EOT, What is it and Why Could it be the Best Option for Your Shareholder Exit?

EOT stands for Employee Ownership Trust and was introduced by the UK Government in 2014, alongside a package of incentives designed to make employee ownership an appealing option for both business owners and their employees.

Employee Ownership Association Chief Executive, James de le Vingne says;

“Just as electric cars are the next generation of transport… EO can and will be a next generation business model. A forward-thinking, future-proof solution that helps us realise a far more productive future. … A business model that is superior to everything that has gone before – a way of working together that benefits EVERYONE and allows them to fulfil their own individual potential, as well as the potential of their businesses and their communities.”

2022 EOA Annual Conference keynote speech

So, what are the key features of an EOT- and why might it still be the right option if you are considering a shareholder exit?

What are the main features of an EOT?

The primary feature of an EOT is that, instead of selling a controlling share in the business to another company or external investor, a controlling share in the business is sold to the staff. This is done through the vehicle of an independent trust which is set up with trustees to ensure appropriate governance and representation.

Another route to employee ownership is a Management Buy-Out (MBO). However, MBOs typically place ownership into the hands of a much smaller group- usually the senior management team-and are structured very differently in terms of risk, funding and the seller’s exit.

With an Employee Ownership Trust the agreed deal value will be paid to the exiting shareholders from the ongoing profits of the business over a period of time, which could be as much as 5-7 years. The exception to this is if there is significant surplus cash within the business, which can be taken out as part of the deal.

With limited external financing, there is typically little or no upfront cash unless the company already holds significant surplus funds that can be distributed as part of the deal.

Why is an EOT a good option?

Research conducted by the Employee Ownership Association in association with Capital Strategies shows that employee-owned businesses can be just as competitive, productive and resilient as owner-managed businesses. In fact employee ownership often drives higher engagement and stronger performance because employees understand they share in the long-term success of the organisation. When businesses create clear routes for employees to contribute ideas and shape decision-making, the benefits can be even more pronounced.

There are also financial benefits for employees who, as indirect shareholders, can benefit from a share of the profits, the first £3,600 of which is tax free.

For exiting shareholders, one of the historic advantages of selling to an EOT has been the favourable capital gains tax treatment. While selling a majority stake to an EOT still results in a significant reduction in capital gains tax, the level of relief is now lower than when the regime was first introduced. A portion of the gain remains exempt from CGT, but not the full amount previously available. Even with this change, the relief continues to be a meaningful incentive and can be particularly appealing for businesses that generate strong cash reserves.

Another advantage is continuity. Selling to an EOT keeps the business in the hands of people who already understand its operations, values and customers. Trade sales often involve cultural mismatch, system integration challenges or significant structural change. EOT transitions are usually smoother, with far fewer disruptions to staff or clients.

For many business owners, the decision isn’t purely financial. After years of working alongside a loyal team, an EOT offers a way to protect the company’s culture, reward long-term commitment and provide employees with a meaningful stake in the future.

In addition, compared with typical trade sales, EOT deals often create more certainty for the seller. Traditional earn-outs – common in third-party sales, tie payment to future performance, at a time when the departing owner may have diminishing control. In an EOT structure, the exiting shareholder often remains involved during the repayment period, improving the likelihood of achieving the full agreed value.

Who determines the value of the business?

In a traditional trade sale we would advise strongly against putting a value on the business because you want to emphasise the value drivers, create competition and allow that to drive out the maximum value according to the buyer’s motive. Of course that is not possible when considering an EOT, so how do you determine value?

That valuation must meet two key conditions:

1. It must be a fair and reasonable market value, supported by recognised valuation methods, financial modelling and market multiples.

2. It must be realistically achievable from forecast profits. An inflated price risks undermining the business or leaving sellers waiting years longer than expected to be fully paid.

This is where experienced advisers like Entrepreneurs Hub can add significant value. By combining detailed financial analysis with industry insights our team of highly experienced and senior FD/CFO level analysts, we will determine a fair market valuation based on expertly modelled financials and well researched industry multiples.

Do you have any examples?

We do, but due to confidentiality and our commitment to client privacy, we cannot share sensitive details publicly. However, we are always happy to discuss case studies privately and explore how an EOT might work for your situation.

Here’s what one of our clients had to say:

“The Entrepreneurs Hub helped us prepare for, and supported us through, the whole process to transition to an Employee Ownership Trust. Our employees are now motivated and know this is a great opportunity for them. Highly recommend the Entrepreneurs Hub to any business owner considering an EOT.”

Mathew Hughes, Managing Director – NWPS Construction Limited