Is an Employee Ownership Trust (EOT) Right for Your Business?
Since their revamp and reintroduction in 2014, Employee Ownership Trusts (EOTs) have become an increasingly popular route for business succession in the UK. Offering significant tax advantages for outgoing shareholders and fostering employee engagement, they can be an attractive option for owners planning their next chapter.
But as with any business structure, the key question isn’t can you set up an EOT – it’s should you?
The right answer depends not just on financial performance, but also on the company’s culture, governance framework, and long-term objectives.
A Quick Recap: What is an EOT?
An EOT is a specific type of trust that is set up for the benefit of a company’s employees, although the employees do not actually own the shares in their own right. The trust holds a controlling stake in the business for the benefit of all employees, and the selling shareholder is usually paid out over time from the company’s future profits, sometimes, but rarely with the help of external financing at the outset.
Let’s look at the key factors to help determine whether this route could be a good fit for your business.
Solid Financial Footing is a Must
The EOT model hinges on the business being able to generate sufficient future profits to fund the purchase of shares from the current owner. Key financial considerations include:
- Consistent profitability – Erratic earnings or ongoing losses make EOT funding difficult.
- Healthy balance sheet – Solvency matters, but so does free cashflow. Can the business support ongoing repayments?
- Realistic valuation – The numbers must stack up. If the seller’s expectations exceed what the business can fund, the structure will likely fall apart. The law now requires the trustees to take care to make sure the valuation is realistic but there may still be a temptation to push the valuation a bit too far
The Motivation Behind the Move
An EOT isn’t just a tax planning exercise, and it shouldn’t be treated as one. In fact if the only reason you are considering an EOT is the tax advantage that is probably a sign that EOT is not right for you or your business.
Successful transitions typically involve business owners who:
- Want to safeguard the business’s legacy and values.
- Are motivated by employee welfare and longer-term continuity.
- Are comfortable with a staged exit, rather than a quick sale.
Culture and Engagement: Key Ingredients
Employee ownership works best where there’s already a collaborative culture in place. Warning signs for a business where an EOT might be struggle to succeed include:
- High staff turnover.
- Low morale or lack of trust.
- Heavy dependence on the founder or key individuals.
Ideal candidates are those businesses where:
- There’s a strong second tier of management ready to lead.
- Employees are already engaged and feel listened to.
- The workforce is of a sufficient size to make shared ownership meaningful.
Governance and Administrative Readiness
EOTs come with a governance burden. There are a number of requirements which need to be met throughout the life of the EOT – if any of these are cease to be met this can lead to adverse tax consequences either for the trustees or even for the former owners.
Trustees need to be appointed – and while former or current shareholders can be trustees, they can’t be in the majority. Some businesses also introduce employee forums to maintain engagement.
If your company operates with an informal or founder-led decision-making style, this can require a real mindset shift but this can actually be a positive step: employees as owners unearth the problems and opportunities in businesses that the founders may never become aware of.
A Long-Term Commitment
EOTs are not intended to be a short-term solution. The essence is that you are creating a perpetual business; think John Lewis and its 100 years of employee ownership or even the co-operative movement.
The model needs to align with your business’s long-term goals and strategy. It’s often a natural fit for:
- Professional services firms.
- Creative and design-led businesses.
- Knowledge-based industries.
But this does not exclude any industry.
Incentivising key employees
As a seller you are likely to be paid your consideration out of future profits over a number of years. It is therefore in your interests to ensure key employees are sufficiently incentivised to continue to drive the business forward.
Combining an Employee Ownership Trust with other share incentive schemes such as the Enterprise Management Incentive scheme for key management personnel is a great way of providing key employees with a clear link between the success of the business and their own personal reward and this approach is increasing in its usage.
What If It’s Not the Right Fit?
An EOT won’t be the answer for every business – and that’s not necessarily a bad thing.
There are several other succession routes worth considering:
- Trade sale – Ideal where a strategic buyer is willing to pay a premium.
- Management buyout (MBO) – Works well with a strong internal leadership team.
- Family succession – Still a viable option, though one that brings its own planning and tax considerations.
- Hybrid models – In some cases, selling part of the business to an Employee Ownership Trust and the rest to investors can help balance legacy and liquidity.
The most important takeaway? One size does not fit all. The right solution is the one that supports both your commercial objectives and your personal legacy.
In Summary
Employee Ownership Trusts can be a compelling succession strategy – when the foundations are right.
Your business might be a good fit for an Employee Ownership Trust if:
- It has stable and predictable profitability
- A realistic valuation has been agreed
- There’s an established leadership team in place or a succession plan in the offing
- Employees are engaged and part of a positive culture
- The owner is focused on long-term legacy – not just tax
If these boxes aren’t ticked, it’s worth exploring other exit options that better match your circumstances.
John Shinnick, Strategic Advisor for IN Accountancy took the time to give us his thoughts on Employee Ownership Trusts:
“The EOT route is attractive amongst other things because the vendors have greater certainty on value, timing and completion of the transaction: 70% to 90% of M&A transactions do not complete. In the EO transactions in which I have been involved, the success rate has been greater than 90%.
If you want to focus on one key aspect that will make an Employee Ownership Trust succeed, it is planning for succession. You don’t necessarily have to have it buttoned up as you transition, but you have started a clock countdown and need to put effort into it.
A challenge for trustees can be the former owners! They tend to still be in and directing the business after transition and during the deferred consideration period but they need to be guided to recognise that they are now stewards and not owners. Having said that, the trustees also have to recognise they are not directing the underlying business, they are just shareholders.
Do I think that all of the 2,500 businesses that have transitioned to Employee Ownership will be EOTs in 10 years time? No, but for a positive reason. EO businesses are shown to perform better than non-EO owned. This means they are attractive purchases and there will be secondary transactions if it is in the best interests of the employees
Employees overwhelmingly respond positively to the Employee Ownership”.
John will be speaking at an IN Accountancy event – Life After Transition: Living With An Employee Ownership Trust taking place on Thursday 13th November!
To sign up and save your free spot click here.
Need Help Deciding?
If you’re considering succession planning or would like to understand more about whether employee ownership might work for your business or your client’s, please don’t hesitate to get in touch. We’d be happy to talk through your options or share our EOT fact find to help guide your thinking.
Whilst you’re here, why not follow our LinkedIn page along with our YouTube page which contains 100’s of useful videos with tax and accounting advice!
There are also hundreds of useful articles on our own website here.
