Have you Considered an Employee Ownership Trust?

March 31, 2023

Livingston James Director, Ali Shaw, discusses employee owned trusts and highlights some reasons why this type of sale might be a good option for your business.

In my line of work, I am privileged to meet many brilliant individuals and phenomenal organisations. As well as established enterprise clients, we love working with entrepreneurs that have built something special from scratch. I’ve had a few conversations in recent months with such business owners starting to look for an exit. Whether it’s post-covid burnout, a talent shortage slowing growth (we can help!), the cost of living crisis causing extra pressure, or actually just the perfect time to pass the business on; I’ve seen an increase in business owners looking to sell and it’s a decision not to be taken lightly.

There are plenty of ways to sell a business on such as an MBO, financial sale or a sale to a strategic buyer, and all have their pros and cons. Another option is transitioning to an Employee Owned Trust (EOT), which perhaps not everyone has considered.

Employee Owned Trusts

In January this year, Livingston James transitioned into Employee Ownership. As a purpose-driven people business, our founder Jamie Livingston was exploring the optimum business model to make us the most attractive place for the best people to work, which then led to the EOT. We’re fortunate that Jamie is very much staying with the business, allowing us to continue to take UK market share. So far, it has been very positive for everyone involved, so I thought I would share a bit more about our experience for other owners out there looking to enhance their business or simply looking for an exit.

So, what does it mean? In an EOT, the ownership of the business is transferred to a trust, which then holds the shares on behalf of the employees. This type of sale can be a good option for business owners who want to ensure that their legacy is preserved and that their employees are rewarded for their hard work.

Here are some of the reasons why an EOT has been a good option for us, as opposed to other types of sale:

It rewards employees: with an EOT, employees are given a stake in the business, which can help to motivate and incentivise them. This can lead to increased productivity, loyalty, and job satisfaction, as employees feel they have invested interest in the success of the company.
It can preserve the culture and values of the business: an EOT can be a good option if the business owner wants to preserve the culture and values of the business. With the employees as owners, there is a greater likelihood that the company will continue to operate in the same way as before, even after ownership has changed.
It can provide tax benefits: an EOT can provide tax benefits for both the business owner and the employees. For example, the business owner may be able to defer or eliminate capital gains tax on the sale, and employees may be able to receive tax-free bonuses through the trust. Under the model, all our employees can earn an extra tax-free bonus of up to £3,600 a year on top of their normal pay and bonus. There was zero push back on this point!
It can create a sense of community: an EOT can help to create a sense of community among employees, as they are all working towards a common goal. This can lead to increased collaboration, communication, and teamwork, as well as a sense of pride in the company.
Owners can step back from the business, on a timescale that suits both them and the business.
The sellers can have a lot of control over the sale process in a sale to an EOT; terms and timescale etc.
Holding the shares in an EOT secures succession for the long term: the business can invest and grow without the distraction of buying out the next generation or trying to look attractive for a trade buyer.
Sale to an EOT protects employee jobs in circumstances where a third party sale may not.
It can provide excellent progression: at Livingston James, the Board of Trustees includes two democratically elected employees offering them invaluable experience as they grow their careers.

There are around 165 companies with headquarters in Scotland that are employee-owned, with the number rising all the time. We’re pioneers in our sector and are still trying to figure out the downside! If you want to find out more about our experience transitioning to an EOT ownership model, please reach out to me at [email protected].