EOTs: a business winner

One of the most challenging times for any small business is when the owner decides to retire or take another path in life. Family succession, a trade sale or winding the company up altogether can all be considerations at this point.

However, another route is increasingly being used: setting up an Employee Ownership Trust (EOT). Taking this option effectively turns those working in the firm into stakeholders in it, giving them a say in how it is run as well as a share in its profits.

These trusts were launched in 2014 and are becoming increasingly popular. Businesses using this model are not necessarily SMEs - household name firms include Wallace and Gromit creators Aardman Animations, hi-fi retailer Richer Sounds and the UK's largest guitar retailer, Guitar Guitar - but the structure also works well as a succession option for smaller firms. Scottish legal practices may wish to consider them for their clients.

Growth in the EOT sector has been remarkable. Some 170 of these businesses now operate in Scotland, of which more than 120 have Scottish headquarters. We are now the second UK region only to London in terms of numbers.

Figures from HMRC show a tenfold increase in successful applications across the UK from 2014 until the 2019-20 tax year. There has been a 13 per cent increase in the number of EOTs since June 2020 alone.

Part of the reason for this strong burst of activity north of the border is attributed to the Scottish Government’s offers dedicated support for EOTs through Co-operative Development Scotland (CDS), a specialist unit within Scottish Enterprise working on behalf of the country’s three economic development agencies. 

The CDS team has extensive experience working with these businesses and can provide free advice, guidance and extensive support including access to experienced qualified advisers who understand the process. It can also help clients of law firms explore if employee ownership is right for them in the form of a funded succession review and employee ownership feasibility study.

There are several advantages for business owners in selling to an EOT. It can achieve a competitive price and the exit is generally pain-free. A lot of these sellers have built their companies up over many years and have an emotional attachment to them: trading them on to employees sees them pass on into trusted hands and allows a connection to continue.

“It’s a consensual sale” explains Glen Dott, Employee Ownership Special Adviser at CDS. “It meets with owner expectations and the owners don’t have to exit the business immediately.

“If the buyers and sellers are from the same company and are in essence sitting on the same side of the table, then it makes the process a whole lot smoother.”

Most owners of small and medium-sized enterprises (SMEs) consider their employees as extended family members, he says. “So there’s definitely an emotional connection - it’s not merely a financial equation. 

“Using this route means you’ll get a fair price for the business and you can outline the terms of your exit path. There's no cliff edge, and quite often the owners stay connected to the business, perhaps as employees, for some time. It’s very much a win-win.” 

There is also evidence, he adds, that using the EOT route creates a strong business. “If the managers and the employees are coming from the same position, then it’s a lot easier to incentivise those working for the company.

“It’s not a faceless office with external shareholders benefiting from the profits. If the company is doing well, all employees can benefit from a tax-free bonus of up to £3,600.”

Clients, too, like EOTs as they offer stability and continuity. “If they are dealing with someone who isn’t just an employee, then they can be assured that the person involved is going to do the utmost for you and provide the best service.

“That person also has his or her colleagues to satisfy, so peer pressure comes into play - in many ways, it’s something of a self-regulating system. 

Glen Dott believes that there is scope for further education about EOTs and the advantages they offer across the Scottish legal profession. “There are some good lawyers actively working in this field who understand the minutiae of these deals. However, we would like to see an increased awareness in this area as being one of our key objectives.”

He sees a real opportunity for Scottish lawyers. “Not everyone will want to operate in this field, but there is certainly a demand for those who do.”

Another strong advocate of EOTs is Carole Leslie, from Stirling-based Ownership Associates, who project manages transactions in this area. 

Some succession models can lead to disruption for the company, its employees, its customers and its suppliers, she says, but the EOT route minimises this for SMEs. 

“By taking this track, owners are really guaranteeing stability and security for the business as well as continuity for the clients and suppliers. They don’t want to see the company relocated or downsized or the way of working changed.” 

An EOT ensures a fair value and that the people who are most interested in it - the people who work for it - get the chance to run it, she adds.

“It doesn’t mean the seller has to compromise on the price. And I think something that is a big attraction for the owners is that if they are not quite ready to hand over the reins, they are able to remain involved and shape the future of the company. With a trade sale, they immediately hand over control of the future to the acquiring business.” 

Many owners will have spent longer with the firm than they have with their own family, she adds. “To then see it in the hands of someone who will do things very differently can be a difficult thing for them to contemplate.”

The success of EOTs can be measured on a range of key metrics: productivity, innovation, profitability, sustainability, resilience, recruitment and retention and employee happiness and wellbeing.

“It’s a very, very stable platform for growth. It’s not about rescue or companies at the end of their shelf life.”

Law firms in Scotland enjoy working on these transactions, Carole Leslie says. “These transactions are very collaborative - you don’t get the same animosity and adversity you can find with trade sales where one party is trying to maximise the price and the other trying to keep it down.

“Everyone’s interests are aligned, so it tends to be a really enjoyable process. We have a number of very proficient lawyers who are actively looking to do more of these.”

To find out more about the EOT transaction, watch a new video guide: www.scottish-enterprise.com/eot