company is liable for the debt. The company directors and trustees must do everything in their power to ensure the business is operated in such as way as to ensure that debt is paid.
Day to day, the directors of the company. When it comes to larger decisions the directors may require approval from the trustees just as directors require approval from shareholders.
People who wish to remain in total control of their business. Selling to an EOT necessarily involves employees having a say in the business they own. Loss making companies, or those shrinking rather than growing may also be unsuitable candidates.
Every owner has different reasons. It might altruistic, to give back to the team who helped you succeed. It might be to safeguard the culture and ensure your baby isn’t ruined by some clueless third party buyer. It might be the only option – nobody else wants to buy. It might be commercial, with the Capital Gains Tax Exemption and lower legal costs making an EOT sale the most profitable. There are plenty of reasons to consider this as an option.