How do you set up an EOT?

A guide to helping businesses successfully transition to employee ownership via an EOT with Shorts.

Employee Ownership Trust (EOT) set-up process

Shorts featured in TelegraphA sale to an Employee Ownership Trust is a uniquely significant point in the lifecycle of an owner-managed business. A successful transition to employee ownership via an EOT will include careful pre-planning and a holistic approach from start to finish.

Broadly speaking, the EOT set-up and sale features 3 main stages.

  • Stage 1: The Employee Ownership Trust is set up by way of a detailed trust deed. This means you need to start to consider with your advisors who the most appropriate trustees are going to be in advance.
  • Stage 2: This is where the purchase takes place. The Employee Ownership Trust will purchase a controlling stake in the business from the existing/exiting shareholder. The EOT must acquire more than 50% of the shares. Any surplus cash on the trading company’s balance sheet can be gifted to the EOT at completion and utilised to fund part of the purchase price.
  • Stage 3: The purchase balance will usually be outstanding at this point and will be paid by the EOT to the existing shareholders by way of deferred payments. This will be funded by the ongoing profits of the trading company.

What considerations should be made before an EOT sale?

The first step of an Employee Ownership Trust set up is to carry out a careful initial review of your personal and business objectives and consider the relative merits of an EOT compared to a trade sale or management buy-out.

For more information on whether an Employee Ownership Trust is right for your business, please visit our blog.

From there, a feasibility study usually takes place to ensure the likely valuation range, and timing of cash receipts from the sale, are clear.

Next, careful consideration must be put towards structure, including the implications of retained shareholdings, minority shareholdings/share options for senior management and the terms of the deferred consideration.

It is also extremely important to ensure debt and deferred consideration repayments are structured to ensure the future working capital and investment requirements of the business can be met, enabling the business to flourish post-transaction.

How long does it take to set up an Employee Ownership Trust?

It is impossible to determine a precise time scale for selling a business to an Employee Ownership Trust, as the length of the process is heavily dependent on the complexity of the sale. However, assuming the exiting shareholders have already concluded that an EOT is the right solution and a relatively straightforward process with quick decision-making, then it should be possible to complete in around 3 months.

A consultation with an EOT expert can help you determine both your suitability and that of your business, for an EOT sale, in addition to an estimated schedule.

How can Shorts help you set up an EOT?

The Corporate Finance team at Shorts are experts in EOT planning and delivery and have helped numerous clients make the transition to employee ownership.

Setting up an EOT can be a lengthy, complex, and multi-layered project, with consideration needed for funding and tax arrangements and advice, collaboration with solicitors in preparation of the EOT trust deed, and more.

Shorts is proud to be a member of the Employee Ownership Association, and we are here to guide you through every step of the EOT set-up and sale process. Speak to our team today to get started or download our free EOT guide below.