Employee ownership trusts

An employee ownership trust (“EOT”) is a government backed initiative which provides an alternative to business owners looking to exit from, or reduce their day-to-day involvement in, their business without the need for a traditional sale or management buy-out.

Building a profitable business requires a significant amount of time, effort and expense. When it’s time to step back from the coal face, effective succession planning becomes essential - especially in businesses where employees are key to ongoing success.

Owners who elect to sell their shares in a company to an EOT may enjoy significant tax benefits and avoid having to sell the business to a competitor or investor by transitioning it to the very people who have helped build it.

What is an EOT?

An EOT is a type of trust that is set up to hold a controlling equity stake (at least 50% of the issued share capital) in a trading company on behalf of all of its employees. The shares in the trading company are indirectly held by the employees via a newly incorporated trust company which will be run by its trustees. As the shares are held indirectly, the employees do not hold any individual rights associated with holding shares i.e. voting and dividend rights. It is up to the trustees to administer the EOT’s shareholding generally in favour of all eligible employees and must do so on the same terms.

Benefits of selling to an EOT

There are a number of reasons why an owner might decide to sell to an EOT which will vary on a case by case basis.

The main benefits of EOTs are as follows:

1. Tax efficient way for owners to exit: provided certain qualifying conditions are met, no capital gains tax (“CGT”) is payable on the sale of shares to an EOT. For many owners, this is a significant financial advantage over a traditional sale to a third party purchaser, particularly to those who do not qualify for the reduced CGT rate with Business Asset Disposal Relief (formerly known as Entrepreneur’s Relief).
2. Quicker process than traditional disposal methods: the transition to an employee owned business is simpler than a sale to a third party purchaser as it significantly reduces the need for extensive due diligence and protracted negotiations, saving time and often resulting in reduced advisory costs.
3. Preservation of business identity: unlike a traditional trade sale or private equity deal, selling to an EOT ensures the business remains independent and that the brand, culture and values remain intact.
4. Guaranteed fair value: in order to sell your business to an EOT, you will need to obtain a valuation from an independent third party. This valuation will represent fair market value and will not be subject to negotiation and “price chipping” as often occurs in trade sales.
5. Flexibility of payment: sales to EOTs are often structured with flexible payment arrangements deferred over a number of years to allow the trading company to self-fund the sale out of its profits. EOTs may also be funded via third party lenders.
6. Business continuity and staff morale: by virtue of the transaction process effectively being an internal reorganisation, a sale to an EOT ensures that disruption to the operation of the business is kept to a minimum. Typically, the management team will remain the same, and the move to employee ownership often boosts morale as staff become more engaged and invested in the company’s success.​​​​​​
7. Employee incentives: employees stand to receive up to £3,600 in tax-free bonuses as part of an EOT. Further employee incentives such as EMI share option schemes may also be used in conjunction with the transition to employee ownership, to incentivise certain key employees and management to continue driving the business forward.

Key considerations

While EOTs offer a unique combination of financial and personal benefits, there are a few practical considerations:

• Funding the purchase: the trust needs to be able to afford the buyout, either upfront or over time. Should the sale be funded by deferred payments or via third party finance, the lender will require security to be granted in their favour over the trading company’s assets.

• Governance: the employee’s equity stake will be managed by the trustees of the EOT who represent the interests of the employees.

• Employee understanding: internal communication and education are key to ensuring employees understand and engage with the new ownership model.

Final thoughts

For business owners looking for a succession plan that rewards employees, preserves their company’s legacy and provides tax-efficient exit options, the EOT is a powerful solution. If you're thinking about your next chapter, it might be time to explore how an EOT could secure your company’s future - and yours.

Contact our Corporate team today to explore how an EOT could work for your business.