Meet James

James has worked in the coffee industry all his life. Over the past decade he’s built a successful, independent chain known as Robusta Revolutionaries. James has a wonderful team and prides himself on providing high-quality, quirky coffee, at a fair price, in lovely, well-decorated surroundings.

James has been working since he left school at 16 and is looking to take a step back and retire in the near future. He doesn’t have a lot of money put aside in his pension so he needs to sell his business in order to start this next adventure. When looking to sell his practice he runs into a number of issues.

The Perils of Trade Sales

Lack of Interest: While lots of people are interested in buying a single coffee shop, and the big chains are interested in buying large groups, James’ business just doesn’t quite seem to be what anyone is after. Despite paying lots of money to agents to list his business, six months go by without any serious offers.

Haggling: After a while, Tom comes along expressing an interest in buying the practice. James pulls together all the financial information, gives Tom a tour and invests a lot of time trying to persuade him that this is the perfect business for him. In the end, though Tom makes an offer well below what the company is worth and wants James to stick around for three years to help him learn the ropes!

Culture: James is almost ready to give up when another buyer comes along. This buyer is nothing like Tom, it’s a major coffee chain looking to buy out Robusta Revolutionaries and merge it into MoonBucks. The offer is great but James is nervous. He is not convinced MoonBucks will continue to serve top-quality coffee, at a fair price. He doesn’t want the amazing business he built to be slowly turned into just another high street coffee chain.

The Ideal Buyer

James takes a step back and really thinks who, in a perfect world, he’d like to sell to. And that’s when it hits him – the team! James has a loyal team of people who have been working with him for many years. They’re all passionate about coffee, about delivering a premium product, at a fair price, in an amazing setting. He knows they’d run with it and go from strength to strength.

Employee Ownership Trusts (EOTs)

While the team would be a perfect buyer they simply don’t have enough money. James doesn’t feel he can ask them to go re-mortgage their houses and risk everything to buy the business from him. For that reason he starts exploring the idea of Employee Ownership Trusts. The more James reads, the more excited he gets. The way it works is like this:

  1. James sets up a trust which will own the company on behalf of the team.
  2. How do the team pay James? Effectively through an IOU. The team promise to keep working hard and continue generating profit. Part of those future profits will go to James until he’s paid in full.
  3. Once James has been fully paid, the company will be fully owned by the trust on behalf of the team.

This solution works brilliantly for James! He can sell to his amazing team, without them needing to pay a single penny or take on any legal risk. What’s more, sales to Employee Ownership Trusts are completely exempt from Capital Gains Tax – James will not pay any tax whatsoever on selling to the trust. The company can also pay staff bonuses of up to £3,600 a year, tax free.

How the Story Ends

James goes ahead and sells to the trust. He remains a paid director for the first year to help with the transition before beginning his long overdue retirement.  While it was an adjustment, and the first year flying solo had its challenges, the team all pulled together and ended up having their most profitable year ever! The team love working somewhere they own and being masters of their own destiny. The tax free bonuses are very welcome too!

James still stops by now and then for a free coffee. Each time he does, he savours the fact that it tastes just as good as the day he left.

Conclusion

More and more businesses these days are following in James’ footsteps and embracing the Employee Ownership Revolution. It is a fantastic alternative to a traditional trade sale, offering company owners the ability to sell their company at full market value, tax free, in a way that gives back to their team and preserves what makes the company great.

We at The Peloton are, ourselves, a 100% employee owned company and have helped many businesses with their own transition. If you would like to discuss in more detail, please don’t hesitate to contact us on 01326 660022 or email tax@thepeloton.co.uk.