This article explores the key Employee Ownership Trust pros and cons to help determine whether this model is the right fit for your business. As more business owners seek value driven, legacy-preserving succession strategies, the Employee Ownership Trust (EOT) has emerged as a powerful alternative to traditional trade sales or private equity exits. By transferring ownership to employees through a trust, founders can maintain company culture, secure tax advantages, and foster long-term employee engagement. However, while the benefits are compelling, navigating the legal structure and ensuring strong leadership are critical to success.
Employee Ownership Trust (“EOT”) PROS
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Preservation of Company Culture and Independence
- The business stays out of the hands of external buyers, private equity, or competitors. This makes an Employee Ownership Trust ideal for owners who care about their legacy, values, and the welfare of their team. A sale resolves succession issues by creating succession.
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Capital Gains Tax Relief for Sellers and Faster Process
- When a business owner sells a controlling interest (more than 50%) to an Employee Ownership Trust, the sale is currently exempt from Capital Gains Tax (“CGT”). This makes it a very tax-efficient exit and sale for business owners compared to third-party sales.
- Most EOTs are seller and advisor-led, therefore the process is typically faster and less complex than trade sales.
- EOTs now account for 6% of business sales per annum and this number is growing as people better understand how they are structured and operate and that they are not as complex as they sound.
- The CGT saving is a one-off and therefore most sales are structured for a sale of 100% of shares to lock in the tax saving for the full value of the business.
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Flexible and Gradual Exit
- An Employee Ownership Trust sale allows for a phased or full exit, giving founders time to groom the next tier of management and secure the future succession.
- A phased exit is particularly suitable when there is no obvious trade buyer or successor, or where a lack of recurring revenue mean that trade buyer valuations of the business would be poor or structured with a risky high earn-out percentage.
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Employee Engagement and Retention
- Although employees do not hold shares directly, they benefit through the Employee Ownership Trust and often feel more valued and this can lead to improved morale, productivity, retention, and engagement.
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Income Tax-Free Bonuses
- Employees can receive income tax-free bonuses of up to £3,600 per year under the current 2014 legislation.
- This is a nice reward, although not a fortune, but can be meaningful as part of the wider benefit structure especially on the ‘shop floor’ pay grade.
- Once the sellers are paid out, rewards and benefits can be further enhanced as there are no dividends or transaction loan notes to be paid.
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Continuity for Clients and Staff
- An Employee Ownership Trust means that there is no disruptive integration with another firm or brand which also helps to maintain the reputation, relationships, and community ties of the business and protects the employees and managers.
- Many managers continuing to work following a trade or investment deal leave in a ‘brain drain.’ EOTs avoid this and maintain the ‘family’ feel of a successful private company.
Employee Ownership Trust (”EOT”) CONS
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No Immediate Cash Windfall (for Sellers)
- Unless the business has significant cash reserves or takes on debt, sellers may be paid overtime from future profits, which means they are taking a risk on the company’s ongoing success.
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Complex Legal and Governance Structure
- Setting up an Employee Ownership Trust involves navigating HMRC requirements, trust law, and corporate governance rules. However, appointing an advisor, such as Avondale, who has a strong EOT track record and understands the process and requirements, will streamline the journey for you.
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Limited Employee Control
- Employees are “beneficiaries” of the trust but do not directly own shares or necessarily gain voting power. If not managed well, this can lead to cynicism or apathy.
- There is also a view that EOTs are share schemes, which is not wholly accurate. Shares are held indirectly and most EOTs are unlikely to resell – this is because the tax burden on a resale is very poor.
- Resales of EOTs are additionally less likely due to the cultural issue of a commercial buyer taking over a ‘mutual’ style business model and culture on any future acquisition.
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Repayment Pressure
- If the company borrows to fund the Employee Ownership Trust purchase, it may be under pressure to deliver strong profits to repay that debt. This can cause stress on the business or limit investment in growth, although most M&A sales have this pressure.
- Loan notes are often used rather than third party debt to repay sellers in an Employee Ownership Trust structure. This structure is easier and ‘softer’ as periods can be extended and, as interest is paid on most loan notes, sellers are more relaxed about the length of the period than, for example, retail banks.
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Succession and Leadership Risk
- If the original owner exits but there is no strong second-tier management in place, the business may flounder. Management needs to have an upper quartile incentive and increased training, but all too often this is not considered at the valuation and transition stages.
- Without a direct equity interest or increased salaries, management may feel demotivated by their lack of a stake in the business. Certainly, it is critical to create alignment with management usually via better pay incentives announced at or just prior to completion.
- Pay increases can impact the valuation, but any seller loan notes are at risk without management alignment.
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Ongoing Compliance and Reporting
- EOTs must ensure ongoing compliance with conditions (like the “equality requirement”) to retain tax benefits and must have an independent, professional Trustee appointed to the trustee board.
- They also need a better dashboard, reporting, and board structure. When established correctly at the start of the Employee Ownership Trust, this increased governance can improve the company’s business reporting.
- A focus on succession and reward, can significantly mitigate many of the downsides.
In summary, there are both pros and cons to an Employee Ownership Trust sale, which means that it may not be suitable for all businesses. However, the cons can be reduced or removed through effective change management and alignment plus a well-structured EOT process, combined with a strong post-sale Employee Ownership Trust model.
| Pros | Cons |
| Tax-free sale and faster process for founders | Possible deferred payments |
| Protects legacy and culture | Complex administrative burden |
| Engaged, stable workforce | Limited employee control, unlikely to resell |
| Income tax-free bonuses | Debt or cash pressure on business |
| Ideal for succession (less stress than trade) | Needs strong internal leadership |
Contact us
If you would like more information about our services or case studies on our recent EOT deals, please visit our website at https://avondale.co.uk. Alternatively, if you would like a free consultation with one of Avondale’s experienced M&A advisors, please call us at +44 (0)1737 240888, email us at av@avondale.co.uk, or fill out the attached form, and we will get in touch straight away.
This article has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for any specific tax, legal or accounting advice. Regulated advice bespoke to your circumstances is essential.
