Demystifying the Employee Ownership Trust valuation process

This is a guest blog from Anthony Rose and Rajiv Thakerar from Simmons Gainsford, an accountancy firm and trusted Partner of Postlethwaite Solicitors. Together we have worked on several Employee Ownership client transitions.

Employee Ownership Trusts (EOTs) have gained popularity as a succession planning tool for business owners looking to transition ownership to their employees. A crucial step in this process is the valuation of the business. In this article, we delve into the EOT valuation process, exploring key considerations and methodologies that play a pivotal role in determining the fair market value.

Understanding Employee Ownership Trusts (EOTs)

Before we consider the valuation process, it is essential to have a clear understanding of what an Employee Ownership Trust transaction entails.
An EOT is a legal structure that allows a business owner to efficiently sell their company to a trust, with the purpose of benefiting all employees. The trust holds the shares on behalf of the employees, providing them with a stake in the company’s success. This acts as a good motivator and assists with attracting and retaining key employees in the business.

EOTs come with the added benefit of being very tax efficient for the business owner where currently they can benefit from a tax rate of 0% on the disposal. (Read more about Employee Ownership Trusts here)

The importance of accurate valuation

A fair valuation is the cornerstone of a successful Employee Ownership Trust transaction. It ensures that the business owner receives fair compensation for their shares, while also safeguarding the interests of the employees who will receive value in the future.

As chartered accountants and business advisors, our role in this process is to effectively employ rigorous methodologies to determine the fair market value of the business.

Key considerations in EOT valuation

• Financial statements analysis: We would begin by thoroughly examining the company’s financial statements. This includes the income statement, balance sheet, and cash flow statement. Key metrics such as revenue, EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation), and net income are scrutinised to understand the company’s financial health, as well as analysing ay historic unusual transactions which may potentially be disregarded for valuation purposes.
• Industry and market analysis: Understanding the industry and market in which the business operates is crucial. Factors such as market trends, competition, and growth potential play a significant role in determining the value of the business.
  • Asset valuation: The value of tangible assets such as property, machinery, and stock need to be assessed. Additionally, intangible assets like intellectual property, trademarks, and customer relationships are also considered.
• Earnings multiples and comparable sales: We often use earnings multiples based on industry standards to estimate the value of the business. This involves comparing the company’s earnings to similar businesses that have recently been sold.
• Discounted Cash Flow (DCF) analysis: DCF analysis involves estimating the present value of future cash flows generated by the business. This method considers the time value of money and provides a comprehensive view of the business’s intrinsic value.
• Tax considerations: We must consider the tax implications of the EOT transaction for both the seller and the trust in order to structure in the most tax efficient way possible.
• Legal and regulatory compliance: Ensuring that the valuation process complies with legal and regulatory requirements is paramount. This may involve adhering to specific valuation standards set forth by regulatory bodies.

Conclusion

The valuation process in an Employee Ownership Trust transaction is a multifaceted endeavour that requires a thorough understanding of the business, financial principles, industry dynamics, and legal compliance.
We play a crucial role in ensuring that the valuation is conducted accurately and transparently, benefiting both the selling owner and the employees who are becoming shareholders.

By employing a combination of financial analysis, industry expertise, and valuation methodologies, this paves the way for a successful transition of ownership and in turn fosters a culture of employee ownership and shared success within the company.

Expertise

Simmons Gainsford, have undertaken a number of EOT transactions with Postlethwaite Solicitors. Like us at Postlethwaite, they can support you throughout the whole process, including those areas that require specialist accounting advice.