Banking and Employee Ownership Trusts...

Are Employee Ownership Trusts doomed to struggle by overzealous bank regulation?

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Employee ownership trusts have favourable tax treatment (at the moment) and for smaller, well run businesses with shared values and good teamwork appear to achieve very good long term outcomes for everyone involved. 

Banks appear reluctant to touch them - I'm told (off the record) that this is because regulations require the beneficiaries to be 'Known' to the bank (not fully ID checked, but known) and becuase employees change jobs (and either start or cease to be beneficiaries) this means there can be lots of changes. Which in turn means that the banks are open to fines from the regulator because their records are 'not up to date' and consequently it's 'just not worth the risk/hassle'

Common sense would suggest that the Bank has the job of fully KYC the Trustees and the Trustees have the job of KYC the beneficiaries (and keeping up with changes). Unfortunately that isn't the way that the Banks are viewing it - for them the risk of 'too much hassle' and 'possible fines' far outweighs the benefits obtained by providing a Trust account for EOTs - Even those few banks that still offer 'normal' trust accounts aren't interested.

Questions:

  1. If you have Employee Ownership Trusts as clients - who do they bank with? Was the transition from 'normal' ownership to 'trust' ownership easy in banking terms?
  2. Do you know of any Banks that are interested in providing banking for Employee Ownership Trusts?
  3. No one can force a bank to provide banking services if they don't want to, but is this a real risk to banks or just a perceived one? If real, how does it get changed? (Market forces will ultimately take care of perceived risks as EOTs become more popular/common - Which won't help the business I'm working with at the moment but will in the longer term.)

Any input or suggestions very welcome.

Replies (8)

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By SSM
02nd Jun 2023 11:19

When it comes to Employee Ownership Trusts (EOTs) and banking services, the landscape can be quite nuanced. While I don't have access to real-time data on specific banks catering to EOTs or the ease of transition from normal to trust ownership, I can provide some general insights based on industry knowledge.

It's true that some banks may be more accustomed to traditional forms of business ownership and might not have dedicated offerings tailored to EOTs. Regulatory requirements and the potential challenges associated with frequent changes in beneficiaries could pose compliance and record-keeping concerns for banks.

Finding banks interested in providing services for EOTs may require some diligent exploration. It's advisable to reach out directly to various banks and financial institutions to inquire about their specific offerings. Exploring banks that specialize in working with small businesses, community banks, or those experienced in trust services might yield better results.

Banks express genuine concerns about compliance and record-keeping, as they play a crucial role in maintaining regulatory standards. The perceived risk of fines and regulatory challenges associated with EOTs might currently outweigh the potential benefits for some banks. However, as Employee Ownership Trusts gain popularity and understanding grows, banks may reevaluate their positions and develop services specifically tailored to meet the unique needs of EOTs.

Influencing change in the banking industry requires collective efforts. As more businesses adopt the EOT model and demand for banking services increases, banks may become more motivated to develop specialized offerings for this market segment. Engaging in discussions with banks, industry associations, and regulatory bodies can help raise awareness and advocate for improved banking options for Employee Ownership Trusts.

Please note that the availability of banking services for EOTs and the ease of transition may vary based on your location and individual bank policies. Consulting with financial advisors, industry experts, and conducting direct inquiries with banks will provide you with the most up-to-date and accurate information for your specific circumstances.

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By Tax is always taxing
02nd Jun 2023 11:35

I've done a few, some were a success (for now - I believe they are all ultimately doomed to failure) and some have already folded (somewhat inevitably).

Clydesdale bank had an EOT specialist and provided facilities for ours, but that was a few years ago. RBS came in and pitched their offering too. You probably need a lawyer and advisor with experience in the area - so find them first, then find the bank (if they decide to go ahead with it)

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Replying to Tax is always taxing:
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By Maslins
02nd Jun 2023 12:52

[quote=Tax is always taxing]

I've done a few, some were a success (for now - I believe they are all ultimately doomed to failure) and some have already folded (somewhat inevitably).

Intrigued by that.

I do think some founders see it as a way to write themselves a blank cheque, tax free. If they're lucky the business will pay them most of the debt before it crumbles. If they're unlucky it won't and they'll have destroyed their business for minimal financial gain.

However, I certainly don't think it's inherently doomed to failure. Far from it. Just needs:
- founder doing it for the right reasons,
- senior team suitably incentivised,
- a modest valuation.

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Replying to Maslins:
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By Tax is always taxing
02nd Jun 2023 14:23

You are indeed correct, most notably in your first part "Founder doing it for the right reasons" - in my experience (and I talk only for the ones I have seen - maybe 15 in total) the reasons are never the right ones (for the business) - they are often great ones for the owner - hence why I did them.

90% would have taken the cash upfront if there was a willing buyer and not take the risk of a deferred consideration that may never get paid (partly because its set so high in the first place!)

If you are intrigued why I think they will eventually fail it's when the realisation hits that the senior team will want to exit the business at some point and they don't have a strategy other than to walk away - so they could build up a business worth 3 times what it was - but get very little or no reward on exit.
Where is the incentive to invest capital and take risks as they get nearer retirement - they prioritise cash out to themselves rather than investment and growth - hence doomed to failure. Not to mention some of the staff meetings with the new 'owners' I have attended have been hilarious... but that's another story

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Replying to Tax is always taxing:
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By Maslins
02nd Jun 2023 14:47

Tax is always taxing wrote:

If you are intrigued why I think they will eventually fail it's when the realisation hits that the senior team will want to exit the business at some point and they don't have a strategy other than to walk away - so they could build up a business worth 3 times what it was - but get very little or no reward on exit.
Where is the incentive to invest capital and take risks as they get nearer retirement - they prioritise cash out to themselves rather than investment and growth - hence doomed to failure.


I agree to a point. With 100% EOT ownership, there's no clear financial incentive for individuals to grow the business. Whilst EOTs can sell the shares, multiple factors make it unappealing. Hence from this perspective, being an employee of an EOT company is negligibly different to being an employee of any other company, in that there's limited likelihood of big cash out/exit scenario.

You can get round this to an extent with the EOT not having 100% ownership, hence some senior staff have direct shareholdings.

Part of me however hopes that plenty of people can do away with the notion of "cashing in". Instead being happy they'll earn a decent amount, including periodic profit shares to help things like clear down mortgage, for as long as they work there, and can put some of that into pension to help them in later life.

I do think the bigger issue is founders setting up a rubbish deal for the staff, advisers (and trustees) waving it through. Staff will see most profits going to founder, with that being the case for a long time. Then they'll be disillusioned, destroying the business, as well as the founder's hoped repayments!

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By Maslins
02nd Jun 2023 12:32

We became EOT controlled ~2 years ago. At the time had two current accounts:
1) Cater Allen - no issues
2) Monzo - they told us we'd have to go elsewhere (can't cope with a corporate PSC). We looked at Starling, but they had the same objection.

We got an account with Revolut, who we gather legally aren't actually a bank...but from practical purposes are. It's been fine.

So it does seem a few banks won't offer accounts to EOT controlled companies, but certainly quite a few do.

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John Toon
By John Toon
02nd Jun 2023 15:05

We've done plenty of EOT's and the banks (predominantly high street) are usually very receptive, particularly as there is usually a funding aspect of the creation of an EOT. Haven't had many issues with banks in this respect

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By philrob
05th Jun 2023 10:46

Thank you all for your replies. I think plan A will be to persevere with the Incumbent High Street bank and hope that the relationship improves. Plan B will be to continue to shop around...

On the wider issue of long term viability of EOT's - I think the key is strength of the continuing management team, shared vision and shared values. There are similarities with small business Co-Ops in that respect - the ones that survive a decade or more are those where the members share the same vision. One I worked with 20 years ago is still going strong.

Leadership transition is a challenge - but that is always the case for small businesses.

I agree that EOT's who's prime aim is owner exit where former owners 'load up with debt and bail out' are likely to fail - That (thankfully) isn't the case with this one.

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