Future Logistics Optimisation Limited: How the founders of a UK based but international IT company secured ownership succession by sale to an employee ownership trust.
Based in the UK, with operations throughout Europe and the rest of the world, Flo Group Limited provides consultancy and systems design for transportation management.
Why employee ownership?
The Company’s founders were looking to retire from the business, initially exploring the option of a sale to a third party. Whilst a sale may have been a possibility, they concluded that it was not the right succession route for the business. Their primary concern was that the Company could become a less rewarding and enjoyable place in which to work under third party ownership, and felt that this was not in the interests either of its employees or the longer term performance of the Company that they had built up over time.
They began to explore employee ownership, and after careful analysis and advice from us, concluded that this was the best solution both for the Company and its employees. The subsequent announcement of capital gains tax (CGT) relief on selling to an employee ownership trust (EOT), which became law under the Finance Act 2014, made this already attractive choice even more attractive from a fiscal stance.
How does it work?
The Company established an EOT and obtained prior clearance from HM Revenue and Customs that any tax payable by UK taxpayers on the proceeds of selling their shares to it would be CGT (rather than dividend income tax), following which full relief against CGT can be claimed.
Having taken professional advice on the Company’s current value, the Company’s shareholders entered into a contract with the EOT under which the EOT agreed to purchase the entire Company.
The EOT will be funded by the Company out of its profits, with the intention that the total purchase price will be paid within the next five years out of future profits.
It is not intended that the EOT will distribute any of its shares to employees. Meaning that in this case, the employee ownership is indirect – through the EOT – with rewards for future performance based on a new Company-wide bonus plan. The Company chose indirect employee ownership as this eliminates the need for regular transactions in shares and because it was not a priority to enable employees to benefit from capital growth.
The Company plans to use a second tax relief introduced in 2014 under which it can pay Company-wide bonuses to each employee free of income tax, with a separate bonus plan for its more senior employees.
Who runs the EOT?
The EOT is the Company’s controlling shareholder but this does not mean it runs the Company. This continues to be the responsibility of its directors, and initially the founders are continuing to perform this role.
The EOT is run by its trustees, which comprise one employee, one director and one independent person from outside the Company. As the beneficiaries of the EOT are the Company’s employees as a whole, the trustees have a duty to act in the best interests of the employees. In large part, this means ensuring that the Company’s directors are managing the Company effectively, ensuring that it generates strong profits which can be shared with employees and invests in the future. The ongoing fostering of a Company culture which is positive and rewarding for its employees encourages them to contribute wherever possible.
If you would like to explore how employee ownership or an employee share scheme might be introduced in your company, please contact us for an initial discussion.
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