EOT Uses and Abuses

EOT Uses

• Fantastic business succession planning tool - facilitates smooth business succession, highly flexible, adaptable, bespoke. No need to find a 3rd party buyer. Stress-free negotiations compared to other alternatives. Can be achieved in 8-12 weeks.
• Extremely tax efficient exit – CGT free exit for vendors; can facilitate significant up front tax-free cash extraction if planned well and shareholder funds have been retained. Increases in CGT rates makes an EOT even more valuable from a tax perspective.
• Facilitates an alignment of values – Vendors, trading company management and employee interests become aligned. Focuses the business going forward through all parties.
• Preserves company culture – Culture is protected and locked in, continuity in leadership.
• Signals long term business continuity – encourages a culture of long-term, shared success amongst all staff.
• Great benefits for staff – Eligible to receive income tax-free bonuses and a portion of sales proceeds should the company ever be sold. Broader wealth distribution. Potential for huge upside when ‘financial freedom’ is achieved.
• Increased employee engagement, retention and attraction – staff are vested in the company’s success and can directly benefit. Opportunities for direct share ownership through EMI schemes.
• Creates people powered businesses – Employees are vested in the growth and success of the company.

When can EOTs go wrong?

• Failure to comply with the EOT rules and ongoing requirements post-sale.
• Overvaluation of the business.
• Poor Trustee governance.
• Cultural mismatch.
• Miscommunication to staff.
• Lack of understanding from vendors and / or employees alike.
• Exiting owner dominance (undermines trust structure and governing requirements).

EOT Abuses

• Intentional overvaluation of the business to maximise tax relief - Burdens the company with more debt that it can pay in a reasonable time frame. Puts stress on the business. Trustees at risk of breaching their fiduciary duties to their beneficiaries.
• Winding the business down after the vendor clawback period has ended – Once this period ends, vendors are no longer personally on the hook for a CGT clawback. The trade could be wound down, lumbering the trust with tax charges it cannot pay, with no impact on the vendors who may have already benefitted hugely.
• Sham EOTs - EOTs that appear to be authentic, but really the control of the company remains with the vendor, with the trading company and trustee boards not providing the correct governance. This is not within the intention of parliament. The owner could have their cake and eat it!
• Appointing non-impartial trustee directors – appointing trustees that will not fulfil their fiduciary duties nor govern the trust in the appropriate manner. They may be agreeable to previous vendors and not put the beneficiaries first in their decision making.
• Miscommunication to employees, or lack of – currently no requirement to communicate with employees.
• No employee focus – Using an EOT to crystallise an exit or as an external marketing tool, but having no employee focus nor an intention to provide benefit to the employees.
• Manipulating tax-free bonus payments – companies are trusted to adhere to the tax legislation, but there is little to no regulation and manipulation is easy. Favouring a certain group of employees, or paying bonuses outside of the permitted legislation.