How do you transition your business to your employees?

Employee ownership offers a combination of potential tax reliefs, and its flexibility means that it can suit a wide range of circumstances and personal preferences.

It provides a framework resulting in reduced disruption, greater confidentiality, and opportunities for the existing employees to become owners of the business, strengthening the bond they have with the organisation.

What is an employee-owned business?

An employee-owned business is where employees have a significant and meaningful stake in a business. This means they will have shares and a say in how the business is run. There are generally three models available:

  • Indirect employee ownership: where shares are held collectively in an employee ownership trust (EOT) or employee benefit trust (EBT)
  • Direct employee ownership: where employees become individual shareholders (potentially facilitated by an EBT or EOT)
  • Hybrid model: a combination of the above

What are the benefits?

Passing the business to employees can often result in a smoother and faster transaction for all parties involved as those within and outside of the business already know the new owner. It can also provide a sense of reward and loyalty to those taking on a share in the business, as they help build the company, which can result in improved culture, business continuity and growth. Employees having a share in the profits can also mean a more engaged and higher-performing workforce, whilst increasing employee retention and aiding recruitment.

Although there are a number of conditions to satisfy (primarily these are assurances that the business is properly held for the benefit of employees), employee ownerships have attracted attention because shares can be sold to an EOT free of Capital Gains Tax.

What do you need to consider when transitioning your business to your employees?

Transitioning a business to employees involves many considerations. Some important factors to take into account are:

  • Selecting the right successors: Choosing the right people to take over your business is critical. They should have the skills, experience, and passion necessary to run the business successfully.
  • Succession Planning: A well-developed succession plan can help ensure a smooth transition and minimize disruption to the business and should be considered and discussed well ahead of any transaction..
  • Legal Structure: The legal structure of the business may need to be changed to facilitate the transition to employee ownership.
  • Financing: Financing the transition will need considerable thought, and may require creative solutions such as seller financing, employee buyouts, or third-party financing.
  • Valuation: Determining the value of the business is critical to ensure a fair transaction. It may be necessary to engage a professional business appraiser to help with this process.
  • Tax Implications: There may be tax implications associated with transitioning a business to employee ownership, such as capital gains tax, income tax, estate tax, and employee Stock Ownership Plan (ESOP) Benefits.
  • Management and Governance: Developing a management and governance structure that supports employee ownership is essential to the long-term success.

What’s next?

For many owners, employee ownership has been a way of phasing employees into future generations of business owners whilst being able to realise some or all of the value of their business now. 

It’s important to gain a solid understanding of each business model option and the potential risks while also working out how much each model option could generate in terms of capital and income over time for the owner(s). You will also need to be aware of any tax and legal implications and address these in the early stages.

Get in touch

If you’d like to know more about employee ownership trusts and how our team of deal advisory, tax and financial planning advisors can assist, please use the contact form below.

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How we can support you if you are looking to transition your business to employees

Our deal advisory, tax and financial planning advisors can support you through all stages of transferring your business to employees. We will work with you to:

  • Help you understand what your business is worth, to ensure the business is transferred at a fair value Understand your key objectives and timing so that we can help advise on the right transaction structure
  • Understand the capital/financing requirements to deliver on objectives and help you identify the right source of capital to meet those objectives, whether that be through cash on the balance sheet, external debt, or new equity from an investor
  • Work with you to understand the potential future value of the business, using our financial modelling experts, to help communicate the opportunity for employees
  • Advise you of your potential tax exposure for any relevant transactions, both for you personally, the relevant employees and the business to ensure you have clarity over any potential tax exposure
  • Undertake a thorough exploration of your individual circumstances as well as the business in order to identify and consider any tax reliefs that may mitigate your tax exposure and ensure any tax traps are understood and navigated in order to provide a bespoke tax plan as part of your strategy
  • Advise you on alternative deal structures to ensure tax efficiency, where appropriate
  • Manage and obtain relevant clearances from HMRC on your behalf, where appropriate
  • Advise you of your reporting requirements to HMRC in order to minimise the burden and give you peace of mind
  • Calculate the level of capital required from the transition to meet your objectives and provide security, using sophisticated cash flow forecasting tools. This helps you understand what is needed and what is aspirational
  • Work with you in advance of the transition to agree a personal financial plan, so plans can be implemented efficiently once proceeds are received
  • If desired, meet with the new management team to help them understand their own financial position, to give them confidence entering into such a transition

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