In the dynamic landscape of UK business, Employee Ownership Trusts (EOTs) have emerged as an increasingly compelling model, particularly for sectors like hospitality that thrive on a strong and motivated workforce. Introduced by the Finance Act 2014, EOTs offer a structured pathway for business owners looking to exit while protecting their legacy and ensuring continuity, employee engagement, and significant tax advantages.

What is an EOT?

An Employee Ownership Trust is a mechanism that allows a business to be owned, indirectly, by its employees through a trust. This model provides the team with a tangible stake in the company, fostering a strong sense of ownership and responsibility that has been proven to increase loyalty and personal investment. Unlike traditional employee share ownership plans, an EOT holds the shares collectively on behalf of all employees, creating a more stable, long-term ownership structure, largely unaffected by inevitable churn.

Benefits for hospitality businesses

The hospitality sector, characterized by its reliance on customer service and staff engagement, can  benefit even more than other sectors by transitioning to an EOT. Here’s how:

1. Enhanced employee engagement and retention:
   • In an industry where high turnover rates are common, an EOT can significantly boost employee morale and loyalty. When employees have a vested interest in the success of the business, they’re more likely to commit to the company and perform better. This improved engagement leads to better customer service, which is so crucial in hospitality.
2. Smooth succession planning:
   • For business owners looking to exit, an EOT offers a structured and employee-friendly succession plan. Instead of selling to external buyers, which might lead to significant upheaval and the threat of redundancies, selling to an EOT ensures that the business continues to operate with its existing culture and values intact. This not only strengthens long-term customer relationships but also bolsters brand reputation.
3. Tax advantages:
   • A key benefit for hospitality in particular is the fact that the first £3600 in employee bonuses can be income tax free – a significant retention driver for these types of workers and something the government were keen to promote.
   • One of the other attractive aspects of transitioning to an EOT is the capital gains tax (CGT) relief. Currently, business owners who sell a controlling interest (more than 50%) to an EOT can benefit from a 0% CGT rate, as long as the company isn’t sold in the following tax year, making it a highly tax-efficient exit strategy. This benefit was promoted by the government to encourage more businesses to adopt the model.
4. Access to novel funding opportunities:
   • Businesses under an EOT structure can access novel funding opportunities that might not be available otherwise. For instance, they can attract investments focused on socially responsible and sustainable business practices. Additionally, employee-owned businesses often have better relationships with financial institutions due to the perceived stability and long-term planning that comes with having employees as stakeholders and part of the board.
5. Enhanced business performance:
   • Research and case studies have shown that employee-owned businesses often outperform their non-employee-owned counterparts. The John Lewis Partnership is a prime example within the UK, demonstrating sustained success and resilience. Employee ownership can lead to increased innovation, productivity, and overall business performance.

Practical considerations

While the benefits are compelling, transitioning to an EOT requires careful planning and consideration:

• Valuation and financing:
  • The business must be accurately valued, and a financing plan should be established to fund the purchase of shares by the EOT. This often involves a combination of internal financing from cash reserves, seller financing, and external loans, but can be made significantly easier through engagement with a solid M&A advisor.
• Legal and structural setup:
  • Setting up an EOT involves legal complexities. It’s essential to work with legal advisors who are experienced in this field to ensure compliance with all relevant regulations and to structure the trust appropriately.
• Employee communication and engagement:
  • For the transition to be the most successful, clear and transparent communication with employees is crucial. It’s been shown that EOT transitions are more successful when employees understand how the EOT works and what it means for both their individual roles, and the future of the business.

For hospitality businesses in the UK, transitioning to an EOT can be a strategic move that ensures business continuity, enhances employee engagement, and provides significant tax benefits to the vendors. By aligning the interests of employees with the success of the business, EOTs can create a sustainable and thriving business model that benefits all stakeholders. As more businesses explore this innovative ownership structure, the hospitality sector stands to gain substantially from the adoption of EOTs.

Find out why LAVA recently became an EOT, or drop Millie a line to find out if employee ownership could be the perfect next step for your business.