In this insightful article, Peter Doyle, CEO of Doyle Clayton, sits down with Shannon Aldis, Recruitment Consultant at AJ Chambers. He explains the benefits of having an Employee Owned Trust and how it creates a sense of togetherness.
Please could you give us a bit of background on Doyle Clayton?
Founded in 1997, Doyle Clayton is a specialist employment and commercial law firm with offices in London and Reading. I was the Senior Partner for 20 years and have been CEO for the last five. We employ over 80 employees and became an EOT owned business in September 2019.
What is an Employee Ownership Trust (EOT) model, and how does it differ from other business structures?
The Employee Ownership Trust is an ownership structure where a trust is established to beneficially hold a controlling interest in a limited company on behalf of all of the company’s employees. The employees do not take direct ownership of any shares. But are eligible for income tax free bonuses, and would split net sale proceeds if the business was to ever be sold.
What criteria needs to be met to be eligible for an EOT?
The first key factor is that the trust must acquire and maintain a controlling interest (greater than 50%) in the company. Additionally, it is an all-employee scheme, with the only qualifier allowed being length of service (up to a maximum of 12 months), and participators (5% or more shareholders, officers and directors) can also not constitute more than 2/5 of all employees. There are other technical requirements, but these are the major obligations.
How long does the process of changing to an EOT structure take?
For a vendor financed deal that doesn’t include any required regulatory approvals. Law firms or IFAs, etc. Most transactions can complete within 10-12 weeks. For larger businesses interested in raising third party debt to help fund the transaction, we tell clients to expect at least an additional two months for the financing process.
What are the key benefits of implementing an EOT model?
The key benefits for the business are remaining independent and preserving the company’s culture. Additionally, numerous studies have found that employee-owned businesses perform better, are more resilient and retain and create jobs at a higher rate than non-employee-owned businesses. From an employee perspective, benefits include job preservation, an increased voice in the business (to a certain degree), income tax free bonuses and a share in sale proceeds if the business is sold at some point in the future.
How does ownership vary between different employees. For example, those still on probation, and those that have been with you for a year or longer. Can employees ‘buy’ more shares from the trust, or is it equal across the board/dependent on set rules?
Under the EOT itself, employees never own any shares directly as it is a collective ownership structure. As an all-employee scheme, the only qualifier that can be imposed is a minimum length of service requirement. A period of up to 12 months is permitted. With an EOT, businesses can still implement EMI or other tax-advantaged share schemes to incentivise employees. Although this is generally limited to key staff. The allocation of tax-free bonus payments and sale proceeds must be done on same terms. Which means, based upon remuneration, length of service, hours worked, or some combination of those factors.
What are some of the best ways you get people on board with the transition?
To date, we have yet to come across any pushback. Once the structure is explained, people generally see the benefit. Particularly if they see that they could be eligible to receive share incentives post-completion. There is absolutely no downside to regular staff. Clients generally do not ask them if they approve of the change.
What is the ‘spirit’ of the EOT model, and how does it affect employees?
The EOT model means every employee counts; there is a greater sense of togetherness within the business. The sense that the business is run in the interests of all employees is a powerful message. Employees will feel more involved and connected, with more financial information shared, And they are aligned to the success of the business. In short, it is a unifying force.
In your opinion, why could EOT be more appealing to certain people?
The answer is straightforward. The full CGT relief on the sale to the EOT is key. Couple that with the fact you can sell for full fair market value. Use a commercial financing structure that pays interest on vendor loans, the EOT is more than competitive with any other sale alternative. Additionally, vendors control all aspects of the transaction, which is another key factor.
Doyle Clayton provide one-stop shop EOT advisory services. From structuring and documenting the transaction to raising capital to support the transition for larger businesses.