Succession Planning 2.0: The Impact of Employee Ownership Trusts

When we hear, ‘succession’ we may think of the HBO drama starring Brian Cox (the actor not the physicist) and the challenges of moving a business through a significant period of change. One of those changes may be the ownership of that business. Businesses have the ability to overtake and outlive us, and therefore this transition needs careful consideration and planning. 

A transition we’re seeing more of is the developing realm of employee ownership trusts (EOTs), which aim towards a more inclusive and equitable business model that empowers employees and drives sustainable growth. For business owners considering a change in their ownership structure or navigating the complexities of succession planning, EOTs offer a compelling alternative that deserves closer consideration.

The concept of employee ownership trusts can be traced back to the 1800’s but has sparked significant interest within the UK more recently, when in 2014, following the Nuttall review 2012 , the government introduced legislation to encourage employee ownership as a means of fostering business sustainability and enhancing employee engagement. 

The EOT model allows businesses to transition ownership to a trust, which holds shares on behalf of the employees. This not only empowers employees by giving them a stake in the company but also incentivises them to work towards its long-term success. 

• One of the key advantages of an EOT is its capacity to mitigate the challenges associated with traditional succession planning. In many businesses, the question of who will take over the reins when the current owner(s) retires, or steps down, can be a source of uncertainty and tension (hopefully not to the scale of the ‘Roy’ family). 
• EOTs offer a structured and inclusive approach to succession planning, providing a mechanism for smooth leadership transitions while preserving the legacy and values of the business.
• Moreover, EOTs can serve as a powerful tool for attracting and retaining talent in a competitive marketplace
• Employees who have a financial stake in the company are more motivated to contribute their best efforts and are more likely to feel a sense of ownership and pride in their work. This increased engagement can lead to higher productivity, better employee morale, and ultimately, improved business performance.
• Not only does an EOT allow a business owner to pass on their business to their employees as a legacy of future employment, but it also allows the business owner to sell their company to a newly set-up EOT for full value completely free of Capital Gains Tax (CGT) and Inheritance Tax.
• While the benefits of employee ownership trusts are clear, it is essential for business owners to be aware of the challenges and considerations involved in implementing this ownership structure. 
• Transitioning to an EOT requires careful planning, communication, transaction structuring and legal expertise to ensure a smooth and successful transfer of ownership. 
• Business owners must also be prepared to navigate potential resistance or scepticism from stakeholders who may be unfamiliar with the concept of employee ownership. 
• Consideration of how the EOT will be funded, as a minimum of 51% of the company’s shares need to be moved into the trust. This may be through the balance sheet or debt funding which the business will take on and the exiting shareholder will likely need to be paid over a number of years.

Despite these challenges, the opportunities presented by employee ownership trusts are vast and compelling. By embracing an EOT model, business owners can create a more sustainable and resilient business that prioritises the well-being and success of its employees. This shift towards a more inclusive and democratic ownership structure can foster a culture of collaboration, innovation, and shared success that benefits both the business and its employees. 

Rob Richardson, Corporate Finance Partner at MHA (www.mha.co.uk) concludes: “We see EOT’s being of most interest to companies where the structure between employees, management and owners is fairly flat, however, no company should rule it out.  Employee ownership is one of several options when you are considering succession and so it is important to via the pros and cons of all options in the round which is how we support businesses.”

One of the companies we support, Thomas Kneale & Co, has become an EOT. You can visit Thomas Kneale & Co and hear about how they do business at our Workplace Safari on 12 November. Click here if you are interested.

If EOTs interest you, or you are looking for other business support, please click here to inquire and someone will contact you.