The interesting rise of the Employee Ownership Trust model in Northern Ireland

What is an Employee Ownership Trust?

An EOT is a trust fund established to acquire and hold a majority stake in a company on behalf of its employees. This shareholding is acquired through the sale of shares by the existing owners. Once the EOT is established, it becomes the legal owner of the shares, and the employees become beneficiaries of the trust.

The sale is typically funded by a mix of cash already in the business, a cautious level of bank debt and vendor loan notes to be repaid to the sellers from future earnings. There is no cash required to be introduced by the employees, and there are attractive benefits for business owners selling to an EOT.

What are the benefits of EOTs?

Unlike traditional merger and acquisition (M&A) models where businesses are sold to competitors, private equity or other external parties, EOTs allow owners to sell their stake (in whole or part) to the employees, ensuring continuity, stability and reward.

EOTs offer significant tax advantages for both the selling owner and the employees. The sale of a controlling interest to an EOT is exempt from Capital Gains Tax, if all qualifying conditions are met. This is very attractive to selling shareholders.

A sale to an EOT also affords owners the ability to retain control over the sale process and to shape their own succession planning without the interference of an external buyer and the challenges of external due diligence. An EOT transaction is therefore seen as a friendlier route to succession and business sale, and execution risk is much lower.  

From the perspective of employees, EOTs offer a unique opportunity to share in the success of the company they help build. It offers individuals tax advantages and the opportunity of financial rewards. By becoming indirect owners, employees are more deeply invested in the company's performance and are motivated to contribute to its long-term success. This sense of ownership can lead to increased productivity, higher levels of engagement, and reduced staff turnover, which are all beneficial for the business.

What has happened in other parts of the UK?

EOT transactions have been gaining significant traction in the UK as a model for business succession. The actual EOT legislation was introduced in 2014, though take-up in the early years was slow, with less than 500 EOTs estimated across the UK at the end of 2020. 

In the last three years, however, the number of EOT transactions has risen dramatically. By the end of 2023, statistics indicate there are c.1,500 employee-owned businesses using an EOT model.

This growth is linked to an increase in awareness across both businesses and advisors. Statistics show that the top five sectors for employee ownership include Professional Services, Manufacturing, Construction, Wholesale and Retail, and Information and Communication, confirming that EOTs work in a variety of business activities.

In terms of business growth, EOT businesses have been shown to outperform in various metrics. Research indicates that employee-owned companies tend to have higher levels of profitability, productivity, and innovation compared to traditionally owned firms, something that is attributed to the alignment of incentives between employees and management. 

What about Northern Ireland?

There has only been a small number of EOT transactions in Northern Ireland to date. However, it is not uncommon to see a time-lag on the implementation of initiatives within Northern Ireland relative to other parts of the UK.

It is perhaps fair to say that our business, and wider culture, put a high sense of worth on privacy, legacy and loyalty. These are all characteristics that lend well to an EOT transaction so it is perhaps inevitable that a sale to an EOT may carry significant appeal in Northern Ireland.

EOTs poised to play important role in Northern Ireland

Employee ownership trusts represent an interesting avenue for business succession, employee empowerment, and sustainable growth. At Grant Thornton we have significant expertise in EOT transactions, having led more than 40 transactions, including a number currently live in Northern Ireland.

It is important to note that an EOT sale is not a ‘one-size-fits-all’ solution. Nor is it a replacement for a traditional M&A exit. However, in certain scenarios, it fits the bill. As the momentum behind EOTs continues to build, it would seem they are poised to play an increasing role in shaping the future of work and business, and there is every likelihood that we will see a rise in EOTs as a popular option in succession planning and securing a business sale in Northern Ireland.