Are we about to see a wave of professional services firms being sold to Employee Ownership Trusts (EOTs)?

Over the last couple of years we have seen a significantly increased interest in professional services firms moving to an Employee Ownership Trust (EOT) structure.

One of the early adopters was Hodge Jones & Allen in 2018, and most notably since then we have seen Doyle Clayton in 2019, coming right up to date with Tapestry in October 2020.

With the majority of law and professional services firms being run through partnerships, owned by the few, not the many, could these businesses be leading the way for other professional services firms to follow?

EOTs have been around since 2014. Yet, to date, this opportunity has mostly been taken up by private businesses, often with one or more founder majority shareholders who are looking to take a step back (eg: Richer Sounds and Riverford Organic Farmers).

Suffice to say the tax benefits of selling to an EOT are significant - allowing individual selling shareholders to sell their shares free from capital gains tax, inheritance tax and income tax. Further, EOT owned companies are also able to pay annual tax free bonuses for employees of up to £3,600. Indeed, these benefits are designed in line with the policy objective set out in the EOT legislation of ‘providing incentives for growth of the employee-ownership section by increasing the attractiveness of indirect employee ownership structures for businesses’.

However, particularly in professional services where the employees (and their knowledge and expertise) are the ‘product’, the employee engagement benefits of moving to an EOT model could well be transformational. Knowing that the profit generated by the business will be distributed by the EOT to a wider employee base (rather than to a small pool of owners/partners) could lead to significant increases in employee engagement, innovation and incentivisation.

Moving from a partnership structure to EOT ownership will involve some additional pre-transaction changes to the structure of the business. However, while these additional steps may have put off others in the past, as in all aspects of life, once someone has proved it’s possible, others tend to follow.

It is unlikely that the EOT model will appeal for all professional services firms. But there is certainly a segment of the market where it is likely to be of significant interest. In particular, this is likely to be for smaller partnerships with a small number of equity partners who are at or around retirement age, but where there is not a natural successor group of equity partners.

In this context, the EOT route allows those retiring equity partners to dispose of their business, while also allowing the wider pool of employees to share what would have been partner profits between them in future years.

Only time will tell whether these trailblazers have become trendsetters or whether it will remain a minority sport. However, based on what we are hearing in the market quite a few more may be on their way soon.

You can find out more about EOTs and join the discussions.