A market-leading incentives law firm credits its recent conversion to Employee Ownership Trust (EOT) as a key driver to its outstanding team culture and financial performance.
“I can’t recommend EOTs enough”
Winner of this year’s Boutique Law Firm of the Year at the Legal Business Awards, Tapestry Compliance converted to employee ownership shortly before the pandemic. Despite difficult trading conditions, the firm has gone on to achieve impressive financial results.
Speaking at a Jonathon Bray webinar on law firm succession, Director Chris Fallon said that the EOT conversion “supercharged the team”, with collective engagement and sense of ownership significantly increased. “Everyone is happy and enthused”, he said.
EOT experts Gerry Young and Tom Lethaby of RVE Corporate Finance spoke in detail about the process of converting to EOT, the qualifying criteria, deal structure, and role of the trustees.
Not all law firms suited to EOT
Although there are fewer than 10 law firm EOTs, this is partly because it is still a relatively unknown option.
But also, it is not right for everyone. “Some firms are too big”, said RVE founder Gerry Young.
For a successful conversion there has to be a broad agreement between the partners/Directors that it is the right thing to do. The more people in the management team, the harder it is to build consensus.
The ideal size is firm with upwards of £1m EBITDA but not more than fifty employees or fifteen Directors.
In order to convert to EOT, the firm will need to be structured as a limited company and authorised as an Alternative Business Structure (ABS). This might mean some pre-deal restructuring.
The benefits of EOTs
We have written about The Magic of Law Firm Employee Ownership Trusts before.
With around 600 EOTs in the UK to date, some very clear business benefits are emerging. Employee-owned firms tend to be more productive and engaged, as illustrated by the Tapestry Compliance example.
The deals also receive very favourable tax treatment. Founders pay nil-rated CGT on the sale of the firm to the EOT, and employees are entitled to take a tax-free bonus of up to £3,600.
With entrepreneur’s relief now limited to £1m, the nil-rate CGT will be even more attractive to law firm founders.
However, according to Tom Lethaby, tax treatment is the “icing on the cake” but rarely the main driver.
Mr Lethaby also highlighted a number of other advantages of EOT over other forms of exit, such as trade sale and management buy-out. These include:
- Execution risks
- Control during earn-out
- Maintaining the firm’s culture
- No need for debt or equity finance
- Flexibility in structuring the deal
Succession is a compliance issue
Rachael Eyre added that law firm succession is not just a commercial consideration, it is a regulatory one. The SRA Code of Conduct for Firms requires managers to monitor all material risks to the business – and business continuity certainly falls into that category.
The recording of this session will be available for 30 days. Please contact us for free access.
If you would like to receive invitations to future sessions, please subscribe to our COLP Insider newsletter (fortnightly compliance updates).