First of all
Becoming an EOT requires certain obligations regarding criteria:
Limited company
The business has to be a limited company, as the tax benefits of becoming an EOT are only available for the sale of shares in a limited company.
Shareholders
Some of the tax advantages of becoming an EOT requires a limit on how many shareholders there are who are also employees, or who own a large stake in the business.
Sound finances
The share purchase to become an EOT is financed through the available cash of the business, not through third party funding. So the business needs a good working capital position and to be in a healthy trading position.
Signs that becoming an EOT is right for your business
A business is in a good place to be sold by an owner to become an EOT, if the following all applies:
Legacy Concerns
A business owner can usually make more money selling a business on the open market and to a third party buyer. This will, however, provide barriers to the owner retaining a position within the business, should they want to, and will also make it difficult to pass on the existing values and culture of the business. So if the sale is motivated by legacy more than money, then an EOT is the right move.
Exit strategy
The owner is emotionally ready and therefore wants to sell the business.
Strong Culture
A culture of collaboration already exists, whereby there is low staff turnover, people are loyal and motivated and there is a sense of shared responsibility already.
Stable and Profitable
Using the free employee ownership valuation calculator you are able to quickly and simply value the business and see if it is in a strong trading position.
The Structure is Ready
Is there good succession planning in place and there won’t be an immediate leadership void once the owner sells? Sometimes if a business is too reliant on one individual’s expertise, it is not a healthy situation. So are there strong people ready and willing to accept new roles and responsibilities?
When are Funds Needed?
Usually, proceeds from the sale of shares in a business to an EOT are paid to the founder/owner over multiple years. This can produce a nice, regular sum to finance a retirement. But if the owner requires a lump sum immediately for other reasons, they may need to secure this finance in another way, and becoming an EOT might not be the right way to do this.
