Employee Ownership Trusts: What does the future hold?

Market Trends and Future Outlook

Rising taxes will undoubtedly keep EOTs sharply in focus and potentially oversold as silver bullets by “specialists”. Critically, as EOTs are long term structures, owners need to consider the end game.

A growing number of EOTs are now reaching key anniversaries, bringing final exit strategies onto the agenda for some. We can expect to see a significant increase in business sales and debt refinancings by EOTs, as former owners seek full realisations and employees eye their beneficial interests.

Some businesses will have flourished or may now need the commercial strength of being part of a larger group. A sale at a great valuation to the right buyer will be demonstrably in the interests of both the company and the employees.

Some former owners, however, might conclude that the EOT route has not necessarily delivered what they would have liked, managerially, commercially or financially, and be concerned that they still have significant value tied up in the structure.

Where trustees become convinced that a sale is merited, there are a number of considerations peculiar to EOTs.

For buyers, the understanding of how the sale of a business by an EOT and the net proceeds are determined and distributed is currently very low. There will be commercial concerns to mitigate and manage, so that employees will benefit financially from the sale and leave, or that motivation will drop without the incentivisation of ownership. There will be questions around who will stand behind the warranties, with a likelihood of insurance being considered.

Trustees are key decision makers that act on behalf of all the employees and must be involved throughout every step of the entire process and might seek independent advice. They control the allocation of consideration, which is generally weighted by a matrix of employees’ roles, seniority and years of service. Multiple taxes are payable, some by the trust and some by the company both at completion and post-sale requiring undertakings from the buyer.

The complexities of a sale are undoubtedly exacerbated by being from an EOT structure.

As many more EOT owned businesses are likely to begin to come to market, there will be more insight into the relative success of these structures and into the significant complexities that need to be overcome by both trustees and buyers to achieve full value realisation.

Conclusion: Is an EOT Right for You?

An EOT is not an off-the-shelf, one-size-fits-all exit strategy and solution to succession planning. And it is not an immediate exit for business owners, given the lengthy period over which consideration is paid.

It is not a silver bullet and, like any transaction route, there are multiple factors to weigh up as part of a thorough exit strategy review supported by impartial corporate finance advisers with expertise in all forms of transaction.

If situationally sub-optimal, structured badly or not implemented with the appropriate cultural shift, an EOT will not deliver the owners’ objectives and could ultimately amount to a shot in the foot.