Corporate Finance
June 21, 2024
  •  
5 mins

Employee Ownership Trust (EOT) Explained: A Guide for Business Owners

Martin Dean FCCA
Director

Ever dreamt of handing the keys to your amazing company to the very people who helped build it? Well, with an Employee Ownership Trust (EOT) that dream can become reality! This increasingly popular approach can be a win-win for everyone involved.

But hold on, before you start your journey, let's make sure an EOT is the perfect fit for you. This brief guide has the key considerations to help you decide if this is the best exit strategy for you, your business and your employee’s.

Know your options – assess whether EOT is the right route to take

Selling your business isn't a one-size-fits-all situation. There are multiple exit route options, each with their own pros and cons.  We'll break down which exit route is best for you based on your objectives. EOT’s can tick a lot of boxes but there are important factors to consider, E.g. if key individuals within your business want to take on the business themselves, you need to think carefully about this.  

Securing your future: tax planning, legal framework and business valuation

So, we have assessed that EOT is the right option, what next?

EOTs involve some legal and tax planning. We'll help you navigate the complexities of structuring the trust and understanding the tax implications for both you and your employees. 

Valuing your company is also crucial. An accurate valuation ensures a fair deal for everyone involved. We benchmark sector multiples to ensure your business is valued at market rate. You can always decide to sell the business to the EOT at a lower amount, but it is important a business valuation is performed to ensure that the business is not being sold above market rate.

How to pay for your EOT

There are different ways to finance your EOT transaction. Shareholders will be able to take surplus cash within the business as part of their consideration. The remainder of consideration tends to be in the form of deferred consideration i.e. where exiting shareholders receive payment over time out of future profits. External funding can also be obtained to part fund the transaction but is dependent on the size of your business and the fundable assets within the business.

Communication is key!

For most EOT’s, an open and transparent communication with your employees is key as it creates instant buyin and trust. We'll show you how to create clear communication documents about the pending change in corporate structure and answer the questions the employee’s and nominated trustee’s may have.  

Employee Benefits

EOTs offer really good perks for your employees, like annual tax-free bonuses and profit-sharing. Again, structuring this correctly is key as there is a balance to strike to ensure deferred consideration payments can still be met with the potential inclusion of such perks.

EOTs are complex for any business owner.

To avoid any missteps, we highly recommend consulting with a qualified Corporate Finance advisor and legal specialist. Our dedicated team has helped many companies transition to EOT ownership, and we'd love to help you too! To speak to our dedicated corporate finance team, click here.

Martin Dean FCCA
Linkedin

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