Introduction to Employee Ownership Trusts (EOTs)

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.

 

Employee Ownership Trusts – Strong financial foundations

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.