Business owner? Why an Employee Ownership Trust might be a good exit route for you

If you’re a business owner who is looking to exit your business within the next five years or so, you may have considered selling your business to an Employee Ownership Trust (EOT).

EOTs are a relatively new business structure, which could allow you to sell your business to a trust controlled by your employees. They were first introduced in the Finance Act 2014, and as of June 2023, the Employee Ownership Association reports that there were 1,418 EOTs in Britain, a 37% increase on the number recorded the previous year.

Depending on you and your business, there are numerous potential benefits of selling to an EOT – particularly if you are passionate about protecting your legacy. That said, if you have other priorities in your exit, it may not be your best option.

Read on to learn more about EOTs, and to discover whether selling to one could be right for you.

An Employee Ownership Trust allows you to sell to a trust run by your employees

An EOT is a form of indirect business ownership where the business’ shares are owned by a trust fund, for the benefit of the employees.

If you were to sell your business to an EOT, first you must agree upon a price. This is normally determined using an independent assessment. Based on this price, as the business owner, you would then sell a controlling share of your business to the EOT.

You will normally not receive the value of the shares you have sold to the EOT immediately. Instead, payments are made over time from the profits of the business.

It is sometimes possible to arrange an external loan so you can receive the sale price in one payment, but this is not commonplace.

After the sale, the EOT will be run by its trustees to maximise employee engagement. The trustees are not responsible for the running of the company as day-to-day management is handled by the management team.

As a business owner, an Employee Ownership Trust enables you to protect your legacy and benefit in several other ways

Selling to an EOT can mean that most of the personnel at your company remains the same. It is not being merged with a larger company, and as a result your legacy, and the identity of your company can be protected.

Though it is a requirement to sell at least a controlling share of your business to an EOT, you can maintain some ownership and stay on as an employee if you wish.

A major financial benefit of selling shares to an EOT is that you do not have to pay Capital Gains Tax (CGT) on your disposal proceeds. Additionally, when compared to a more traditional sale, selling to an EOT can be relatively quick.

Your employees and clients can benefit as well

Because the personnel at your company largely remains the same when you sell to an EOT, your clients are unlikely to notice much of a difference post-sale. They will probably continue to deal with the same team, and the approach and culture of your business are likely to remain consistent.

Your employees will probably enjoy this continuation of the business culture, boosting retention and morale.

EOTs are run by employees to boost employee engagement, which could have the knock-on effect of improving innovation within the company.

Employees can also benefit financially, receiving up to £3,600 a year in tax-free bonuses, a limit set by the government in 2014.

These bonuses are paid out of the EOTs profits, usually after the debt to you as the former business owner has been paid off. Bonuses must be paid to all employees – although a minimum service period can apply and employees under disciplinary proceedings can be excluded – and bonus size must be determined for all employees on equal terms, dependent on factors like length of service and salary.

If you want to maximise your cash payout upon sale, an EOT may not be right for you

If you are a business owner who is looking to maximise your profit upon the sale of your business, then selling to an EOT may not be your best option.

Sometimes, business owners will receive a lower price when selling to an EOT than they would when selling to a more traditional third-party buyer. Although, this could be balanced out by the CGT exemption.

Additionally, unless an external loan has been arranged, you will not normally receive a lump sum payout. Instead, you will receive the sale price in regular payments out of the EOT’s profits.

Whether an Employee Ownership Trust is right for you depends on your business

An EOT isn’t the right exit route for everyone, but it can be an excellent option for some. It could be worth considering selling to an EOT if:

Your legacy is important to you
Your business has a strong management structure in place
Your business is large enough to continue to operate without you there as an owner.

However, as previously mentioned, if you would like to receive the maximum lump sum payout, it may be better to consider other options.

Get in touch

At Clarion Wealth, we have a good understanding of EOTs and we work with many business owners as they approach their exit.

If you’d like to learn more about EOTs and whether they may be the right choice for you – or if you have questions about other options as you seek to exit – please get in touch for a chat.

Email [email protected] or call us on 01625 466360.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.