A lot is said about the unique benefits of an Employee Ownership Trust (EOT). There is a good reason for this, too. For the right business and seller, the EOT route of exit is not only the most tax-efficient way to sell your business, but also a way to drive future success and sustainability for the business you are leaving behind.

The key phrase here is “for the right business and seller”.  

The reality is, despite its benefits, the EOT route will not be the optimal route for every business to take. In fact, if an EOT is pursued for the wrong reasons, or by a business that is not suitable, big problems can crop up.

In this blog, I’ll take you through the main pros and cons of an Employee Ownership Trust to help you make an informed decision on this exciting but complex exit strategy. As always, support from our team is available if you have any questions.

In summary: EOT pros and cons

First, let’s look at the pros and cons from the perspective of the exiting shareholders (the seller).

For the seller

Pros

• 0% Capital Gains Tax on the transaction, subject to qualifying criteria. This will be subject to a tax recovery period of four years.  
• You are guaranteed to receive the full market value for your shares, providing you get an independent valuation.  
• Your exit will be guaranteed within a clear and defined time frame.  
• You can reward and protect the employees who helped your business succeed.

Cons

• You may be able to negotiate a strategic price with a trade buyer (as opposed to the deemed market value).  
• You will not usually receive full payment straight away. A lot will be paid from future profits of the business as deferred consideration  
• Considerable legal, accounting and tax advice will be required to ensure no issues arise.  
• If you have key individuals within your management team that value share ownership, an EOT model may not be the most viable solution.

For the employees

Due to the fact the EOT was designed principally to benefit employees, there are very few downsides of this route for them. The benefits, however, are numerous.

Pros

• Employees get to share in the success of the business, including tax free annual bonuses of up to £3,600
• Trade sales sometimes lead to restructuring and possible redundancy, an EOT protects staff from this uncertainty.  
• Employees have greater influence over the company’s overall direction and are represented on the board of trustees.

Cons

• Despite indirect ownership, shares will not be held directly by the employee. This may not be optimal for employees seeking direct share options (however, these can also happen alongside the EOT)  
• EOTs are complex and can be difficult to understand initially, including how it works, the rights of employees, and how decisions are made.

For the business

The employees make up the business, but there are some ways that an EOT will impact the business overall, including performance, sustainability and culture.

Pros

• EOTs help preserve a company’s culture and values when moving under new ownership.  
• Studies by the EOA have shown that employees are more motivated, engaged and productive, ultimately boosting profit and resilience.  
• EOT- owned companies often get a reputation boost, which can attract high quality customers and talent.

Cons

• Conflicts may arise between employee beneficiaries and trustees regarding business decisions or profit distribution. These must be managed carefully.  
• EOT does not guarantee success. This is still dependent upon the effectiveness of the senior leadership team, market conditions, competition and other factors.

Understanding your options

EOTs are popular and highly regarded, particularly by those who have already sold a controlling stake of a business via this route. However, that doesn’t necessarily mean it’s the best route available.

Understanding how an EOT works, including qualifying criteria and other restrictions, is key to making the right decision.

The good news is, even if an EOT is not a suitable exit route, there are several other effective and proven options available, including:

• A trade sale (through a private buyer or private equity firm) ‍
• Management Buy-Out
• Management Buy-In ‍
• Mergers
• Initial Public Offering (IPO) – this is usually used by large privately held companies. Please note: this is not something that Gravitate Corporate Finance provides as a service.