For many business owners, planning an exit is one of the most significant decisions they will ever make. Traditionally, this has meant selling to a trade buyer, private equity, or a management team. In recent years, however, Employee Ownership Trusts (EOTs) have become an increasingly popular alternative, offering a route to succession that preserves a company’s culture while rewarding the people who helped build it.
An EOT allows a business to be owned by a trust on behalf of its employees. Instead of selling to an external party, the owner sells a controlling stake to the trust, which then holds the business for the benefit of the workforce. This structure can offer tax advantages, continuity for the business, and a strong legacy for the owner. As more UK businesses explore succession options, EOTs are now firmly part of the conversation.
Understanding How an EOT Works
In simple terms, an Employee Ownership Trust becomes the majority shareholder of the business. The trust is established for the benefit of all employees and is overseen by trustees who act in their collective interests. The existing owner sells shares to the trust, usually funded over time through company profits.
This approach allows owners to realise value for their shares without requiring an external buyer. It also enables a gradual transition, giving management teams time to take on greater responsibility while maintaining stability for employees and customers. For many owners, this balance of continuity and reward makes the EOT model particularly attractive.
Succession Planning Without a Traditional Sale
One of the main reasons owners consider an EOT is succession planning. Finding the right buyer is not always straightforward. A trade sale may result in integration into a larger group, potentially altering the culture and direction of the business. A private equity transaction may introduce new pressures and time horizons.
An EOT provides an alternative. It allows owners to step back while preserving the independence of the business and protecting its values. For businesses with strong teams and a loyal workforce, this can be a compelling option. It ensures that the company continues under familiar stewardship and that employees have a direct stake in its future success.
The Tax Advantages of Employee Ownership
Tax efficiency is another significant driver behind the growth of EOTs. In the UK, qualifying disposals to an Employee Ownership Trust can benefit from favourable capital gains tax treatment, provided certain conditions are met. This can make an EOT an attractive route for owners seeking a tax-efficient exit.
In addition, once the trust owns the business, employees may receive tax-free bonuses up to certain limits each year, subject to the relevant rules. This can enhance engagement and create a tangible connection between performance and reward.
However, while tax benefits are important, they should not be the sole driver. The structure must make commercial sense and align with the long-term objectives of the business and its owners. Careful planning and advice are essential to ensure the arrangement works in practice.
Strengthening Employee Engagement and Culture
Employee ownership often has a positive impact on engagement. When employees have a stake in the success of the business, they are more likely to feel invested in its future. This can lead to improved productivity, stronger retention, and a shared sense of purpose.
For many businesses, culture is a key asset. An EOT can help preserve that culture through a period of transition. Rather than introducing an external buyer with different priorities, the business remains focused on long-term stability and collective success. This continuity can be reassuring for employees, customers, and suppliers alike.
Ensuring Business Continuity
Continuity is a central consideration in any succession plan. Customers and suppliers want reassurance that the business will continue to operate reliably. Employees want to know their roles are secure. Owners want confidence that their legacy will be protected.
An EOT structure can provide this continuity. Because ownership transfers to a trust rather than a third party, the business can continue operating with minimal disruption. Management teams often remain in place, and the transition can be phased over time. This stability helps maintain relationships and supports ongoing performance.
Is an EOT Right for Every Business?
While EOTs offer many advantages, they are not suitable for every situation. The business must be financially robust enough to support the purchase of shares over time. There must be a capable management team in place to run the business once the owner steps back. The owner must also be comfortable with a transition that may involve deferred consideration rather than an immediate cash payment.
Exploring whether an EOT is viable requires careful analysis of financial performance, governance structures, and long-term objectives. For some owners, it provides the ideal solution. For others, alternative routes may be more appropriate. The key is understanding the options early and evaluating them in a structured way.
The Importance of Early Preparation
As with any transaction, preparation is crucial. Establishing an EOT involves legal, financial, and tax considerations. Early planning allows time to review the structure of the business, ensure it meets the necessary conditions, and put the right governance arrangements in place.
Starting the conversation well in advance also allows owners to consider their personal financial goals and how an EOT fits within them. It provides clarity and avoids rushed decisions later.
Moving Forward with Confidence
Employee Ownership Trusts have become an increasingly attractive route for UK business owners looking for a tax-efficient, values-driven succession solution. They offer a way to realise value, preserve culture, and support long-term continuity, but they require thoughtful planning and expert guidance.
If you are considering succession planning and want to explore whether an EOT could be right for your business, now is the time to start the conversation.
At UHY Williamson Croft, we work with business owners across the UK to assess suitability, structure transactions, and guide them through the process from start to finish.