“Employee ownership” is a broad concept encompassing several different structures. An EOT is a tax-efficient way to structure employee ownership. A Trust holds the shares for the benefit of the employees rather than every employee owning shares directly. Whilst there are many variations, the essential mechanics of an EOT can be observed within the simple diagram. The UK government introduced EOTs in 2014 because research showed that they increased productivity. To encourage their growth, EOTs receive generous tax incentives. Employee ownership delivers all the benefits of selling your business and more, including getting your time back. In addition, you can ensure your business is heading in the right direction before saying goodbye completely.

A controlling interest must be sold to the EOT (over 50% of the shares), which means you can retain a minority shareholder position in the company should you wish. Any retained shares will accrue in value should the company continue to expand and would then be sold to the EOT later. Shares sold to the EOT in the first instance are exempt from CGT; however, retained shares sold later qualify for CGT, so many owners opt to sell 100% of their shares from the outset. Phasing the sale over time would enable you to remain invested in the business, especially considering that employee-owned companies tend to be more productive. It would be in the interests of the EOT to buy any retained shares where a put-and-call mechanism is utilised. Again, this arrangement would mean that the debt incurred by the company would be less burdensome; however, it should be weighed against a CGT liability on the retained shares. Any retained shares sold to the EOT at a later stage are not tax-exempt and will incur a Capital Gains Tax liability. Additionally, a sale of a minority holding of shares may require an additional discount applied to the value of these shares when independently valued (EquiPartners can resolve this).

In 2014, the UK Government introduced tax reliefs for Employee Ownership Trusts (EOTs) to encourage business owners to transition to a more productive employee ownership model. Business owners who sell their company to an EOT are not charged Capital Gains Tax (CGT). Selling your business on the open market triggers a Capital Gains Tax (CGT) liability, which reduces the sale proceeds. Owners of smaller companies that qualify for Business Asset Disposal Relief pay a lower proportion of CGT, typically between 14% and 24% after April 2025, and between 18% and 24% after April 2026. However, companies with higher valuations can expect a tax bill closer to 24%, resulting in them losing nearly a quarter of their sale proceeds. Instead of selling your business to an outside investor, you have the option to sell it to your employees tax-free. Any excess cash is part of the consideration and is distributed tax-free on day one.

With an EOT, there's more risk for the vendors, as any deferred sale proceeds depend on the business’s performance moving forward. However, a sale on the open market also involves some risk, as nearly every transaction involves some form of earnout and some deferred consideration. If your business is operating in an unattractive sector, offers may fall below your company’s fair market value (FMV). Management buyouts and buy-ins (MBOs and MBIs) can also involve significant amounts of deferred sale proceeds as some managers can struggle to attract the right level of funding.

Shares sold to the EOT are CGT-free; however, CGT will be applied to any retained shares sold to the EOT at a later stage. Some vendors opt to sell 100% of their shares, benefiting from the tax advantage. Other vendors opt for a hybrid model, retaining some shares and remaining invested in the business. As previously mentioned, these retained shares qualify for CGT when sold. Interest charged on the deferred consideration is subject to income tax.

When a company is sold to an EOT there are several qualifications that the company must continue to meet.

An independent professional valuation of the company is necessary. HMRC does not approve the company’s sale price before the transaction is completed, but can reassess this after the transaction and potentially decrease the value of your shares. The valuation methods used for an EOT are the same as those used when selling on the open market or for an MBO. The EOT must be sold for a Fair Market Value (FMV). If your business operates in an attractive sector and you were to sell on the open market, competing bids may increase your FMV. Conversely, if your business operates in an unattractive sector, you may receive low offers that are below your company's actual FMV. It is crucial to obtain an independent valuation from experienced corporate financiers such as EquiPartners. Vendors who use inexperienced accountants to value their businesses risk losing significant amounts of money.

When initially formed, the EOT does not have any money to purchase the shares held by the current shareholders. Therefore, shares are swapped for loan notes, with any surplus cash in the business transferred to the shareholders on the day of completion. The loan notes are then paid out of the company’s profits (after tax). If more cash is required for the exiting shareholders on day one, EquiPartners can secure a senior bank loan, meaning more money upfront and perhaps less risk for the vendors. However, where a bank loan is secured, loan notes will rank behind the Bank, and repayments must not be missed or covenants broken. Most EOTs are entirely funded with loan notes, where interest can be charged in the same way as if a bank were providing the loan. This provides an excellent internal rate of return, as the loan is treated more like an investment in a well-known asset. While the sale proceeds (including the surplus cash) are CGT-free, interest received on the loan notes will be charged under income tax. It is important to note that you must ensure that an EOT is financially viable before you waste money on expensive tax and legal advisors. EquiPartners will ensure that an EOT is financially feasible before you commit to further costs.

Studies have shown that the top 50 EOTs are 7% more productive than before transitioning to an EOT. EquiPartners increase this uplift by helping EOTs adopt the right messaging and helping employees link performance with rewards. The Fixed Charge Coverage ratio (FCC) ensures that the company can afford to repay the deferred consideration. Where possible, we recommend allowing some surplus cash so the tax-free bonus can be paid to the employee-owners, linking productivity to reward.

EquiPartners maximise your position, enabling flexibility and allowing room to extend an interest and/or a repayment holiday should the need arise.

When IHT rules are applied, loan notes are placed in the same category as cash. This risk can be covered with IHT insurance or DCI insurance, providing extra comfort for the vendors. EquiPartners actively helps minimise your exposure to these risks and many more.

Deferred Consideration Insurance (DCI) covers the outstanding consideration in the event of the vendor's death. The company pays for DCI because it's in the company's interest to repay any outstanding consideration as soon as possible. In the event of the vendor's death, the estate's beneficiaries receive the remaining consideration, which could cancel out the need for IHT insurance.

With an EOT the shares are held in a Trust Company for the benefit of the employees - no employee holds physical shares. The Trust Company first issues loan notes and then pays these loan notes off using the company's post-tax profits.

The shares held in the Trust Company are for the benefit of all current employees. When new employees join the company and have met the qualifying criteria, they become beneficiaries of the Trust. When they leave the company, they forfeit their rights to benefit from the trust and leave the same way any other employee would leave their company.

It is possible to specify that the company cannot be sold in the future; however, selling may be advantageous in certain circumstances. In the short term, it wouldn't be in the best interests of the employees to sell before the deferred consideration has been repaid, as the total of the outstanding loan notes and CGT that the vendors left behind will be greater than the sales proceeds. However, selling may be advantageous in certain circumstances, especially if the company's financial health depends on being acquired. In the short term, anti-embarrassment clauses protect the vendors, and if the company were to be sold, any remaining deferred consideration would be repaid on completion. If the company were to be sold, the employee-owners would receive a share of the sale proceeds once all debt and tax has been paid.

Essentially, the board of trustees replaces the departing shareholders and interacts with the board of Directors in the same way. The trustees only get involved in big decisions such as the acquisition of an expensive asset, replacing a Director, arranging finance, or decisions that contravene the agreed-upon business plan. The trustees and Directors usually meet quarterly or as needed. All decisions are made with the best interests of the employees in mind.

One or two employee trustees can represent the employees. In this role, they are tasked with opening communication channels with the workforce and representing their common interests within the decision-making processes. In larger workforces, employees participate in forums and are represented by key influencers who, in turn, interact with the employee trustees. Once the EOT becomes established, employee trustees can be nominated and elected by the employee-owners to serve every two or three years.

In some companies, employees have little involvement in governance and decision-making. In contrast, other companies appoint employee trustees who make up a third of the trustee board. Initially, employee trustees are chosen by the selling shareholders. However, once the Employee Ownership Trust (EOT) is established, employee trustees can be nominated and elected to serve on the board every two or three years. The role of employee trustees is to establish communication channels with the employee-owners. In smaller EOTs, trustees communicate with staff through meetings with individual teams within the business structure. Larger companies use forums or councils, and key influencers meet with different departments within the business. These key influencers then report to the employee trustees.

The trustees replace the role of the shareholders and function in a similar way. They meet with the board of Directors every quarter or when needed. They are required to adhere to the Trust Deed and ensure that all decisions are made in the best interest of the employee-owners. Trustees only get involved with the big decisions, such as when Directors need replacing, when arranging finance, when purchasing high-value assets, and when making decisions that contravene the agreed-upon business plan.

Initially, the selling shareholders select the trustees, although sometimes the company’s senior leadership team are also involved in this process. Venders, Directors, and employees can be trustees; however, neither should account for more than a third of the board. It is recommended that the board should include an independent trustee who will bring valuable experience from other EOTs. The independent trustee should ensure that there is no bias towards the Vendors, Directors or employees in the decision-making process. All decisions should be made with the best interests of the employees in mind.

The company directors have the right to remove a trustee as required.

Engaging an independent trustee is not obligatory, but it's advisable. Independent trustees can bring a wealth of experience from serving on other trustee boards. They can also ensure that the board of trustees remains neutral without bias towards vendors, Directors, or employee-owners.

Essentially, the board of trustees replace the role of the departing shareholders and interacts with the board of Directors in a similar way. Trustees must ensure that decisions are made in the employee’s best interests. Directors only consult the trustees with significant decisions, such as appointing Directors or purchasing large assets or issues that contravene the agreed business plan. Directors and trustees tend to meet quarterly or as needed.

The board of Directors meet with the trustees quarterly or whenever needed. (See 'How much influence do the trustees have over the board of directors?')

The board of trustees replaces the function of the shareholders and meets with the board of Directors, usually quarterly or whenever needed. Like the shareholders, the trustees are consulted before making significant decisions such as arranging finance, acquiring large assets, replacing directors, or any decisions that contravene the agreed business plan.

Some vendors opt for a hybrid model, in which they retain some shares, enabling them to remain invested in the business. Vendors can continue to serve as trustees, Directors, and employees or step away from the business entirely.

A benefit of employee ownership is that you can ensure the business is heading in the right direction before you say goodbye. An EOT provides time for the Directors to gradually take on more responsibility, and having a board of trustees means that the burden of responsibility is shared. Developing a business plan at the beginning of each year is advisable, providing everyone with context and direction.

An experienced and talented leadership team is essential for the company's future success. Should performance decline or managers move on, the founders can return to safeguard any outstanding sale proceeds. Interim management can also be used while new talent is sought. Additionally, Enterprise Management Incentives (EMIs) and bonus schemes can help attract and retain talented leaders.

Vendors can serve as Directors, employees, trustees, or consultants within the new structure. An EOT provides an opportunity to ensure the business is on track and heading in the right direction before saying goodbye completely. In the short term, vendors usually serve as trustees to safeguard their interests. When the time comes to step away from the business, there is a provision to regain control if any outstanding consideration is threatened.

The Employee Ownership Trust is set up as a limited liability company, and the trustees become the Directors. This means the Trustee Directors have the same limited liability as Directors and can be easily removed from office if necessary.

The vendors initially appoint the trustees. Once the EOT is established, the employees can nominate and elect employee trustees.

Many businesses have been built on the merits of talented Directors, and you may feel that their hard work should be rewarded. This can be achieved through awarding shares, which can be sold to the EOT alongside your own. Beneficiaries can then be granted shares in the new structure, giving them two bites of the cherry while at the same time aligning them with your objectives. There are other tax-efficient ways of rewarding those who have helped build the business, which your team of advisors can explore.

Such arguments can be defused by stipulating the use of salary rankings or league tables as a plumb line. Alternatively, the company could engage remuneration consultants to advise on salary levels.

If the shares were granted with the correct conditions, they can be sold to the Employee Ownership Trust (EOT) alongside your own shares. Beneficiaries can then be awarded shares or options in the new structure, giving them two opportunities for benefit while also aligning them with your objectives. Shares in the new structure are a great investment because they increase in value as the deferred consideration is paid down and as the company grows and expands. Shareholders with less than 5% can participate in the EOT, while those who own more than 5% cannot be beneficiaries of the trust. This means that if the company is sold in the future, they won't receive an equal share in the proceeds. Shareholders with over 5% can be compensated by including a provision in their employment contract stipulating that they will receive an equivalent amount if the company is sold in the future.

No, because only the holding company is changing; an update to the employee handbook is usually all that is required.

The main conditions are as follows: (i) The controlling interest requirement; (ii) The trading requirement; (iii) The limited participation requirement; (iv) The all employee benefit requirement; and (v) The no related disposal requirement. Each of these can be discussed in detail, and an assessment can be made as to whether the company would qualify based on each of these.

Essentially, the main difference is that the shareholders are replaced with a board of trustees, and the board of trustees interacts with the Leadership in the same way as the shareholders did. The trustees' guiding principle is to ensure that all decisions are made in the best interests of the employee-owners. Similar to the departing shareholders, the trustees are only consulted when big decisions need to be made, such as the arranging of finance or the acquisition of large assets. There is a slight re-orientation in the way that the Directors communicate with the employees as the relationship is slightly different moving forwards.

This will depend on your company and leadership team. Technically, you can appoint trustees and complete without telling anyone; however, it is in your best interest to garner the support of your leadership team and, where possible, lead rather than impose. Once you're happy with the valuation and repayment schedule and there are no legal impediments or tax liabilities, you can solicit the support of your leadership team. EquiPartners help sequence communications, limiting unnecessary exposure at every juncture.

It's essential to win the support of your leadership team, as they will drive the business forward into the next chapter. It's prudent to ensure you're happy with the valuation and that your company can repay the sale proceeds within an acceptable period before you make your plans known to the leadership team. You should also ensure that there are no legal impediments and that the transaction is tax-efficient. This will ensure that a premature announcement doesn’t erode essential relationships. Meeting with each Director one-on-one would isolate any potential disappointment. It's a good idea to prepare an information leaflet, including a Q&A, to head off any difficult questions that may arise later. EquiPartners help sequence communications at every juncture, limiting unnecessary exposure throughout the timeline.

It is common for leaders to be resistant to change. They might have been expecting a sale on the open market or a management buyout/buy-in and may not be familiar with the advantages of employee ownership. It is important to give them some time to understand all the information. If there is a deadlock, you may need to postpone the process until new talent is fully integrated. If you intend to continue with the business, the leadership may be able to absorb any unexpected changes in leadership.

It is best to announce your plans before completing the transaction rather than after. This allows you to lead rather than impose. When you are certain that the transaction is feasible and there is support from the leadership, it's a good time to announce your plans to the team. Typically, there is an announcement day and a document that includes a Q&A, in case questions arise at a later stage. EquiPartners helps you manage change by sequencing communications at every stage, limiting exposure, and enabling a smooth transition.

It will take time for your team to catch up and absorb all the information. It's important to keep adding any new questions to the Q&A as long as it's necessary, and to maintain transparency and consistency throughout. Some employees will be interested, and others will not; however, the goal is to increase engagement to over 80%. Starting from the announcement day, it's a good idea to maintain breakout groups where people can ask questions and express concerns in a safe environment. Over time, as employees witness positive changes within their working environment, engagement will increase.

Employees should receive regular updates on the company's financial performance and may need training to understand the information. Connecting financial performance with employee benefits like bonuses can boost engagement. However, some details, such as wage levels, how much they paid for your company and specific business expenses, should be kept confidential.

It's vital to establish effective two-way communication between employee-owners and decision-makers in order to fully leverage the benefits of employee ownership. Employees should be regularly informed about the company's monthly financial performance. Some initial training may be necessary to help them understand the information. Linking financial performance to employee benefits, such as bonuses, can increase engagement. For larger workforces, creating a group of key influencers to communicate with departments and subgroups is a good idea. This ensures that every staff member has the opportunity for a two-way conversation. Some employee-owned businesses utilise customised phone apps to keep their workforce updated, and online forums can be great places to foster innovation and discussion. Specialist software can be used to measure and track employee engagement. Regardless of the method, regular two-way communication is essential to fully benefit from co-ownership.

From a day-to-day perspective, nothing changes; however, because the employees are now owners, they care more about the company that they now own. They care about waste, missed opportunities, and the co-owners sitting beside them. Ownership delivers a greater sense of security, and creativity and innovation are released when people feel safe.

Unlike mergers or acquisitions, an EOT enhances your company's unique culture and values, preserving a legacy for the departing shareholders. Studies have shown that the top 50 EOTs are 7% more productive than before transitioning. This uplift can be further increased by adopting the right messaging and helping employees link performance with reward. Because employee ownership is an ethical way to do business and a key selling point, customers are likelier to remain loyal.

By engaging an independent trustee, you will benefit from the wealth of experience they bring from other employee-owned companies that have transitioned before you. Joining the Employee Ownership Association will help you meet and learn from other employee-owned companies, and the EOA also offers some great training courses through EO Learn.

Some vendors engage expensive tax and legal advisors first, only to discover that their company's valuation will not meet the exiting shareholder’s valuation requirements. EquiPartners ensure that an EOT is financially feasible before you commit. Later in the timeline, Independent tax advisors should be engaged to provide a complete tax review, ensuring that the transaction is tax-compliant.

When transitioning to an EOT, a significant portion of the consideration is tied to the business's future. Should the business run into difficulty, it may need help repaying the deferred consideration. EquiPartners maximise your position while also ensuring that interest and repayment holidays are available should such circumstances arise. When the time comes to step away from the business, it is essential to leave behind a strong leadership team. If things do go wrong, provisions are included within the legal documents to ensure that vendors can take back control of the company’s board or engage interim management while the leadership is strengthened and new talent is recruited.

Selling your business on the open market or to an MBO or MBI triggers a Capital Gains Tax (CGT) liability, eroding sale proceeds. Owners of smaller companies qualifying for Business Asset Disposal Relief proportionally pay less CGT (between 14% and 24% after April 2025 and between 18% and 24% after April 2026); however, companies with higher valuations can expect a tax bill closer to 24%, losing nearly a quarter of their equity. Rather than selling your business to an investor, you can sell it to your employees tax-free, preserving your business’s unique culture and values. Any excess cash forms part of the consideration and is distributed tax-free on day one. Studies have shown that the top 50 EOTs are 7% more productive than before transitioning. This demonstrates that employee-owners are more engaged when they have a stake in the business moving forward.

When you sell to outside investors, trade buyers, or your management team, you will have to pay Capital Gains Tax. Selling on the open market involves less risk because usually, more of the payment is made upfront. However, in a trade sale, there is almost always an earn-out, where part of the payment is dependent on meeting certain conditions, such as reaching specific sales targets or profitability levels in the future. Similar to an EOT, trade sales can also include deferred payments, such as loan notes. Management buyouts are not always easy because managers often struggle to raise the necessary capital to finance the transaction.