Employee Ownership Trusts: a lawyer's perspective

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29 April 2019

Succession planning is never an easy topic for business owners to address. However there is an alternative to selling the business. Employee Ownership Trusts are now becoming established as a successful option for businesses.

Sometimes a sale to a trade buyer can be challenging for business owners. The due diligence process can be long, with many constraints on the sellers. Moreover, many business owners just don’t want to see someone else’s name over their door, especially if that door is likely to be relocated many miles away leaving loyal employees without jobs.

Selling the shares to the company’s management team can ensure the business remains local, in the hands of people who understand how the business works, but there are downsides. Management buyouts can put a lot of stress on individuals, and sometimes the expectations of the funders are not aligned with the leadership team.

Employee Ownership Trusts

There is another solution: one that maintains the independence of the business, allows the owner to exit at their own pace, and protects the employment of the workforce for as long as the company continues to be viable. Since its introduction in 2014, the Employee Ownership Trust has become established as a feasible succession option. If key qualifying conditions are met, the following tax benefits are available.

• Full capital gains tax relief for the owners on the disposal of a controlling interest to an Employee Ownership Trust

• Employees can benefit from a bonus, of which £3,600 per annum will be tax free. 

A flexible model

The business outcomes of employee ownership are well documented. It makes sense, if the employees have a stake in the business, that they are more likely to work harder to make the company successful. And this fits with our experience: when a company moves to employee ownership we often see an uplift in corporate performance.

It’s a flexible model that can be shaped to suit the aspirations of the business owner as seller, and also the employee group as buyers. The Employee Ownership Trust can sit alongside executive share schemes such as EMI options, and with all-employee share schemes such as share incentive plans. The business owner can retain a shareholding if that’s what they want to do, although they do have to consider how that shareholding can be divested in future.

Funding

Funding for employee ownership deals is now more accessible. Until recently, most of these deals were vendor financed. We have seen a significant shift in the attitudes of lenders in recent months and there is now more likely to be an element of external funding. 

Engagement

For the corporate lawyer, employee ownership transactions are a dream to work on. It’s a collaborative deal; everyone wants what is in the best interest of the company. They are very different from trade deals, where the seller wants best price and the buyer wants the top deal.  Many firms like to involve employees in the negotiations; the increased understanding can smooth the process.  The deal completion is often a reason for the whole company to celebrate, and there is something very special about being part of that.

A viable option for business owners

The Employee Ownership Trust is here to stay. Interest in employee ownership continues to increase, and these deals comprise a growing proportion of our corporate transactions.   There is now no need for business owners to shy away from the succession conversation; there will be a solution and the role of the adviser is to support the business owner in making that informed choice. A sale to an Employee Ownership Trust can fit well with the owners’ expectations of the deal, and bring benefits for the employee and for the company. It’s not going to be the answer for everyone, but it’s an option that should be on the table.

Case Studies

Priory Hotel, Beauly

A long standing family business, the Priory Hotel plays a key role in the local community of Beauly.  No one wanted to see the hotel taken over by a larger chain, and Stuart Hutton was particularly keen to protect the position of his loyal staff.   An employee buyout meant that the company’s independence was maintained. Stuart’s son Kenneth took over the reins as MD, keeping the family tradition going.  Kenneth has retained his shareholding, a decision welcomed by the employees as a demonstration of the family’s commitment to the hotel’s future.

“The Priory Hotel was too important, and too unique, to see it taken over by someone else.  The sale to the Trust has allowed us to combine family ownership with employee ownership and preserve the independence of the hotel.  Customers have been overwhelmingly supportive. It’s been great for us.”

Mediascape, Glasgow

Husband and wife team, Angus and Shona Knight could have sold their Glasgow based audiovisual business to a larger player in that market. That would inevitably have meant relocation, probably to the Midlands, and the loss of significant jobs.  Many of the workforce had started with the company, building their careers with Mediascape.  A sale to an EOT meant that Angus and Shona could hand over the business gradually, and keep the company’s HQ in Scotland.

“The EOT was the right move for us.  We’ve already seen people rise to the challenge, taking on more responsibility.  Client feedback has been very positive.  There haven’t seen any negatives.”

Grossart Associates, East Kilbride

Bill Grossart and John MacDonald had received several offers for their successful consulting engineering firm.  The offers were good, but having been their own boss for 30 years, the idea of being tied in to a new employer for a pay out period just was not attractive.  The employee ownership solution delivered a good price for the business, and allowed the principals to phase their exit from the business, ensuring continuity for the customers.  It was also good news for the employees who are now in control of their own destiny.

“It was a chance conversation that led us to the Employee Ownership Trust.  It’s the perfect solution for Grossarts.  John and I get to reduce our time to the company, and stay as involved as we want to be. It’s the employees who are the future of this business; it’s only right that they are in the driving seat.”

Paramount Care, Kirkcaldy

Ruth Smyth started Paramount Care as a care agency with a difference; one that genuinely put people at the centre of care. When she began to consider retirement, the easy option would have been to sell to one of the national firms that dominate the care sector.  Ruth wasn’t convinced that the high standards for which Paramount was known would be maintained.  A sale to the employees meant that the future of the company is now in the hands of those she trusts to continue with the vision she set out for Paramount.

“Care is about people.  My conscience wouldn’t allow me to hand over the fate of Paramount’s clients and staff to some remote agency. The sale to the Employee Ownership Trust has let me semi-retire, and kept the ownership of the company in Fife.  It’s worked out well for everyone.”

This article originally appeared in the Journal of the Law Society of Scotland's April 2019 Employee Ownership supplement.