Employee Ownership Trust

An increasing number of owners now sell their businesses to their employees via an Employee Ownership Trust. This is because such a sale structured correctly is at 0% capitals gains tax. They are also largely immediate, at full commercial value (subject to HMRC clearance), vendor led and a great reward to employees.
Avondale are highly experienced EOT advisors providing a turnkey, one-stop shop solution that covers structure, valuation, finance, legal, trustees and transition support with minimal disruption. Please enquire below or call us to discuss how we might help you with such a sale.

Your Employee Ownership Trust Experts

An Employee Ownership Trust requires planning and careful consideration, however, for many sellers it is an exciting exit opportunity. Avondale can lead the whole process and support in transition, funding options, the critical element of leader succession and business support during implementation.

We offer a personal service to reduce the complexities for you and the team whilst maximising value and transition. Finance is via a blend of initial distributable reserves, third-party finance and vendor loan notes over a period to be agreed. The valuation is vendor and advisor-led subject to HMRC clearance and dictated by your business cash flow, forecasts and reserves.

Our expert advisors undertake a complete financial and commercial analysis; looking at the financial modelling, headroom, third-party funding options and valuation, as well as assessing key management capabilities and the best handover approaches. This helps you best understand how an Employee Ownership Trust may meet your ambitions and compare favourably to alternatives, such as MBOs or the archetypical trade sale.

We craft and submit a detailed clearance request to HMRC and finalise any loan note structure. Where relevant we secure third-party funding using our extensive network of specialist EOT lenders to assist with debt funding, securing the right terms and debt serviceability. This ensures you can focus on your business rather than the financial and tax complexities.

Our full legal pack for an arm’s length sale and purchase agreement, including seller protections, trust deed and loan documents are produced and we walk you through each of these in a series of meetings to ensure you understand all the technicalities and that your sale is kept on track. In parallel, we build on the strategy for change management for your team to ensure succession.

An Employee Ownership Trust (EOT) business sale is at 0% Capital Gains Tax and at full commercial value; a great reward for you and your team. EOT is a regular limited company run on commercial terms, however the shares are owned by a trust for the benefit of all the employees. For your EOT we use a new trust company limited by guarantee, so it does not have shares or shareholders which protects employees from liability. It enables employee mobility without share transfers, thereby reducing succession issues.

The benefits to you are a vendor and advisor-led sale process; that is with the Trust holding the shares indirectly for the employees, who are not usually required to approve the sale. Employee Ownership Trusts maintain company culture and maximise value, whilst enabling you, if required, to step back over time. With up to £3,600 pa tax free bonus EOTs aid recruitment and retention of staff, increased productivity and local investment.

Being employee owned means companies run things more openly, support a team that’s driven and committed to the future of the business and they reward everyone with an annual profit share. Employee owned businesses are proud to be part of a growing movement of progressive businesses putting people first.

Why sell to an Employee Ownership Trust?

Employee Ownership Trust businesses are not new – John Lewis is probably the oldest example. Many owners are now choosing to sell their businesses to their employees via employee trusts because of the many advantages. In particular:

  • EOT sales are highly attractive because subject to HMRC clearance, they are 100% tax-free; the Government is incentivising such sales as there is significant evidence that EOT’s are sustainable and lead to greater productivity.
  • There are benefits for the employees: tax-free bonuses, better job security, and a feeling of inclusiveness.
  • The process can be vendor-led and employees are not required to drive the approach as would be the case in a Management Buy-Out (MBO).
  • They are more immediate and require less due diligence than trade sales.

What is the sale approach?

An EOT sale does not mean that the business has to become wholly run by the employees. The former shareholders can remain involved at management level; although they concede board control of the business to the Trust they can take a position as a Trustee after the sale. The key points of the EOT approach are:

  • The sale must be for 51% or more of the company shares to benefit from the 0% CGT rate. Many EOT sales are 100% share sales for simplicity.
  • Typically a new company is created which will act as the employee share ownership trust and the shareholders sell their trading business shares to this EOT company.
  • A sale and purchase agreement is executed, although associated due diligence is typically lighter.
  • After the sale, the company trades as a wholly-owned subsidiary of the EOT company.
  • A trust document sets out the obligations of the Trust to the employees.
  • The fixing of the multiple used to value the trading company is a commercial discussion and there is no golden rule.

How will my business be valued?

Typically, private company valuation multiples range between 4 to 7 but cashflow, financial headroom and reserves will all have a bearing. The valuation, which will be led by Avondale, is subject to HMRC clearance and will be assessed using comparisons with other private sale benchmarks.

How will the sale be funded?

There are three ways for the Trust company to fund the buy-out – company reserves, vendor loans (typically over 5-7 years from our experience), and sometimes third-party debt is also used. Financial aspects to consider:

  • Any debt or vendor loans are structured in much the same was as a management buy-out from future cashflow (profit after tax) – analysing seasonality and the headroom to pay debt plus interest from the income.
  • Owners’ salaries are sometimes adjusted at the point of sale.
  • The trade company will make payments out of profits after tax on the vendor loan to the EOT company which will then repay the selling shareholders.
  • The vendor loan is often a ‘promise to pay’ and therefore may not sit on the balance sheet. From a practical perspective this means that if cash flow is struggling, the loan period can be extended.
  • Interest on vendor loans must be charged to ensure that there is an incentive for management and Trustees to repay the loans on schedule.
  • Dividends can be restricted until all vendor loans or third-party loans are paid off.
  • The vendor loans are typically structured as loan notes secured against the business.
  • Any initial payout from reserves needs to leave sufficient working capital.
  • Any third-party debt may need personal guarantees from the sellers and will take precedent over the vendor loans in terms of repayment. The trust needs to approve reasonable finance terms.

What happens to the employees?

Employees are usually highly motivated by employee ownership. They like the inclusivity and cultural approach that it brings to the company and their roles. It also benefits the recruitment process. Many employees also see that beyond any debt repayments the business can scale-up as the ongoing dividend requirement is lessened/eradicated. Typical benefits include:

  • Following debt repayment, pay for key managers is typically in the upper quartile for the sector.
  • Increased retention.
  • Better productivity as staff increase the ‘stakeholder’ mindset.
  • Tax-free bonuses of up to £3,600 per annum for each employee, typically from year one.
  • The sellers can remain employees and gradually handover the reigns over-time, as appropriate.
  • Strategy and culture can often be reset with increased team-driven initiatives.
  • The trust acts in the best interests of the beneficiaries – the employees.
  • Usually, there is a professional trustee, an employee trustee and an ex-shareholder trustee. Avondale will help establish your trust panel as part of its service approach.

What are the next steps?

All EOT sales are bespoke as the approach is highly flexible. It typically takes Avondale 3-4 months to complete an Employee Ownership Trust, working directly with the sellers on a one-to-one basis on all aspects from feasibility, finance and clearance to strategy and the establishment of the trust panel.

With significant expertise in valuing businesses, cash flow modelling and gaining HMRC clearance, we are unique in the EOT market as we also have in-house hands-on expertise to lead the EOT cultural transition within a business. We believe Employee Ownership Trusts should be completely commercial in terms of the return to the seller shareholders, and then on the sale, the business should become an employee-driven strategically advantaged business.

Our Employee Ownership Specialist Lenders

Employee Ownership Sales with Avondale

We are the only advisor providing a turnkey solution that covers all aspects of an EOT from start to finish, maintaining personal services throughout. Contact us today to discuss how employee ownership could work for your business.

Resource Centre

Guides & Insights

An Insight into Employee Ownership

With an increasing number of owners now assessing the potential of selling their businesses to their employee, our Employee Ownership Insight examines the key advantages of employee ownership sales and answers the most frequently asked questions by business owners and management teams, such as:

  • Why sell to an Employee Ownership Trust?
  • Who will my business be valued?
  • How will the sale be funded?
Avondale Guide - Employee Ownership Trusts

Our Employee Ownership Trusts Guide is written to help business owners and management teams gain an in-depth understanding how an EOT may help shareholders create succession and secure shareholder value, whilst creating the legacy of a sustainable business working for the benefit of all staff members. Topics covered include:

  • Advantages, Benefits & Considerations of Employee Ownership
  • Forms of Employee Ownership & Funding the Transaction
  • Practicalities of Distributable Reserves & Implementation
Avondale Guide - Exit Strategies by Design

Set against a number of case studies, our Exit Strategies by Design Guide examines the different exit options available for business owners and shareholders, together with key elements to consider, such as preparation for the sale, valuation and timing. Topics covered include:

  • Detailed Overview of Possible Exit Strategies
  • Types of Buyers
  • Business Cycles & When to Exit


On-Demand Webinars

Our on-demand webinars are led by accomplished speakers and professionals covering all aspects of employee ownership sales. Bringing together specialist EOT advisors, trustees and ex-sellers, topics of discussion include the pros and cons of employee ownership, transaction steps, the cruciality of successful transition and life of previous owners after the sale.