Employee Ownership Trust
“We were exploring a Management Buy Out or possibly even a trade sale, but then Avondale explained about Employee Ownership. It resonated straight away as we have a highly skilled and loyal team whom this would reward. The Avondale team led the whole process from legal, financial and strategy. They structured the finance to ensure we secured an exit at full commercial value with 0% tax on the sale. As an employee-owned business we believe we can contribute more – and our clients seem to really like it to.”
“We are so happy with the result of this process and, as you can see, so are the staff. You are right, I was a massive sceptic of giving away £1.5m of the cashflow but it has actually worked out perfectly. I wanted to be able to help all those people who have stayed with us in the hard times.”
“Many thanks for your fantastic help and support re getting this deal done. I very much thank you for all your help to me personally as this is a very emotional journey for me.”
We are Employee Ownership Trust Experts
Employee Ownership Trust requires planning and careful consideration, however, for many sellers it is an exciting exit opportunity. Avondale can lead the whole process and support in transition, funding options, the critical element of leader succession and business support during implementation.
Our expert advisors will undertake a feasibility assessment; looking at the financial modelling, headroom, third party funding options and valuation, as well as assessing key management capabilities and the best handover approaches. This helps you best understand how an Employee Ownership Trust may meet your ambitions and compare favourably to other alternatives such as MBOs or the archetypical trade sale.
Our Employee Ownership service also includes all legal drafting, facilitating trustees and documentation and any associated employee management shares if required. In addition to discussions with management and trustees, we assist with transition consultancy. If appropriate, we will then craft a Financing Memorandum, using our network of specialist EOT lenders to assist with debt funding, securing the right terms and debt serviceability.
Implemented correctly, Employee Ownership can be a highly rewarding exit for sellers; commercial in the terms of return to the seller shareholders whilst creating more sustainable and strategically advanced businesses with highly motivated, rewarded and engaged employees. We are the only advisors that can prepare your Employee Ownership Trust from start to finish, maintaining a personal service throughout. Call us today on +44(0)20 7788 8250 or email email@example.com to speak to a specialist.
Latest Employee Ownership Trust Case Studies
Employee Ownership Trust Resource Centre
Guides & Insights
With an increasing number of owners now assessing the potential of selling their businesses to their employee, our Employee Ownership Insight examines the key advantages of employee ownership sales and answers the most frequently asked questions by business owners and management teams, such as:
- Why sell to an Employee Ownership Trust?
- Who will my business be valued?
- How will the sale be funded?
Our Employee Ownership Trusts Guide is written to help business owners and management teams gain an in-depth understanding how an EOT may help shareholders create succession and secure shareholder value, whilst creating the legacy of a sustainable business working for the benefit of all staff members. Topics covered include:
- Advantages, Benefits & Considerations of Employee Ownership
- Forms of Employee Ownership & Funding the Transaction
- Practicalities of Distributable Reserves & Implementation
Our guide on How Employee Ownership Compares to other exit strategies examines the differences between selling a business to an Employee Ownership Trust, a management buyout, a traditional trade sale and a growth capital transaction/Private Equity sale, covering key areas including:
- Valuation, Process & Timescales
- Capital Gains Tax, Costs & Support
- Risk & The Potential Future of the Business
Our on-demand webinars are led by accomplished speakers and professionals covering all aspects of employee ownership sales. Bringing together specialist EOT advisors, trustees and ex-sellers, topics of discussion include the pros and cons of employee ownership, transaction steps, the cruciality of successful transition and life of previous owners after the sale.
Frequently Asked Questions
- Why sell to an Employee Ownership Trust?
- What is the sale approach?
- How will my business be valued?
- How will the sale be funded?
- What happens to the employees?
- What are the next steps?
Employee Ownership Trust businesses are not new – John Lewis is probably the oldest example. Many owners are now choosing to sell their businesses to their employees via employee trusts because of the many advantages. In particular:
- EOT sales are highly attractive because subject to HMRC clearance, they are 100% tax-free; the Government is incentivising such sales as there is significant evidence that EOT’s are sustainable and lead to greater productivity.
- There are benefits for the employees: tax-free bonuses, better job security, and a feeling of inclusiveness.
- The process can be vendor-led and employees are not required to drive the approach as would be the case in a Management Buy-Out (MBO).
- They are more immediate and require less due diligence than trade sales.
An EOT sale does not mean that the business has to become wholly run by the employees. The former shareholders can remain involved at management level; although they concede board control of the business to the Trust they can take a position as a Trustee after the sale. The key points of the EOT approach are:
- The sale must be for 51% or more of the company shares to benefit from the 0% CGT rate. Many EOT sales are 100% share sales for simplicity
- Typically a new company is created which will act as the employee share ownership trust and the shareholders sell their trading business shares to this EOT company.
- A sale and purchase agreement is executed, although associated due diligence is typically lighter.
- After the sale, the company trades as a wholly-owned subsidiary of the EOT company.
- A trust document sets out the obligations of the Trust to the employees.
- The fixing of the multiple used to value the trading company is a commercial discussion and there is no golden rule.
Typically, private company valuation multiples range between 4 to 7 but cashflow, financial headroom and reserves will all have a bearing. The valuation, which will be led by Avondale, is subject to HMRC clearance and will be assessed using comparisons with other private sale benchmarks.
There are three ways for the Trust company to fund the buy-out – company reserves, vendor loans (typically over 5-7 years from our experience), and sometimes third-party debt is also used. Financial aspects to consider:
- Any debt or vendor loans are structured in much the same was as a management buy-out from future cashflow (profit after tax) – analysing seasonality and the headroom to pay debt plus interest from the income.
- Owners’ salaries are sometimes adjusted at the point of sale.
- The trade company will make payments out of profits after tax on the vendor loan to the EOT company which will then repay the selling shareholders.
- The vendor loan is often a ‘promise to pay’ and therefore may not sit on the balance sheet. From a practical perspective this means that if cash flow is struggling, the loan period can be extended.
- Interest on vendor loans must be charged to ensure that there is an incentive for management and Trustees to repay the loans on schedule.
- Dividends can be restricted until all vendor loans or third-party loans are paid off.
- The vendor loans are typically structured as loan notes secured against the business.
- Any initial payout from reserves needs to leave sufficient working capital.
- Any third-party debt may need personal guarantees from the sellers and will take precedent over the vendor loans in terms of repayment. The trust needs to approve reasonable finance terms.
Employees are usually highly motivated by employee ownership. They like the inclusivity and cultural approach that it brings to the company and their roles. It also benefits the recruitment process. Many employees also see that beyond any debt repayments the business can scale-up as the ongoing dividend requirement is lessened/eradicated. Typical benefits include:
- Following debt repayment, pay for key managers is typically in the upper quartile for the sector.
- Increased retention.
- Better productivity as staff increase the ‘stakeholder’ mindset.
- Tax-free bonuses of up to £3,600 per annum for each employee, typically from year one.
- The sellers can remain employees and gradually handover the reigns over-time, as appropriate.
- Strategy and culture can often be reset with increased team-driven initiatives.
- The trust acts in the best interests of the beneficiaries – the employees.
- Usually, there is a professional trustee, an employee trustee and an ex-shareholder trustee. Avondale will help establish your trust panel as part of its service approach.
All EOT sales are bespoke as the approach is highly flexible. It typically takes Avondale 2-3 months to complete an Employee Ownership Trust, working directly with the sellers on a one-to-one basis on all aspects from feasibility, finance and clearance to strategy and the establishment of the trust panel.
With significant expertise in valuing businesses, cash flow modelling and gaining HMRC clearance, we are unique in the EOT market as we also have in-house hands-on expertise to lead the EOT cultural transition within a business. We believe Employee Ownership Trusts should be completely commercial in terms of the return to the seller shareholders, and then on sale, the business should become an employee-driven strategically advantaged business.
Discuss Employee Ownership Trusts in Complete Confidence
Avondale are the only advisor providing a turnkey solution that covers all aspects of an EOT from start to finish, maintaining personal service throughout.
Our unique EOT service offering covers structure, valuation, finance, legal, trustees and transitional support. Book a free exploratory consultation with one of our specialist consultants to discuss how employee ownership could work for your business.