Employee Ownership Trusts in the Care Sector – an alternative route for succession planning?

Introduction

Against the backdrop of a UK care home market estimated to be worth approximately £27 billion¹, care providers continue to face challenges including recruitment pressures, rising operating costs and increasing regulatory demands.

For many care home owners, succession planning can therefore be challenging. A significant number of care businesses remain founder-led or family-owned and, whilst the sector continues to see consolidation and investment activity, a sale to a trade buyer or private equity investor may not always align with an owner’s long-term objectives.

For some owners, preserving the ethos of the business, maintaining continuity of care and rewarding employees who have contributed to its success can be just as important as achieving value on exit. Employee Ownership Trusts (EOTs) are increasingly being considered as part of that conversation.

What is an EOT and how does it work?

An EOT is a specific form of employee benefit trust which acquires and holds a controlling interest (more than 50%) in a trading company for the long-term benefit of employees.

In practice, the trustees of the EOT purchase shares from existing owners, usually at market value. The purchase price is commonly funded through deferred consideration arrangements and, in some circumstances, third-party lending. Rather than employees purchasing shares directly, the trust holds the shares collectively for employees as a whole.

The result is that employees have a collective, long-term interest in the success of the business without needing to fund the acquisition personally. Employees do not generally become involved in day-to-day management simply because ownership changes and leadership teams often continue to operate the business following completion.

Why are owners considering EOTs?

For many business owners, an EOT can provide an alternative to a traditional trade sale or private equity transaction whilst allowing the business to continue independently and preserving culture and identity.

For care providers, that may be particularly attractive. Reputation, continuity of service, staff retention and quality of care are often critical to long-term success. Where the culture of a care business is closely linked to employee commitment and continuity of care, employee ownership can potentially reinforce a sense of shared purpose.

Tax considerations – an important part of the discussion

Tax considerations are frequently one of the key drivers behind EOT discussions. Historically, qualifying disposals to an EOT could potentially benefit from full capital gains tax relief where the relevant conditions were met and this played a significant role in the growth of EOT transactions.

However, the position has evolved and the level of relief potentially available has reduced. Whilst EOT transactions may still offer comparatively attractive outcomes when compared with some traditional exit routes such as a trade sale or private equity transaction, the tax landscape continues to evolve and owners should understand both the current position and any scheduled changes affecting transaction economics.

Qualifying EOT-owned companies may also be able to pay income tax-free employee bonuses (subject to legislative limits and conditions). However, the availability of reliefs and the overall tax consequences will depend on the particular facts and transaction structure and specialist tax advice should be obtained alongside legal advice at an early stage.

Viability and funding – can the structure work in practice?

One of the key practical questions in an EOT transaction is how the purchase price will be funded.

Deferred consideration commonly forms part of the funding structure, although third-party lending can also form part of the overall transaction funding structure and banking and finance arrangements may sit alongside vendor financing to support the acquisition and spread payment obligations over time.

In practice, this is often structured as part of the wider transaction funding package rather than as a simple standalone borrowing by the EOT itself, as in practice the EOT itself often has little or no independent assets or cash flow at completion.

For care providers, lenders are likely to focus on matters such as occupancy levels, historic and projected cash flows, regulatory performance and operational resilience.

Governance, employees and the ownership transition

Employee ownership does not mean employee management and an EOT transaction is not simply a legal transfer of ownership.

For employees, the move to employee ownership can represent a significant cultural shift and it is important that employees understand what the transition means in practice. Employee ownership does not necessarily mean employees become involved in day-to-day management decisions nor does it automatically alter management structures.

What it should involve, however, is an appropriate framework for employee voice and representation. Some businesses also engage specialist employee ownership advisers to support the transition and help employees understand how their interests are represented within the ownership structure.

Regulatory and compliance considerations

For care providers, the analysis needs to extend beyond the EOT transaction documents themselves.

Depending on the structure of the business and services provided, ownership changes may require consideration of issues involving the Care Quality Commission (CQC), including registrations, controllers and governance arrangements.

Providers may also operate under local authority or NHS commissioning arrangements and contracts. It is therefore important to identify any notification requirements, consent obligations or change of control provisions that could be triggered.

Is an EOT the right route?

EOTs can be an effective succession tool where a business has strong management, predictable cash flows and a genuine commitment to employee ownership.

Early planning is key. Care providers are often considering wider questions around long-term strategy, continuity of care, employee engagement and future investment alongside legal and tax considerations.

EOTs will not be the right solution for every business but, where succession planning objectives align with preserving culture, maintaining independence and supporting employees, they can provide an attractive alternative route with the potential for comparatively favourable tax outcomes for the selling shareholders, subject to the relevant conditions being met, alongside wider strategic benefits.

If you have any questions about the topics raised in this article, please get in touch. This article first appeared in The Carer Magazine.