Piece of the pie: The rise and rise of Employee Owned Trusts

Written By Tom Gallop

Sir Winston Churchill wisely believed that “it is much better to prophesy after the event has already taken place” and of course he’s right. Certainly, predicting how the M&A market will bounce back post-pandemic is fraught with difficulties.

Will trade buyers focus on rebuilding their balance sheets and preserving cash, or will they go on a spending spree and hoover up distressed assets hit hard by Covid-19?

Will Private Equity firms find vendors unwilling to give up equity at today’s deflated prices, or will they find good homes for their money with ambitious and credible management teams?

One thing does seem certain…the continued popularity of Employee Owned Trusts as a way for founders and families to manage succession in an orderly and efficient manner.

Since they were introduced in 2014, the number of EOT owned companies has risen to over 400 and the total is currently growing at over 40% per annum. Current estimates are that by 2030 there will be over 2000. Recent local examples of businesses that have made the transition to employee ownership include fleet management business Knowles Associates in Essex and employment and skills specialist Seetec. Here at Ashcroft we recently completed the sale of technology staffing business Red 10 to an EOT.

A sale to an EOT offers clear benefits to shareholders when compared to selling to a trade buyer or private equity.
The most obvious advantage is the nil tax rate for the selling shareholders, even more valuable since the recent changes to Entrepreneurs’ Relief that saw capital gains above £1m increase to 20% on a share sale.

Another advantage is the EOT entails a relatively swift and uncomplicated process, without the need to “go to market” and become embroiled in an often lengthy, time consuming and emotionally draining sale process. There would also be far fewer warranties and indemnities demanded of the shareholders.

Furthermore, a sale to an EOT means that the business can continue very much as before, with no real change to the culture, brand or independence of the business. No job losses would be incurred, and employees would be able to benefit from tax free bonuses in the future.

Finally, and according to the Employee Ownership Association,

“…co-owned companies tend to be more successful, competitive, profitable and sustainable.”

Will they also prove more resilient and adaptable post-pandemic? We shall see.

In the aftermath of Covid-19, some business owners, battered and bruised by the experience, will be looking to de risk and manage their succession in an orderly way….and secure an exit before another “Covid-19” hits these shores. A sale to an EOT represents a tax efficient, swift and orderly route to succession, and also a means of rewarding and empowering employees. Some vendors may feel they owe a debt of gratitude to their teams for getting them through COVID….be it through hard graft and long hours, adapting so readily to remote working, or by accepting reduced hours and pay. The desire to thank those employees will be strong and a sale to an EOT is one way of doing just that, whilst also securing an exit for the founder. Expect to hear a lot more about EOTs in the years to come.

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