Case Study: EOT Created as Part of Early Exit Strategy

Why did the client want to pursue an EOT? 

The clients were the owners of several companies within the engineering sector. The company’s owners looked into pursuing a trade sale, but finding a buyer who was the right fit proved difficult. They also struggled to find a buyer willing to pay the price desired in full; there was always going to end up being a deferred consideration element.  

In the end, the clients decided to pursue an EOT because the owners didn’t need a clean break and were not looking to retire immediately. It was thought of as an early exit strategy and because time was on their side, they were willing to remain in the business in some capacity.  

How did the client find Ramsdens? 

Ramsdens has acted for the clients in some capacity for many years. The clients had also attended a previous seminar conducted by Ramsdens and a leading firm of accountants on the topic of EOTs. These two factors together ultimately meant that they had faith in our knowledge base and expertise to carry out the work required. 

What work did Ramsdens carry out?

Our scope of work involved the preparation of a share purchase agreement in respect of the shares in the parent company of the group of companies to be sold to the employees (this is a major commercial document of the transaction). 

Because an EOT requires a trustee to hold the shares on trust for the employees, we were instructed to incorporate a limited liability company (to act as trustee), which entered into the share purchase agreement with the owner, as seller, to buy the shares. This meant that we were also required to produce Articles of Association for the new company and prepare a trust deed setting out the conditions and mechanics of the Trust. 

Before all of that could happen, we had to pull together several companies and create a formal legal group of companies.

What was Ramsdens’ approach to the case?

Our approach to this case was to apply specialist knowledge (including that of the tax advisors that we partnered with) to the circumstances involved to ensure that an EOT was the right model for the business. Where necessary, we would liaise with other professionals, and be guided by tax advisors and corporate finance experts to ensure that the owner was receiving a fair value for the business. We needed to approach the transaction in such a way that it was stress-free for both the sellers and the employees.

Why was this the best course of action to take? 

An EOT was the best course of action to take because it was the right fit for the clients and the group of companies at the time. The owners wanted to realise the value built up in their business but at the same time preserve the existing business values and culture of the group. Because they were able to remain in the business, it meant that any succession issues could, to some extent, be delayed and implemented over time, with the confidence that when they retire from the business, the business would be left in good hands with the team of employees and workforce at the helm.  

What challenges arose, and how did Ramsdens overcome these? 

The main challenge here was deciding who would sit on the board of directors for the newly incorporated trustee company. For an EOT, the seller(s) should not, for tax reasons, control the buying entity. This does, however, mean that the board of the trustee company from a seller’s point of view normally ought to include an independent director (along with employee representatives) and establishing the best person to fit that role has to be a well-thought-out decision.  

What was the outcome and what difference did Ramsdens’ involvement make? 

The transaction was successfully completed. We were able to complete the transaction efficiently, with limited fuss, and the business was sold to its employees on terms that were right for all parties involved.