The following is an extract from an article called "Employee Ownership as a Business Succession Solution"
"Employee ownership ("EO") could be achieved by all employees buying shares directly in a company from the existing owners. But, in practice, EBOs often involve an employee trust as the purchaser of shares, with a corporate trustee holding those shares indefinitely on behalf of all employees. The new employee ownership trust ("EOT") capital gains tax ("CGT") exemption was designed to encourage EBOs of this sort, and to raise awareness generally of EO. Typically someone selling a private company would expect to benefit from entrepreneurs’ relief and pay CGT at 10%. The new EOT exemption means that the idea of an EBO should get considered as an alternative to a management buy-out or other form of exit. An individual or group of individuals can sell shares to an EOT and, provided all conditions are met, that sale will be free from CGT - this is an important incentive, in particular, for individuals who wish to perpetuate the independence of their business rather than, say, sell to a competitor.
In some respects, the purchase of shares by an EOT is the same as any other sale. There are, however, some key differences in addition to the EOT tax exemptions, which help make an EBO attractive.
An arm’s length sale to a third party would typically involve the selling shareholder in the following:
- a full due diligence exercise, involving disclosing confidential information;
- detailed negotiations on price;
- agreeing comprehensive long form sale documents;
- accepting that at least part of the consideration for the sale is dependent on the future profitability of the business being sold;
- losing their influence over how the business is operated and developed in the future;
- a lack of control over the timing of the sale; and
- uncertainty over the support for the business going forward from all its employees (which may impact on any "earn-out" payments).
A management buy-out can also involve much of the above and the use of a "Newco" as the buy-out vehicle.
By contrast, because there are no third parties involved, a typical EBO (using an EOT to acquire at least a controlling shareholding) would involve:
- no detailed due diligence and no disclosure of confidential information to third parties;
- quicker agreement on the value of the company;
- shorter form sale documents;
- agreed instalment payments for any consideration not paid upfront;
- continuity regarding the existing ethos and independence of the company;
- complete control over the timing of the EBO;
- support from all the employees for the business following the change in ownership; and
- no need for a "Newco".
The above is a very brief overview. There are risks with an EBO. In a sale to a third party the funding for the purchase depends on the financial strength of the buyer. An EBO is usually funded by the company itself and so the sellers are dependent on the company’s continued success to finance any deferred consideration."
The full article is available at: http://www.fieldfisher.com/publications/2016/03/employee-ownership-as-a-business-succession-solution. It was first published by Bloomberg BNA in Tax Planning International, European Tax Service, International Information for International Business, Vol 18, No.2 Feb 2016. Copyright © 2016 by the Bureau of National Affairs, Inc. (800-372-1033) https://www.bna.com