What is an EOT?
An Employee Ownership Trust (EOT) is an ownership structure that enables employees to indirectly acquire a significant and meaningful stake in their employing company. Doing so can provide the outgoing shareholders with an effective succession plan and a tax efficient means to dispose of their shares when compared with other methods of disposal.
A key part of the process is obtaining an independent valuation to ensure that the transaction is fair for both parties, to adhere to any compliance or governance requirements, and to manage risk
More on EOT structure and how it works
Why is an EOT Valuation required?
The interests of the outgoing seller and the EOT must both be considered, and there are various risks of challenge from HMRC, and other stakeholders should the consideration be deemed to be greater than market value.
Protecting Trustees and Employees: Trustees have a duty to act in the interests of the employees and must also take reasonable steps to ensure that the EOT does not pay more than market value for the business as a requirement for the relevant tax reliefs to apply for the sellers.
Ensure Compliance with HMRC: Paying more than market value for the shares can jeopardise the tax benefits associated with establishing an EOT, which would result in unexpected capital gains tax as well as income tax charges arising for the selling shareholders.
Secure the Business’s Future: An inflated value could place undue financial strain on the business, protract the process of paying for the acquisition and detract from the longer-term benefits of employee ownership.
What are the benefits of an EOT sale?
Selling to an EOT can come with valuable advantages, provided certain conditions are met.
Key Conditions:
Eligible Transferring Company:
The transferring company must be a trading entity or the parent company of a trading group.
EOT Control and Residency Requirements:
The EOT must hold a controlling interest in the shares in the company at the end of the tax year in which the transfer takes place and trustees must be UK resident.
Equal Benefit Provision and Shareholding Limits:
Any benefits that are provided by the trust to individual employees must be provided on the same terms in favour of all eligible employees (although this does not prevent those employees from being fairly remunerated as normal). Certain individuals must be excluded from the trust, which includes anyone who holds (or has held) more than 5% of the shares in the company.
Ownership Limits Among Employees and Directors:
The number of employees or directors who hold 5% or more of the shares in the company must not exceed two fifths of the total number of employees.
Advantages:
Succession and Exit Opportunity:
EOT can provide a viable exit route for shareholders, including in scenarios where a trade or other buyer cannot easily be identified
Quicker Exit for Shareholders:
The EOT structure may allow for a quicker and efficient exit process compared to a trade or other sale. The fees associated with a transfer of shares into an EOT are also typically lower than for trade sales.
Tax Reliefs:
Disposing of a controlling interest in a company to an EOT should generally not result in any capital gains tax, income tax and inheritance tax charges arising.
Tax-Free Employee Bonuses:
Once an EOT is in place, employees can receive up to £3,600 per year in tax free bonuses.
Owner’s Continued Involvement:
The business owner(s) can potentially remain in the business and receive market rate remuneration for any continued services.
Improved Employee Retention and Morale:
Employee ownership encourages greater loyalty and satisfaction among the workforce.
Increased Employee Engagement:
Employee ownership can lead to greater involvement and commitment across all levels of the organisation.
Protected Legacy:
The legacy, core values and culture of a business can potentially be protected.
How is an EOT Valuation calculated?
An independent valuation expert should be instructed to produce a report on the market value of the shareholding being acquired. Every business is unique, so our approach is tailored to the individual business and its shareholders, however, there are many key factors that can influence a valuation:
- Financial Performance
We would analyse financial statements, revenue, profit margins, cash flow, and other key financials.
- Future Growth & Profitability
We would consider projected earnings and long-term business sustainability.
- Market & Industry Trends
We would assess sector performances, competitor activity and economic conditions.
- Business Assets & Intellectual Property
We would evaluate tangible and intangible assets, such as property, equipment, brand reputation, and proprietary technology.
Valuing a company in anticipation of selling shares to an EOT is particularly important, including ensuring that the transaction takes place on a commercial and equitable basis for all parties, and to manage the tax and legal requirements. A robust valuation that is fair, commercially acceptable, and can satisfy HM Revenue & Customs is an essential part of the process.
Why choose Menzies for your EOT Valuation?
At Menzies, we use recognised valuation techniques, benchmark data, and industry expertise to ensure our valuations are accurate, transparent, and fair to all parties. We take the time to explain our findings in plain language, ensuring there is no confusion or uncertainty during the process.
Selling to an EOT is a significant decision, and we aim to make the process as smooth as possible, providing you with independent and unbiased assessments, detailed reports and supporting evidence, as well as the opportunity to work alongside tax experts across the firm. Also, if you’re unsure of your options or concerned that an EOT might not be the best option for you or your business, we, at Menzies, are able to advise more generally on options for succession planning and considering alternative restructuring options that might better satisfy your business and stakeholder needs.
If you’re considering an EOT and need a reliable, independent valuation, contact our team today to discuss your EOT valuation needs.
As well as assisting with business valuations, Menzies can also support with the process of implementing an employee ownership, including considering the appropriateness of this approach, tax structuring and obtaining any relevant clearances. Further information on the favourable tax regime can be found on our Employee Ownership Trusts page.
