What are the Disadvantages of an EOT?
They are a popular way to transfer company ownership to employees…
but they come with some disadvantages. Below are the main drawbacks to consider:
Complex Setup and Costs
Setting up an EOT can be legally and financially complex. It often requires professional advice (lawyers, accountants), which can be costly, especially for smaller businesses.
Loss of Control for Founders/Owners
Once ownership is transferred to the trust, the original owners may lose direct control over the company’s future decisions, depending on the trust’s governance structure.
Limited Liquidity for Owners
Selling to an EOT might not generate immediate or full market value for the owners compared to selling to an outside buyer, especially since payments can be spread over time.
Ongoing Administrative Burden
Managing an EOT requires ongoing administration and compliance, including maintaining the trust, communication with employees, and ensuring the trust operates in employees’ best interests.
Potential Employee Disengagement
While the goal is to increase employee engagement, in some cases employees may feel ownership is symbolic rather than practical, leading to disengagement if they don’t perceive real influence or financial benefit.
Restrictions on Share Sales
The trust typically holds a controlling stake and restricts the sale of shares to outsiders, which can limit future fundraising options or strategic partnerships.
Cultural Fit Issues
Not all companies or workforces are suited to employee ownership models. If the company culture or employee expectations don’t align, the benefits may not materialise.