If you’re a business owner, weighing up different exit strategies is an important part of the planning process. One increasingly popular option is the Employee Ownership Trust (EOT). 

In this simple guide to EOTs, the expert business advisory consultants at Williamson & Croft break down what they could offer you and your company for your consideration.

What is an Employee Ownership Trust?

An EOT is a type of employee benefit trust designed to hold a controlling stake in a company on behalf of its employees. Legally, these trusts must own more than 50% of the company’s shares. 

This arrangement offers a unique approach to business ownership that balances the interests of employees and the business. A unique perk of EOTs is that way in which the buy-in of employees can help to foster a shared sense of purpose.

The tax benefits of EOTs

One of the most attractive aspects of EOTs for business founders is the potential tax efficiency. When you sell your business to an EOT, you can receive full market value for your shares without paying Capital Gains Tax on any gain. This could result in huge potential savings and is one of the reasons this business exit model is gaining popularity. 

Example: If you sold your company and made a £1,000,000 gain, you could save up to £200,000 in tax at current Capital Gains Tax rates. 

For employees there are also tax benefits. They can benefit from tax-free bonuses of up to £3,600 per year however, they would still need to pay National Insurance contributions.

Benefits for your business and employees

Aside from the clear potential tax advantages, EOTs can offer considerable benefits such as:

  • Fostering staff engagement and loyalty
  • Offering sustainable business continuity
  • Preserving company culture and operational understanding
  • Gives potential for increased productivity and innovation in employees

What’s involved in setting up an Employee Ownership Trust?

The process of setting up an EOT typically takes between 3 – 6 months. Here are the key steps, broken down simply:

  • Assess suitability: Review whether your business is a good candidate for an EOT, considering factors like size, profitability and whether staff show interest.
  • Business valuation: Obtain a professional business valuation to determine a fair price for the shares being transferred to the trust.
  • Financing: Decide how the EOT will finance the purchase of the shares. This can often involve the trust taking out a loan, which is then repaid using future company profits.
  • Legal setup: Work with a solicitor to create a Trust Deed and establish a board of trustees.
  • HMRC clearance: Before setting up an EOT, you’ll need to get clearance from HMRC, which takes around 4 to 6 weeks.

Balancing considerations for business founders

While EOTs offer many advantages, there are other considerations to weigh up. 

Valuation: In this style of exit strategy, the sale will be at market value, which may be lower than a premium achieved on the open market. Consider carefully whether tax efficiencies outweigh this for you.

Payment structure: Often sellers get paid out over time from business profits, which can impact cash flow. You’re unlikely to receive a lump sum in the way that an open market business sale would offer.

Loss of control: While day-to-day operations remain with the management team, major decisions will be made by the trustees. If you have founded your business you will have to adjust to major decisions being approved by the board of trustees.

Can an EOT be right for your business?

If you’re looking for an alternative exit strategy to selling your business on the open market, EOTs can have distinct advantages. However, they are not suitable for everyone. 

To decide whether an EOT aligns with your personal and business goals, consult with our team of expert business advisors. We’ve helped businesses successfully manage the transition to EOTs, so are highly skilled at assessing the suitability of individual businesses. 

Get in touch today to discuss the nuances of your business and whether an EOT is right for you.o discuss the nuances of your business and whether an EOT is right for you.