Employee Ownership Trusts (EOTs) have become a familiar feature of the UK business landscape since their introduction in 2014. They are often promoted as a great solution to succession planning, offering tax advantages for the selling shareholder and engagement benefits for employees.
But as with any structural change, the real question is not whether you can establish an EOT, but whether you should.
Suitability depends not just on the financials, but also on culture, governance, and long-term goals. Some businesses thrive under employee ownership. Others find the model an uncomfortable fit.
At its core, an EOT is funded out of future profits. The selling shareholder typically receives a combination of an upfront payment (sometimes funded by third-party debt) and deferred consideration, repaid over time from the company’s cashflow.
This means the business needs to be financially stable, which includes:.
Consistent profitability – a business with erratic earnings or losses will struggle to meet repayment obligations.
Good balance sheet health – but solvency alone isn’t enough. The key test is whether free cashflow is sufficient to support the EOT deal.
Valuation realism – if the shareholder’s expectations are out of line with what the business can genuinely afford to fund, the model will not work.
The right motivation
Numbers aside, the owner’s motivation is a central factor in any EOT transaction. For this reason the EOT model is well-suited to shareholders who:
Wish to secure succession while maintaining continuity of the business.
Value legacy, culture, and employee welfare alongside personal exit goals.
Are comfortable with a staged repayment rather than a clean break.
Where the driver is solely tax relief, the structure can unravel. Employees may view it with scepticism, and trustees may find themselves holding an ownership interest without genuine engagement from staff, which brings us to….
Good employee engagement and a great culture
Employee ownership thrives in businesses with a collaborative culture. High staff turnover, weak morale, or a culture of mistrust are not a great start. Equally, if the business is overly reliant on the founder, employees may not be ready to step into a more empowered role.
Strong candidates for EOTs tend to have:
A committed second tier of management capable of running operations.
A culture where employees already feel valued and listened to.
A workforce size large enough to make shared ownership meaningful, (as to which see below)
Comfortable with governance and administration
An EOT is not administratively easy. Trustees (including independent representatives) must oversee the trust, annual valuations are needed, and reporting obligations are significant. There may also be employee councils or forums to ensure genuine representation.
Businesses with a clear governance structure and a willingness to embrace this are far better placed than those which have historically operated informally.
Prepared for a long-term commitment
Unlike a trade sale or management buyout, an EOT is not designed to be unwound easily.
Once in employee ownership, the expectation is permanence. That makes it vital to consider whether the model fits the long-term brand and strategic direction of the business. For some sectors, typically but not exclusively professional services, creative industries, and knowledge-led businesses, the alignment can be natural. For others, particularly those with heavy capital requirements or volatile markets, the fit may be less obvious.
So, what is the ideal size for an EOT?
This is a question we get asked a lot.
Whilst there is no statutory minimum size for an EOT, in practice the model works best at a certain scale.
Employees:
At least 10–15 employees, often 20+, so that the benefits of employee ownership are spread across a meaningful group. Equally, if the majority of employees are directors or family members, the “equality requirement” under s236M CTA 2010 can be compromised. HMRC expect broad-based participation, not just a handful of “insiders” who benefit. Additionally, if too high a proportion of the employee base are directors or participators, the arrangement risks looking like a disguised management buyout rather than a genuine EOT. This might even mean that the selling shareholders do not obtain capital gains tax relief as they had anticipated.
Turnover and Profitability:
Businesses with a reasonable turnover (likely at least in the low millions) and steady, predictable profits are often the best fit. Small companies with thin margins may not generate enough free cashflow to fund the EOT, while very large companies may need a more formalised governance structure to manage the complexities of employee ownership. A certain size is also critical to fund the costs of the transaction itself, such as the costs of obtaining professional advice, which are not to be underestimated if dealt with properly.
What if having read this I think an Employee Ownership Trusts (EOTs) might not be right for me?
For some businesses, an EOT is not the right answer. That doesn’t mean, of course, that there are no other options for exit.
A trade sale can be attractive where a strategic buyer is willing to pay a premium.
A management buyout (MBO) works well if there is a strong leadership team eager to take control; and
Family succession remains viable where the next generation is engaged, although can brings its own tax complexities.
Finally, in certain cases, hybrid solutions, such as selling part to an EOT and part to investors, can balance legacy with liquidity.
The important thing to recognise is that one size does not fit all. The right structure is the one that aligns with both the financial realities of the business and the legacy its owners wish to leave.
Conclusion
An EOT can be a powerful succession and exit planning option where the business has:
Sustainable, predictable profitability.
A realistic valuation and funding model.
A supportive culture and strong second tier of management.
Owners motivated by legacy and employee welfare, not just tax.
But not every business is an ideal candidate for an EOT. Companies with unstable cashflow, weak management depth, or disengaged staff may find the model a poor fit. Where those factors apply, exploring alternatives such as trade sales, management buyouts, or family succession may be a better option.
If you have any queries about this article on employee ownership or would like to receive a copy of our factfind, which might help you start to understand whether employee ownership might be right for your, or your client’s business, please get in touch.
Case of the month – Succession Planning for a Family-Owned Business
Introduction
Our clients, a married couple in their late 60s, wished to start passing ownership of their successful family business to their children during their lifetimes to avoid potential disputes after their deaths.
While they were happy to hand over control, they wanted to retain some influence to help guide the company when needed. Their priority was ensuring the process was completed in the most tax-efficient way possible.
The Issue
The clients were concerned that, even with clear wills, future disputes over ownership could arise. They wanted to transfer ownership to their children now while maintaining a role to support the business where appropriate.
Additionally, the company wished to incentivise certain existing shareholders by enhancing their share rights.
How we solved it
We provided detailed advice on reorganising the company’s share capital. This involved a combination of share buybacks, gifts, and new share issues — all carefully structured to maximise available tax reliefs and minimise exposure to IHT, CGT, IT and CT.
We outlined a clear, step-by-step plan for implementation, worked closely with the clients’ solicitors, and advised on creating a Non-Executive Director (NED) role to preserve the clients’ influence where needed.
The outcome
The clients successfully transferred control to their children in a fully tax-efficient manner while retaining an appropriate NED role.
They gained complete clarity on the tax implications and confidence in the robustness of the structure. Key employees were also incentivised through enhanced share rights.
The project was delivered successfully, with close coordination between advisers to ensure all compliance and legal requirements were met.
A Management Buyout (MBO) involves a company’s managers purchasing either:
The shares of the company, or
The trade and assets of the company (to become shareholder-directors).
The management team must decide between:
Buying shares of the company (retaining the company’s history and allowing the use of any existing tax losses), or
Setting up a new company to purchase the trade and assets of the target company.
Capital gains/loss considerations for a management buy out
Share disposal for the individual selling their shares/assets.
Seller might be able to benefit from Business Asset Disposal Relief (BADR) if conditions are met.
For the company being sold, there is no break in their accounting period and it continues to trade as normal.
Buying at less than market value (shares)
If employees (management) pay less than market value for shares, the discount is treated as employment income.
They’ll be taxed on the difference between market value and the price paid.
The shares are likely considered readily convertible assets, therefore subject to Class 1 NIC.
Buying at less than market value (trade and assets)
If employees (management) pay less than market value for trade and assets, the same employment income tax rules apply as above.
The taxable amount is the difference between market value and the amount paid.
Cost adjustment – CGT base cost
Any employment income taxed due to undervalue will be added to the capital gains tax base cost of the shares/assets for future disposal calculations.
Loan to fund purchase
Management will likely need to borrow funds to finance the share purchase.
This is treated as a qualifying loan if it’s used to buy shares in a close company or employee-owned company.
Interest on the loan is deductible for income tax purposes.
Hive down
A hive down is another method to acquire a company.
It provides a way for a buyer (either a third party or the MBO team) to acquire a clean company (i.e., without historical liabilities) whilst still purchasing shares rather than the trade and assets directly.
This approach also allows the buyer to acquire only part of the target company.
Example
For example, say Mr A owns A Ltd. The management want to buy A Ltd. A new company is set up by Mr A, called Newco Ltd. A Ltd transfers its trade and assets to Newco Ltd – this is a normal transfer of trade and assets which would be a succession as 75% ownership is unchanged as Mr A owns at least 75% in both A Ltd (the seller company) and Newco Ltd (the buyer company).
The losses can transfer with the trade. In addition, as the history of the old company is not transferred, Newco Ltd is a clean company.
The management team (or third party) then buy the Newco Ltd shares from Mr A – this is a normal sale of shares. The management team (or third party) have purchased shares but in a clean company.
Next Steps
Please get in touch of you have any further questions regarding management buy outs
A business valuation isn’t just about numbers, it’s about ensuring you stay tax-efficient, compliant, and in control of your financial future. Whether you’re selling up, planning for the next generation, or facing an HMRC review, understanding when and why you need a valuation can save you from unexpected tax bills and missed opportunities. So, when exactly is a business valuation essential? Let’s have a look.
Selling Your Business
Thinking of selling your business? Before you do, you’ll need to determine its fair market value for Capital Gains Tax (CGT) purposes. An accurate valuation ensures you only pay tax on the real profit and can take advantage of tax reliefs like Business Asset Disposal Relief (BADR), potentially reducing your CGT to just 10%. However, it is important to note that the rates of BADR are increasing to 14% from April 2025 and 18% from April 2026. The right valuation could mean thousands in tax savings!
Inheritance Tax (IHT)
What happens to your business when you’re gone? If you own a business at the time of your death, it forms part of your estate and may be subject to Inheritance Tax. A professional valuation helps ensure that HMRC doesn’t overestimate the business’s worth, potentially reducing the tax burden on your heirs. Plus, certain business assets may qualify for Business Relief, which can significantly lower or even eliminate the IHT liability.
Gifting Shares
Thinking of gifting shares to family members ? Be aware that HMRC considers this a ‘disposal’ for tax purposes, meaning a valuation is required to determine if Capital Gains Tax applies. However, with careful planning, tax-efficient succession strategies can usually defer tax liabilities.
Employee Share Schemes
Offering shares to employees through schemes like Enterprise Management Incentives (EMIs) or Company Share Option Plans (CSOPs) is a fantastic way to motivate your team. But before you start handing out equity, you’ll need a business valuation to determine the fair market value of the shares. This ensures compliance with HMRC and prevents any unexpected tax demands for your employees.
HMRC Investigations
No one wants to be caught in a HMRC dispute over the value of their business. Whether it’s a challenge to your reported tax liability, a valuation for inheritance purposes, or a disagreement over a business sale, having an independent valuation in hand can be the key to defending your position and avoiding unexpected tax bills.
Mergers, Acquisitions & Restructuring
Merging with another company? Restructuring your business? Acquiring a competitor? A valuation is crucial for tax planning in these situations, as it determines how gains are reported, how goodwill is treated, and whether any tax reliefs apply. The last thing you want is a restructuring plan that leads to unnecessary tax costs.
Planning to retire? Before you step away, you’ll need a solid valuation to structure your exit in the most tax-efficient way possible. Whether you’re selling shares, transferring ownership, or liquidating assets, a well-timed valuation helps you minimise tax liabilities and maximise your financial return.
Don’t Leave It to Chance
A business valuation isn’t just a box-ticking exercise, it’s a powerful tool that can shape your financial future. Whether you’re selling, planning for succession, or facing an HMRC challenge, having an accurate valuation ensures you remain tax-efficient and legally compliant.
Next steps for your business valuation
If you need a valuation or have any queries in this regard, please get in touch. ETC can make sure you are prepared for whatever comes next so please get in touch.
Valuing shares is essential for anyone involved in business or investment decisions. Whether you’re an investor seeking to determine the worth of a potential investment or a business owner considering the sale of shares, the method of valuation you choose can significantly influence the outcome of your financial decisions. In this article, we will examine four of the main methods for share valuation: maintainable earnings, recent transactions, net assets, and dividend yield.
Maintainable Earnings Approach: Focusing on Sustainable Profitability for your share valuation
The maintainable earnings method is one of the most commonly used approaches for valuing shares. It centres on assessing a company’s ability to generate consistent, long-term profits. This approach involves analysing past earnings and adjusting them to remove any irregular, one-off events that might skew the company’s true earning potential. For example, extraordinary gains like asset sales or rare losses such as legal settlements are excluded from the calculation.
The main goal of this method is to determine the company’s true earning power, how much it can consistently generate in the future based on its current operations. After calculating the maintainable earnings, this figure is typically multiplied by an industry-specific multiple to estimate the value of the shares. This method works particularly well for businesses with stable earnings, such as established manufacturers or retailers, whose financial history follows a predictable pattern.
Recent Transactions Approach: Reflecting Current Market Activity
Another method for valuing shares is the recent transactions approach, which looks at the prices at which shares have recently been bought or sold. The idea behind this method is that recent market transactions offer an accurate snapshot of a company’s value. If a company has undergone a transaction, such as a share sale, merger, or acquisition, this method can serve as a real-time reflection of the company’s worth.
However, the recent transactions method has limitations. If there have been few transactions, or if those transactions occurred under unusual circumstances (such as during a market downturn or distressed sale), the resulting value might not accurately reflect the company’s true worth. This method is particularly useful for private companies or businesses that have recently been involved in significant deals, as it offers insight into what buyers and sellers have agreed upon in the market.
Net Assets Approach: Assessing the Value of Physical Assets
The net assets approach, or asset-based valuation method, provides a more straightforward way to value a business. It calculates the company’s worth by subtracting its liabilities from the total value of its assets. This method is ideal for businesses that have substantial physical assets, such as real estate, machinery, or inventory. Essentially, it asks: what is the company worth if all of its assets were sold off and its debts were paid?
While this method is useful for asset-heavy businesses, it doesn’t always capture the full value of a company, particularly in industries where intangible assets, like intellectual property, brand reputation, or customer relationships, are crucial drivers of value. The net assets approach is often used when companies are being liquidated or for businesses focused primarily on tangible assets, most usually property-investment companies.
Dividend Yield Approach: Valuing Shares Based on Income Generation
For businesses that regularly distribute dividends to shareholders, the dividend yield method offers an alternative way to value shares. This approach focuses on the income that shareholders can expect to receive from their investment in the form of dividends. It compares the annual dividends paid by the company to the current share price, giving investors an idea of the return they can expect.
This method is particularly valuable for companies with a strong track record of paying dividends, such as utilities or established businesses with stable cash flow. However, it’s less applicable to high-growth companies that reinvest their profits into expansion rather than paying dividends. The dividend yield approach gives investors insight into the immediate income potential of the shares, rather than their long-term growth prospects.
Choosing the Right Valuation Method
The right method for valuing shares depends largely on the circumstances of the business in question. Each of these methods provides a unique perspective on a company’s value, and in some cases, combining multiple approaches can offer a more complete and accurate valuation. As a tax adviser or investor, understanding these different methods is essential for making informed decisions about investments, mergers, acquisitions, and tax planning. The key is to select the method that best reflects the company’s financial health and aligns with your investment goals.
Next steps in share valuation
If you find yourself needing a share valuation, don’t hesitate to reach out. Our team can guide you in selecting the most suitable valuation method, perform the valuation, and, if necessary, assist with applying for clearance from HMRC to ensure compliance and peace of mind. Please contact us here.
With upcoming changes to certain tax reliefs (mainly Business Relief for IHT and Business Asset Disposal relief for CGT), many business owners are considering whether to sell their companies, or transfer them to family members as part of a wider family tax plan. People are wondering about valuing a business…
An important part of which, will be to place a value on the business which in this article, we will be looking at the different ways which this can be achieved.
The Basics
HMRC requires valuations to reflect the fair market value (FMV)—the price the business would fetch between a willing buyer and seller in an arm’s-length transaction. Ensuring compliance with HMRC guidelines and proper documentation is critical to avoiding disputes.
The Income / Capitalised Earnings Approach
The income approach estimates a business’s value based on its ability to generate earnings or cash flow. The discounted cash flow (DCF) method projects future cash flows and discounts them to present value using a rate reflecting risk and time value.
Alternatively, the capitalised earnings method evaluates historical profits and applies a capitalisation rate to determine the value. This approach works well for established businesses with consistent income streams.
The Market Approach
The market approach uses comparisons with similar businesses. Comparable company analysis assesses metrics such as Price-to-Earnings or Revenue Multiples based on publicly available data.
Precedent transactions focus on sale prices of comparable businesses, adjusted for differences in terms, industry, and economic conditions. These methods are particularly useful for businesses operating in competitive sectors with accessible market data.
The Asset-Based approach
The asset-based approach calculates the net value of a company’s assets, often used for asset-heavy businesses or where the business is no longer a going concern.
The adjusted net asset method determines the fair market value of all tangible and intangible assets, minus liabilities. In cases of liquidation, the valuation assumes the business’s assets are sold in an orderly or forced manner.
When valuing a business for UK tax purposes, it’s vital to comply with HMRC rules and consider the tax context.
For inheritance tax, FMV is assessed as at the date of death. Accurate documentation is key to being able to demonstrate that the valuation reflects market conditions at the time of death.
Capital gains tax valuations focus on changes in asset value between acquisition and disposal.
Intangible assets, such as trademarks, patents, and goodwill, often significantly affect valuations and require specialised appraisal.
Common challenges faced when valuing a business include:
Difficulties in forecasting future cash flows.
Selecting an appropriate discount or capitalisation rate.
Adjusting for non-market assets.
Family-owned businesses or private companies often require bespoke adjustments due to limited market comparables.
It is vital to ensure any valuation is accurate and defendable should HMRC come knocking.
To do this, use multiple methods to cross-check results.
Here at ETC Tax, we are specialists in carrying out business valuations so should this be something you or your clients require, please to get in touch.
