Employee Ownership Trusts: A Strategic Exit Option for Business Owners

Understanding the Merits of Employee Ownership Trusts (EOT)

As a fractional Finance Director working with founders considering an exit, I’m often asked about the merits of an Employee Ownership Trust (EOT).

EOTs were introduced by the UK coalition government in 2014 to encourage employee ownership. In recent years, the number of EOTs has grown significantly. According to the Employee Ownership Association, over 2,250 companies are now employee-owned via EOT structures, collectively employing more than 316,000 people, with John Lewis being the most celebrated example of a business owned by its employees.

Advantages of an EOT Compared to a Trade Sale

EOTs offer a number of compelling benefits for founders and employees:

Tax Benefits

• Capital Gains Tax (CGT) Exemption: Founders who sell their business to an EOT pay no CGT, compared to a trade sale where Entrepreneurs’ Relief applies at 14%, rising to 18% from April 2026 (up to £1m consideration)
• Tax-Free Bonuses for Employees: Employees can receive up to £3,600 annually tax-free, fostering a stronger link between performance and reward

Strategic Benefits

• Enhanced Employee Engagement: Ownership promotes a shared purpose. Employees tend to be more engaged and aligned with long-term business goals
• Preservation of Culture and Independence: An EOT protects the company’s existing culture and values, often better than a trade buyer would
• Long-Term Incentives: After the earn-out period, there’s potential for enhanced bonuses for employees as the trust generates surplus profits

Practical Benefits

• Transaction Costs Covered by the Company: Professional and legal fees are typically paid by the business, not by the exiting shareholders
• No Cost to Employees: Employees acquire ownership without needing to invest personal capital—effectively gaining a stake in the business for free
• Lower Deal Execution Risk: EOT deals are typically less complex and lower risk than third-party sales

Challenges of the EOT Route

While the benefits are significant, EOTs do come with some key considerations:

• Extended Earn-Out Periods: Founders may need to wait 8–10 years to fully realise the value of their exit, compared to the 2–3 year earn-outs common in trade sales
• Profitability-Dependent Payments: As the earn-out is funded by the business’s ongoing profits, low margins or weak performance can lead to limited or delayed payouts to founders
• Valuation: Business owners should be aware that selling to an EOT may result in a lower valuation compared to a trade sale, where competitive bidding and strategic buyers can drive up the price
• Retention of Key Staff: Without additional incentives, it may be difficult to retain key employees over a long timeframe

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Lak Sidhu has been advising numerous B2B SMEs on their growth and exit strategies. Please get in touch if you’d like to discuss how OppenheimFD can help you.