THE LEGAL BITS

The tax benefit is often a key motivator for any owner who wishes to sell their business to an employee ownership trust (EOT).

The structure is important to meet all the requirements and ensure the vendor receives the tax relief and also gives meaningful employee ownership.

There are three requirements that the EOT structure must meet:

1. All employees must benefit;
2. Benefits must be on an equitable basis; and
3. The trust must have control (more than 50%) over voting rights and profits.

The fundamental issue to address at the very beginning is this: The owner is unlikely to be paid in full for a number of years because the consideration is through vendor loans or deferred consideration, so it is not unfair to require control of the company over that period. It is totally understandable and comes back to my pint about having a saleable business before this route is chosen.

The EOT has to take over from the start in which case there needs to be mechanisms to give assurances to the vendor which comply with those requirements.

This is the main difficulty in putting these arrangements into place.

Let’s go back to square one – if you, the owner, have made the decision to sell then an EOT is viable. However if you have not made that decision, then an EOT may not be the answer you are looking for.

Disclaimer

These notes are intended to promote discussion and debate and are not put forward by way of definitive advice and should not be relied upon without seeking further advice in relation to any specific matter.

Whilst every effort has been made to ensure the accuracy of the notes, no responsibility can be taken by the writer and Assynt Corporate Finance Limited, for the consequences of any actions taken or refrained from being taken in response to these notes.

It is recommended you seek specialist advice, from Assynt Corporate Finance Limited or another suitably qualified professional adviser, in relation to any specific client matter.

The law and HMRC practices are summarised as they are understood to have effect as at 1st May 2019.