Selling to an Employee Ownership Trust: Pros and Cons

An Employee Ownership Trust (EOT) is a special form of employee benefit trust that acquires and holds a controlling interest in a trading company for the long-term benefit of all employees. The trust owns the shares on a permanent basis and is required to operate for the employees as a whole, rather than for any specific individual or group.

HOW AN EOT SALE IS STRUCTURED

The trust is established and acquires a controlling stake of more than 50% of the company’s ordinary share capital. The purchase price is set by reference to an independent valuation. The initial consideration is usually provided by the target company as a contribution to the EOT and a significant part of the consideration is commonly deferred and funded out of the company’s future trading profits – third-party funding can also be used.

KEY ADVANTAGES

An EOT sale can offer several commercial and tax advantages, subject to eligibility and proper structuring.

Tax relief for sellers: For qualifying disposals to an EOT on or after 26 November 2025, 50% of the seller’s capital gain can be exempt, with the remaining 50% chargeable. This partial relief cannot be used in conjunction with business asset disposal relief (available on up to £1 million of capital gain on qualifying disposals) but remains advantageous compared with most third‑party sales.

Business continuity and culture: An EOT helps preserve the company’s independence, ethos and brand. It provides an internal succession route without the disruption that may accompany a trade sale or private equity investment. Founders can step back gradually, supporting transition of leadership and knowledge.

Employee engagement and retention: Ownership through a trust can improve engagement and retention. All eligible employees benefit on a similar basis, and the company may be able to pay tax‑free annual bonuses within statutory limits to eligible employees if conditions are met. New management can be incentivised with tax-efficient EMI share options.

Valuation and deal certainty: Pricing must be based on a fair market valuation by an independent valuer. There is no need to find or negotiate with an external buyer, which reduces transaction uncertainty and confidentiality risk.

Simpler diligence and documentation: EOT transactions usually involve lighter-touch diligence and fewer warranties and indemnities than a trade sale. Less legal negotiation is required, which means transaction costs are reduced and the process is less stressful.

KEY DISADVANTAGES

Capital Gains Tax (CGT): The EOT relief is no longer a full 100% CGT exemption, so the sellers will be liable to pay CGT on 50%, of their sale proceeds. The trust and company must meet EOT qualifying conditions on an ongoing basis. Breaches can have adverse tax or legal consequences.

Cashflow and timing of tax versus proceeds: CGT can arise on completion even where a significant portion of the consideration is deferred and funded from future profits. This creates a cashflow mismatch for sellers who may owe tax before they have received all sale proceeds. However, the sellers can agree with HMRC to pay tax on deferred consideration by way of instalments to manage this risk.

Funding risk and long tail of payments: The EOT is usually funded by the company’s future profits, so there is a risk to timing and quantum of deferred payments if trading underperforms. Covenants and security may be limited compared with third‑party financed or cash deals.

Governance and control shifts: The EOT must hold a controlling interest and act for the benefit of all employees. This introduces new governance requirements and trustee oversight. Board composition, trustee independence, and conflict management need to be properly structured and considered on an ongoing basis.

Marketability and future exit options: Any future external sale may be culturally unattractive and less likely. Liquidity for remaining minority shareholders can be limited unless managed through an internal share buy-back.

IS AN EOT THE RIGHT FIT?

An EOT can be compelling for “people” businesses with stable cashflows, a strong culture, and owners who value legacy and employee participation. It is less suited for sellers who require maximum cash at completion and/or if a strategic buyer or private equity investor would pay a meaningful premium.

NEXT STEPS

• Feasibility and objectives: Clarify shareholder objectives, desired timelines, and leadership succession. Assess whether an EOT aligns with culture and long‑term plans.
• Independent valuation: Commission an independent valuation to benchmark pricing and affordability, including financial modelling of debt capacity and forecast profits.
• Tax advice: Obtain tax advice on eligibility for EOT relief, the 50% exemption for qualifying disposals on or after 26 November 2025, the CGT position on deferred and contingent consideration, and personal tax planning.
• Financing plan: Determine initial payments, deferred schedule, any third‑party or vendor financing, and appropriate covenants or security. Test affordability under downside scenarios.
• Governance and structure: Take advice on trust and company governance, trustee composition and ongoing compliance processes.
• Employee engagement: Plan communications and policies on employee participation and potential bonuses.

If you have questions or concerns about EOTs, please contact Andrew Bretherton or Paul McCourt.