Have you heard these myths about selling an Employee Ownership Trust (EOT)?
Myth 1: Once you’ve sold to an EOT, there’s no turning back.
Myth 2: EOT tax implications are straightforward.
Myth 3: EOT transactions are simple and risk-free.
Andrew Evans, a seasoned tax lawyer, brings a wealth of experience in guiding business owners through the complexities of Employee Ownership Trusts (EOTs). With a deep understanding of the legal and financial implications, he offers invaluable insights into EOT sales. Andrew’s expertise spans tax considerations, benefits, and legal aspects of EOT transactions, making him a trusted authority for entrepreneurs looking to navigate this transition confidently.
Andrew Evans’s Journey:
Andrew first encountered Employee Ownership Trusts (EOTs) through a colleague’s recommendation. Intrigued by the potential benefits for his business, he delved into researching and learning more about this unique approach to business succession. As he navigated the complexities of EOTs, he recognised their profound impact on both the business’s future and its employees. This sparked a deep passion for understanding EOT nuances, leading him to become a valuable resource for entrepreneurs considering similar paths. His journey highlights the transformative power of knowledge and the potential for positive change in the business landscape.
In this episode, you’ll able to:
- Learn insider tips for successfully selling your business to an Employee Ownership Trust.
- Discover the potential tax implications of selling to an Employee Ownership Trust and how to navigate them effectively.
- Uncover the benefits of transitioning your business to an Employee Ownership Trust and its positive impact.
- Understand crucial legal considerations involved in the transaction process when selling to an Employee Ownership Trust.
- Explore strategies for exiting a business under an Employee Ownership Trust structure.
Introduction to EOTs and Employee Ownership:
Understanding the fundamentals of EOTs and employee ownership is pivotal. Employee Ownership Trusts hold shares on behalf of employees, allowing them to benefit from the company’s success without direct ownership. This collaborative approach aligns employee interests with the company’s performance and long-term sustainability. Andrew Evans sheds light on the advantages of EOTs from the trustee’s perspective, emphasising the trustee’s crucial role in safeguarding employees’ best interests during a potential sale. Through detailed examples, Andrew underscores the significance of trustees’ responsibilities in ensuring a transparent, fair, and beneficial sale process for all employees. His insights provide valuable guidance for entrepreneurs navigating the complexities of transitioning ownership to foster employee prosperity and business continuity over the long term.
Watch the episode here:
EOTs, or employee ownership trusts are a great way to secure the future of your business. But what if a better offer comes along? Or it turns out that an EOT is not the right structure and your business doesn’t thrive in that, and the legacy doesn’t go on forever? In this episode, I’m talking to Andrew Evans, a tax lawyer, who tells us and shares his thoughts and insights on what are the requirements, what do you have to do if you do need to sell an EOT, and what are the hurdles you have to jump over? It’s a really insightful episode. Andrew’s got an amazing amount of experience, and he’s the guy you want to listen to on this topic.
Welcome to the podcast that’s dedicated to helping business owners prepare for exit so they can maximise value and exit on your own terms. This is the Exit Insights podcast presented by succession plus. I’m Darryl Bates-Brownsword, and today I’m joined by Andrew Evans from Geldards. Welcome, Andrew. Thanks for joining me today.
Delight to be with you, Darryl. Looking forward to it.
Yeah, great. Andrew, the reason I asked you, and you willingly agreed to join me on the podcast, is because we’re always talking on this podcast about what business owners of owner managed business or business owners of businesses need to do to prepare themselves and get ready for exit.
We know that EOTs, Employee Owned Trust, or employee ownership trusts, are becoming more and more popular, especially over the last five or more years. And I guess there’s a lot of it feels like the message in the marketplace, or the belief is that once it’s an employee owned trust, that’s it. The bets are off. But you raised my, brought to my awareness that you’d sold a couple of businesses that were employee owned, and that really piqued my interest. So I thought, well, let’s unpick that a bit and figure out how that works and what are the constraints and the pros and cons of that and when it’s a good idea and when it’s not a good idea.
Yeah. I’d like to have a chat about it. There’s lots of different issues to think about. It’s important to remember an EOT is one business method. It’s not there necessarily forever in a day, the circumstances may change. Therefore, there may be an opportunity for an EOT to be sold or to sell the trading company. It just depends on the circumstances.
Well, let’s just drill down that, because for a sec, you mentioned sell the trading company, and I guess there’s a lot of people listening to this podcast who possibly just thinking of an EOT, and they’re not even quite sure of the intricate details of what an EOT means. So perhaps we could start by just at a highest level, explain what an EOT is and how it works.
Yeah, sure, Darryl. An EOT is effectively a trust, and so the founders or the owners of the company at the moment, will sell their shares to a trust. And it’s a trust that is the employee ownership trust. The definition there is a trust. That trust will have a trustee, and it’s generally a company limited by guarantee, and that acts as a legal owner of the shares for the trust.
Now, the trust deed will set out how those shares are dealt with by the trustees or the trustee company. Effectively, those shares are held on trust, that is, on behalf of all the employees that qualify in the business. So it could be employees with either six month service or twelve months. And once they hit those buying service conditions, those employees have a right to a share of the trust fund, which is the value of the shares in the trust.
Yeah.
That’s what effectively it is. It’s a method of holding the shares on behalf of the employees without the employees having a direct shareholding.
Yeah, that’s the important piece, isn’t it?
The employees do not have a share stability in their hands. The shares are held on behalf of the employees by the trust.
Yeah. So it’s on behalf of the employees as a whole. And as you point out, you know, individual employees don’t have direct share ownership, they’re beneficiaries. And there’s rules of engagement, so to speak, of how they participate. And I think what you pointed out is what determines an employee. And I guess we can, or there’s some rules or criteria of how wide you can spread that net.
Yes. The basic terms is all the employees of the business subject to a minimum service level. So if they haven’t been employed for anything up to twelve months, then they’re not a qualifying beneficiary. Also excluded from being a beneficiary are the original shareholders who’d held 5% or more of the capital shares in the company, and the relatives of those shareholders. So if you’ve got a typically husband and wife holders, if their adult sons or daughters work in the business, those sons and daughters are not beneficiaries of the EOT in terms of any future capital distribution from the trust on, say, a sale of the shares of the trading company.
In the case of a sale, the EOT will sell its shareholding in the company, whether it be that the trading company or the holding company of a trading group.
Okay, so we’ve now set up this. We’ve got the trust which looks after and holds the shares on behalf of the employees, and we’ll consider that it moving forward. And so it really, in simple terms, it’s just another private company which just so happens to have the ownership of all of their shares via this trustee company is the employees in simple terms, it’s In that sense, it’s no different to any other trading company.
Yes, exactly. You’ve got a shareholder being the trust or the trustees, and they making the decisions on behalf of the employees. So looking after the interests of the employees and making sure interests, the employees are looked after and satisfied and effectively doing their best for the benefit of the employees.
Yeah. And so when we look at it in that light, it makes so much sense that, well, we’ve now got an EOT company that’s trading and growing and doing its own strategic planning and looking about the future. And when a company continues to grow, sometimes it’s a natural progression for that company to go, well, actually, we’d be better off if we were part of that group or our future is not necessarily tied to our past. Now, I guess in that case, when strategic buyers come fishing around, they might knock on the door and they might look at a company go, that would be a good fit for our poor, figure out who the owners are and they’ll knock on the door of the trustees, I guess. Is that what happens?
Yeah, I’d imagine the first approach is made to the chief executive or the managing director of the trading company on the basis that some buyers may not do their due diligence and work out the zone by a trust, and they’ll send a letter to the managing director, are you interested in an offer?
And can we have a chat? Therefore, it’s probably beholden on that managing director to pass the offer on to the trustees if he thinks it’s in the ballpark as to what they want to consider. Any kind of buyer who’s done the due diligence will work out at his own buyer trust and therefore probably send the letter into the trustee or the trust, the trustee, directors or whomever, and take it from there. So it depends on where the offer comes into. I think any managing director would be required to pass that offer on to the trust as a shareholder because it’s not his or her decision to make in terms of acceptance.
Okay, so for the purpose of this, let’s assume that an offer comes out of the blue the business wasn’t planning or considering being sold as the next part of their journey. They get this offer out of the blue, they pass it on to the trustees. What are some of the things that the trustees need to consider? Are there any barriers to them selling the EOT compared to, dare I say, at a normal company?
Yeah. Well, the trustees have got a lot of issues to think about. They’ve got to think about what is the best interest of their beneficiaries, the employees, in accepting the offer. The EOT was set up in the first place to protect the interests of the employees, to maybe create a long term ownership vehicle for the company so that it can’t be sold to a third party and for the founders to protect their business legacy. So there’s a lot of kind of comfort there for the employees that their job is safe and they’re not subject to a maybe a rapacious third party owner is looking for cost savings, initial cost savings for a lot of people. Businesses are the employees and their salaries.
So the trustees have to consider what is in the best interest of their employees. It may be that the number on the bottom of the check is so large that they have to consider that offer. And don’t say it’s a flat no. Now, the technical reasons or the technical decisions I’d have to make is probably driven by the trustee. The trustee may say, where does the buck stop in terms of making the decision?
Does it stop the trustees and therefore the trustee directors, maybe three or five of them, or however many there are, they have the final say, or the trustee may, if the trustees want to accept the offer, have to pass an offer to perhaps an employee counsel, which would be a selection of employees who make a decision as to the future direction of the trust. And then if the employee council say, yes, we want to accept, it may then be passed to the employees. So the beneficiaries. So all the employees who had their minimum qualifying service of six or twelve months, and those employees have to vote in favour. Again, that vote may not necessarily be a 51% majority, it may require a super majority, say 60% or even.
I’ve seen 75 or 80% of the employees voting in favour of a sale. So you have to look at the trustee to see who has a final say in that acceptance.
Yeah. And you touched on and making the point earlier that it’s not just purely a commercial, is it a good financial deal? You’ve also got to, especially in these circumstances, think about the counterbalance of the cultural considerations, what’s best for the employees and I’m guessing what we’re thinking in that case is would they get better career progression? Would they get more opportunities, would they get pay rise? Would they have, would that secure the job in the local area? And there’s all these non purely financial considerations that would come into play.
Yeah, there’s a lot of softer consideration. You’re right. Is there a good career structure being part of a bigger group? So if you’re part of a small company, perhaps there’s a limit to how far you can progress until you’re waiting for dead people’s shoes. Whereas if you join a bigger group, there may be better career progression, there may be great opportunities for more interesting work or working on bigger jobs, different clients, working for market leading clients, rather than perhaps being a small consultancy with a limited pool of clients. So it’s a whole host of factors that need to be considered, and it’s not just the number on the bottom of the page in terms of the offer. Is everything around.
Okay, so we’ve had a look at can the trust be sold? And we’ve gone, yes, it can be. And we’ve got in the trustees and the trust documentation around how that will guide the trustees in how to make that decision and whether they need to bring what percentage or proportion of the employees in to be involved in that decision and what sort of majority or quota needs to be made to be in favor. We’ve said that we need to consider, it’s not just a finance, we need to look at the whole picture, the softer issues or the cultural issues. What about the tax consequences, Andrew? Is it taxed just like any other transaction or things?
Different things are very different. First off, when you sell the trading company, the trust comes around and that’s what’s called a disqualifying and therefore the trust, because they bought the shares and the founders obtained their cash consideration on a tax free basis, the trust is treating as having acquired those shares with effectively the original base cost of the founders, and that may be just 100 pounds. So when the trust sells, it is treated as selling and reacquiring their shares at today’s market value, and therefore it is subject to capital gains tax at 20% on current rates on the whole market value of the business when it sells. So it doesn’t matter if it bought the company for 10 million pounds. If it’s selling for 30, it is liable for 20% capital gains tax on the whole 30 million pound disposal price. So you’ve got a big bill to start with before any money is paid out. To employees or the former ships.
And given the trust is just the entity that owns and runs the business on behalf of the employees. If it were to sell, where would that money come from?
Well, that money would come from the buyer. So the buyer would write their check or whatever it is, for my example, 30 million pounds and pay that to the trustees. The trustees then deduct 20%, so 6 million pounds to pay HMRC and pay the 20% tax bill. They then have to pay the professional advisers on the sales of the lawyers and the accountants. The next chunk of money coming out from the trust would be any deferred consideration still payable to the former shareholders because they will want their, they will want to be paid out because they won’t get their money from anywhere else.
And then the trust will have to decide what it does with the remaining cash and that cash has to be paid out to the employees. Now any employee then will be liable to income tax national insurance contributions. So there’ll be employees national insurance contributions payable on any cash. Then the company will have an employer’s national insurance issue. The employer’s NICs can’t be paid by the trust, that is paid by the employer and therefore that probably comes off the 30 million pound purchase price before the trust gets any of that money.
So the buyer will then pay that employee NICs or employer NICs, sorry, to the trading company, for payment to HMRC. So the tax consequences is absolutely horrendous. As a tax lawyer, it makes you want to cry and sit in the corner crying my eyes out, because you’re having effectively almost 70% of the cash consideration going in tax, let alone any money being paid to the former shareholders.
70%?
On the other hand, the employees are getting 30% of something.
Exactly.
So yes, they’ll see an awful lot going in tax, but they can still be having life changing amounts of money.
That’s the bottom line, isn’t it? We can have a look at it from a tax perspective and go, that’s an unreasonable amount of tax being paid out. But if we’re looking at it from the trustees perspective, whose responsibility is to consider what’s best for the employees? And we go, if each employee effectively gets a bonus or a cash free, well, it’s treated from an income tax perspective, isn’t it? I think you said. So they’re effectively getting a wad of income tax, which, as you say, if it’s income tax, that’s going to potentially whack them straight into the top tax bracket. But the net injection of cash could still be life changing for a lot of these employees, which makes it the deal worthwhile, because the employee, because they’re still employees at that time and beneficiaries, is a significant life changing event for them. So therefore a good deal.
Yes, exactly. We did a transactions in the public domain, and I won’t mention the name here, the employees got 186,000 before tax, so they’ve got about 96,000 after tax.
Each?
Each in their hands.
And how did that 96,000 pounds How did that sort of compare to their average annual salary, for example?
It was probably one and a half times annual salary. Their employees working in the city of London for a very good firm, they were being paid well, but still being probably at least one or one and a half times their salary. Yeah. And admin assistant, they could have been on 30,000. So it’s three times our annual salary. It’s life changing.
It is, isn’t it? And if they get that life saving, that, that big chunk of cash, they could pay off a significant mortgage or qualify for a mortgage that they normally wouldn’t be able to it accelerates their personal wealth, doesn’t it?
Exactly. Some of the employees in their twenties, that was a deposit for flat, otherwise they wouldn’t otherwise do it. And in that particular case, the trustees were very careful. They made sure that the ethos of the buyer was aligned with the cultural aspects of the EOT and the buyer was prepared to invest in the business and grow the business, make sure all the employees are looked after. And they also put in a very fantastic incentive scheme for the employees moving forward, because on that particular deal, two thirds of the employees got something out of the transaction, but one third hadn’t been there long enough. And therefore the buyer had to look after the newer employees, the recent joiners, to make sure they’re still happy. So it has to be a win for everybody.
So in this scenario, and I know this isn’t going to nurture all scenarios, but the employees got a big injection of cash, so there’s a life changing event and by the sounds of it, they all ended up with a better job.
Yes, exactly. Yeah. Because again, the trustees made sure that it was a good deal for everybody, not just the lucky two thirds getting a big cash payout. There’s also a very tricky or nasty trap in that if the trust pays out cash to the employees on a sale, they also have to consider all the employees who’ve left, for whatever reason, in the previous two years before the sale transaction. And so they are entitled to the same cash payment as all the other employees who qualify as beneficiaries.
Oh, okay.
That’s a very, it’s probably a not very well known trap, and that’s why it’s a trap. You need to be very, very careful. Now you can possibly sometimes get away around that by transferring the shares to all the qualifying employees the day before you do the completion of the sale. And therefore you’ve broken the trust. The employees are still subject to income tax and national insurance contributions on the market value. Those shares of, they then sell those shares to the buyer and they receive the cash consideration after deduction or the tax so the employees are instilled net of tax, same position. But then you don’t have to pay any money out to the previous former employees of the business.
What I just heard..
Makes it nice and very, very complicated for the lawyers dealing with the transaction.
Yeah, well, what I heard, Andrew, is that, and reading between the lines and paraphrasing somewhat is that EOTs are still a relatively new, let’s call them a business structure. It is possible to sell them should the right circumstances. Based on what you’ve just said, that’s happened more than once already. So there’s been a few transactions. They’re perhaps a bit more complex than your average business transaction. So it’s even more important than normal to get good tax advice, good tax planning advice and legal structure advice.
The trustees to do this because they’re acting in the best interest of the company, but they’re going to want to protect themselves and make sure that nothing comes around and bites them after and find out that they’re liable or exposed to something that they didn’t see coming. Is there protection and indemnities or what do we need to talk about here to.
You’re probably talking about lots of jobs for different lawyers. Unfortunately, there’ll be laws acting for the buyer relatively straightforward. They’ve just got their one client. You probably got another set of lawyers acting for the company, the target company, because the management team will want to be protecting their employees and knowing that everything’s being looked after from that point of view. And then the trustees will have their own lawyers advising the trustees on their trustee duties. I’d suggest that can’t be the lawyers that act for the company. So it’s a conflict of interest between advising the company and advising the trustees. And so I think it’s well worth the trustees saying, we want a separate law firm advising us because the trustees, if they get it wrong, they could be personally liable for making their decisions. They don’t want. The trustees don’t want employees coming back in two years time saying, you breached the trust rules by doing something you shouldn’t have done, and therefore the trustees need to have advice that they’re making the right decision. They need to document that advice and keep the records as to why do they make the decision to sell. What do they consider and why did they reach that decision that it was a good idea to sell the business from the trust?
Yeah. So that’s their protection, if you like. And they’ve gone, here’s how we made the decision at the time to the best of our knowledge, it’s the best decision we could make. Two years later, down the track, new information may emerge. But at the time, that information wasn’t available.
Yeah, it may be two years down the track, an employee gets dismissed or is made redundant and therefore thinks, well, if I hadn’t been part of an EOT or the EOT hadn’t sold the trading company, I may still have my job. Therefore, who can I blame for getting made redundant? I know, I’ll go and look at suing the trustees. The trustees will also probably have an indemnity from the company and the employees receiving the cash. So on the basis of receiving the cash, the employees give an indemnity to the trustees, including a requirement not to sue the trustees if everything goes wrong in the future.
So it’s not without risks of being a trustee, but you try and minimise the risks in terms of giving out or giving away lots of cash.
And we’ll take it for granted that trustees are sincerely acting in the best interest of the, of the trust and therefore for the beneficiaries.
Exactly. Yeah. The trustees may be an employee and therefore they may be getting a cash pay themselves, but they need to declare that conflict of interest and beware of that decision when they’re documenting their decisions. I would hope you’d have an independent chair, maybe another independent trustee who has no skin in the game and therefore can look at things objectively rather than thinking, I’m going to get a lot of money, therefore I’m going to vote in favor of this decision. So it’s trying to divorce yourself as an employee trustee director from the big pot of cash at the end of the rainbow to, is this the right decision for my beneficiaries, that is, my employees or the employees in the business.
And all you’re doing is reinforcing. At the moment is the requirement for good governance in the getting up and running. Andrew, we haven’t talked about when businesses often sell the owners, the founders, are often required to give some sort of warranties and indemnities. How does that happen in this scenario, or does it happen?
It’s very difficult because trustees, their starting point is we don’t give warranties or indemnities. We’re a trust. We can’t pay out any money other than to our beneficiaries, that is, the qualifying employees, and therefore they’ll say, all we’re giving warranties are, is that we own the shares and we haven’t encumbered those shares by charging to anyone else. So the buyer is left in a difficult position. They’ve got no one to go after in terms of paying out probably many millions of pounds to buy shares in a trading company and don’t have protection. I think in those sorts of circumstances, no buyer is going to take a risk in terms of having no warranty cover unless they’re supremely confident in their due diligence and spending a lot of time going through the books of the target. What they probably will do is have warranty and indemnity insurance. So that will cover off the warranty risk up to certain levels. There’ll be a premium paid and that premium may be either paid by the trust or shared between the buyer and the trust.
That warranty and indemnity insurance will be another set of lawyers acting for the insurance company or the brokers providing the insurance cover, and they will carry out a full legal due diligence exercise into the EOT and the trading company. It would be the same exercise the buyer would carry out, but the insurers carry it out instead.
So we’re looking at protecting. So we’re talking here about, hey, look, we need that. The buyer is going to want to do thorough due diligence and really make sure they’re clear on what they’re acquiring and uncovering any skeletons that you need be.
If they’re going to go to that level of effort, they’re probably only going to do it for a business of a certain size and presents a certain opportunity for them. Have you got any sort of thoughts or perspectives on what size of business probably in terms of valuation, the minimum needs to be before this even becomes looking like it’s a viable option for, for all parties involved.
I think it depends on the circumstances of the trust or the company. If it’s being sold because it’s really, really successful, you’re probably talking 10 million pounds plus. But if it’s being sold because the EOT business isn’t operating very well, is going a bit wrong and therefore it’s a rescue situation.
It may be a case of the buyer does the deal, does some due diligence, that realises it’s paying a purchase price and will take a risk because it’s getting this target company for a salt, it’s a bargain, and therefore take the risk that they can recover their money through sale of assets or existing banks.
And so, yeah, new management.
And from a trustees point of view, they’ve got a choice between either the company and everyone is the job or they sell the business. The employees get no cash, but they’ve got a job that ticks an awful lot of bucks. They can still continue to pay their mortgages, rent their homes and put food on the table for their families.
And at the end of the day, most people would rather have a job than not.
Exactly. So, yeah, that’s the other end of the scale of EOTs, when EOTs don’t work.
Yeah, sure.
It’s a rescue situation. It happens. We’ve had, unfortunately, two circumstances where that’s happened.
Okay.
But it’s. Yeah, I think your listeners and viewers need to realise EOT, they’re designed for long term ownership by the trust. Shareholders shouldn’t be entering into EOTs for the tax free cash and then think they’ll do another onward sale in three years time.
They should be seeing this a sale and it stays in the EOT ownership. Like John Lewis. John Lewis has been around an employee ownership for probably approaching 100 years. That should be the plan for founders looking to sell to an EOT, not a sale, and then do a private equity deal or whatever in three or five years time.
Yeah. So I think what you’re suggesting there is, hey, look, EOT, if the possession is a wholly employee owned company, then the reasons behind that are primarily legacy, cultural, social. Yeah, it is a way of running a business. But what we’re also suggesting is that’s a good thing to do. It’s an admirable thing to do, but in some situations that does change and it is undoable. It can be changed. Should that be required? You’re not locked in for life. If the circumstances change.
Yeah, if circumstances change, the EOT can sell the trading company or sell the shares, and trustees should be open to that offer. If you’re a very successful business, you’ll have offers being made and it just depends on what’s the number on the bottom of the page.
Is it big enough to attract the interest of the trustee and encourage them to sell, take account all the other issues discussed as common culture, ethos, protection for the employees, career prospects. Everything has to add up and go in the right direction. Otherwise the trustees have to weigh it up and make a decision.
Absolutely. Okay. Really helpful. Really appreciate your insights. Andrew. The only thing that. The question that I don’t think I have asked is what happens in the situation let’s assume the business is going to be or has had an offer, and it’s like it’s a 50% or less than 100% EOT and there are other shareholders. Does that change things?
Well, if it’s an EOT, the EOT has 51% of the shares, so it probably has control. The minority shareholders may have a veto right of sale, although they may say, oh, fantastic. If the number hits their target, or what they’re hoping to get, they may be delighted to sell their minority shareholding to a buyer.
Means they get paid cash now. They may get the money down site quicker than waiting for the EOT to buy their shares. At some point in the future, if they’ve put those arrangements in place when they did the original EOT, they may have sold their 51%, put nothing in place to deal with their minority shareholding, and therefore they’d be faced otherwise with EOT saying, well, why do we need to buy your shares? We control the company. You didn’t put anything in place to force us to buy your minority shareholding, offer you ten quid for your shares if you want to sell.
Whereas if they get an offer from a third party, the third party will want to say, we need 100%, therefore the minority say, right, I’ll have pro rata value. Thank you very much. Fantastic. From their point of view, Christmas has come early multiple times
And they don’t and because they’re direct shareholders, they don’t have the same tax issues, so to speak.
No. Yeah. They’ll be subject to capital gains tax on the sale of their shares at the normal rates of capital gains tax. They may qualify for business assets relief, therefore pay 10% tax on the first million pounds of lifetime gains. They haven’t used it up already, and then 20% at current rates on the balance. So, again, it’s not as good as selling to an EOT, but they’ll get the cash and pay the tax. They may have an issue over having to give warranties and indemnities for their shop rates, rather than the trust saying, right, we’ll cover everybody. So I imagine those minority shareholders will have to put some money at risk, effectively selling their shares for warranties and tax indemnities again, they’ll want to be probably separately advised on their position as minority sellers.
Yeah. So, as always, it depends. We’ve covered a lot of ground here, Andrew, and I really appreciate you spelling it out in nice, nice plain terms, which is great to hear. And so the listeners who haven’t done a lot of legal work, and I think you’ve really explained it brilliantly. If I can explain it, then there’s a good chance that others can explain. It is always a good benchmark that I use. But is there anything that you thought that I would ask or needs to be identified that we haven’t touched so far? Haven’t touched on so far?
I think it’s being very, very wary about accepting an offer. The trustees, their knee jerk reaction shouldn’t be, oh, yes, that’s a lot of cash, I’ll accept that offer. They do need to think about their duties and responsibilities of being trustees, then if they’re in doubt, despite what the EOT deed may say, that they have the final say, if there’s any doubt, go to the employees and get the employees to vote in favour, because if it’s a good enough deal, the employees should be able to kind of ratify it and say, yes, we want to accept that offer.
Yeah.
It is a question then of, do you go to all the employees or just the employees and get some cash.
And get some advice, get the employees input, get the feel of the group. And I imagine in that situation, you’d have to explain what it would mean to them, personally or individually, as much as you in some terms.
So it’s not just you could receive an awful lot of cash. You’ve also talked about the negative potential consequences. You could lose your job. The buyer does a restructuring or gets rid of employees. How many HR departments do you need?
Or how much finance departments, many finance teams do you need? So it’s aware of cost savings, but also kind of the career prospects for staff may be more attractive for them. So it is making full disclosure to the employees as to the pluses and minuses, kind of risk and reward. And do the employees want to go back into a possibly, dare I say, more cutthroat environment that’s not employed?
Well, there is that, and it’s also likely to be a bigger business. It’s not that’s acquiring them. So they’re moving closer towards that corporate bigger business culture, which may be good or bad, depending on.
Although I’d also say Darryl, the buyer could well be another EOT. If there’s an EOT out there, that’s looking to build its business. Buying another EOT is very attractive. They’ll acquire the shares and they may not have to pay too much cash that the employees kind of are taking on into a bigger EOT group.
Has that happened yet?
I haven’t personally seen any. We did have a client who thought about it but it didn’t quite work for them and therefore they pulled out of the transaction. The more EOT’s we see, there could well be caution in say recruitment sectors or construction sectors. And that sort of thing is making a bigger company.
Yeah, as employee ownership sector develops and evolves, it’s more and more likely, isn’t it? Exactly, yes. Andrew, I really appreciate your insights and sharing your knowledge with us as well. I don’t think there’s too many people who would have experience in the UK yet of having sold EOTs and sharing your knowledge.
The one question I always ask everyone at the end of the podcast is given everything you’ve shared so far with us today, what’s the one? What’s the overriding message that you want listeners to take away from this episode that we’ve had today? This conversation?
I’d say don’t rush in to take your time. It’s such an important decision. You should not rush things. Take your time and get some advice either. Financial advice, check the valuation that’s being offered and then check your legal position as trustee directors. Can you make that decision? And who do you need to go and consult with if you want to accept it? So don’t take your time is a key thing.
Take your time. Thanks Andrew Evans from Guild ads thanks for sharing your exit insights with us today.
It’s a pleasure, Darryl. Great to talk to.
About Andrew Evans
Andrew Evans advises on a broad range of tax issues for companies, business owners and private individuals. A major par of Andrew’s work is advising on the transition of companies to employee ownership via Employee Ownership Trusts (“EOT”) and advising existing EOTs on issues involving the operation of the trust including the sale of the company owned by the EOT.
He works with the Corporate teams across the whole firm to provide tax advice on their transactions including acquisitions, disposals and corporate group reorganisations plus advice on the adoption and implementation of share option schemes. He works collaboratively with other tax advisers to identify key issues and find mutually acceptable solutions.
Andrew provides advice to the Commercial Property teams on vat and stamp taxes with particular emphasis on SDLT and LTT.
Way from the office, Andrew enjoys dinghy sailing and skiing. He also keeps fit with cycling in the Vale of Glamorgan having completed Lands’ End to John O’Groats bike ride several years ago raising money for Dementia UK.
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