Graham Cunning: EOTs increasingly popular alternative to trade sales
Graham Cunning, head of corporate finance with Azets in Scotland, discusses the marked increase in the popularity of Employee Ownership Trusts (EoTs).
A growing number of business owners have expressed concerns about trade sales, in particular the lack of privacy, the time required for the bidding and due diligence and the potential for a ‘price chip’ late in the deal process.
The trade sale or MBO have been the dominant models for business owners wishing to exit and seeking to maximise the value in their business, however, whilst trade sales can often realise the best financial return, an increasing number of owners are reluctant to engage with potential trade buyers, especially if they are competitors. Owners and shareholders value privacy and want to remove uncertainty from the transaction by shaping the deal and preserving a legacy for their staff and the community.
Scotland is predominantly an SME economy and EOTs offer an attractive exit option for helping with retirement planning. Employee Ownership has long been a secondary exit option but a surge in popularity during the last 4 years can be clearly linked to owners’ desires to see continuity of the company and the culture they have developed over many years.
From a financial perspective, EOTs offer several funding options including cash at completion, ‘self-financing’ from future profits and external debt funding. EoTs are also attractive from a tax perspective, as the owners can bank a 0% tax rate on the sale. The structure needs to ensure that it does not put undue financial stress on the new employee owners and gives them the time and space to grow and develop the business.
Changes to Capital Gains Tax and business asset property tax relief, formerly known as Entrepreneurs Relief, are likely during 2022.
Although 2021 may end up being a ‘window’ in which owners can sell their business at known rates of CGT, it is not dampening interest in EoTs, in fact quite the reverse. Back in 2019, shareholders were often dubious about EoTs when they were raised as an exit option, but now I am being proactively asked about them as a model.
Around half of the EoT deals on which we are advising, the business owners have already considered a trade sale, or a trade sale has stalled or simply been aborted. Employee Ownership Trusts have matured into a viable and often preferred exit option, and we would encourage more business owners to ensure to consider them when drawing up their exit plans.
To sum up, the mantra for an exit during 2021 and 2022 will surely be ‘To EoT or not to EoT?’