What is an Employee Ownership Trust?EOT Guide

An Employee Ownership Trust (or EOT) enables a company to become owned by its employees. It is a trust, set up by existing company owners, for the benefit of all employees.

This trust then becomes the majority owner of the business as part of an exit or succession planning strategy.

Employee Ownership Trust is a relatively new type of employee benefit trust, which was introduced by the UK Government in 2014. The intended purpose of Employee Ownership Trusts is to encourage business owners to set up ownership structures like the “John Lewis model”.

How does an Employee Ownership Trust work?

An Employee Ownership Trust is like an employee benefit trust. While an employee benefit trust will generally hold funds or other assets for the benefit of employees, an Employee Ownership Trust will crucially acquire a controlling stake in the company. Unlike traditional employee benefit trusts, an EOT must also be for the benefit of all employees equally.

The price agreed for the controlling stake will be market value, based on independent assessment.

Once the previous shareholders have been fully remunerated for their shares, all employees will collectively receive the full economic benefits that would normally be accrued by shareholders.

Because an EOT is a trust for the benefit of all employees, the employees will not directly own the shares in their company; they are beneficiaries of the trust which owns a controlling share. An Employee Ownership Trust is a type of indirect employee ownership.

Case Study: The EOT process

Why does the government support EOTs?

An employee ‘shared capitalism’ model has been proven by various studies to improve employee engagement, leading to improved productivity, increased job creation and retention.

This ownership model is seen by the government as a counter to short term capitalism, with the enduring ownership structure and tangible employee benefits, resulting in a long-term strategic view and increased business investment, to the benefit of the whole country.

Employee-owned companies often have a greater commitment to corporate and social responsibility and involve themselves more with local communities.

Greater business performance also means a greater contribution to the UK economy, which is why successive UK governments have passionately advocated Employee Ownership Trusts since they were introduced.

Who can set up an Employee Ownership Trust?

The Employee Ownership Trust will need to be set up by the existing owners of a company, which is why it is generally considered as part of an existing business owner’s exit and succession planning strategy.

We have created a guide that helps businesses learn how to set up an EOT. The guide gives advice on who can set up an EOT and how, but if you need more information then please don’t hesitate to contact the Shorts team.

Who would an EOT work well for?

Selling a business to an Employee Ownership Trust is a tax efficient exit strategy that offers significant benefits to both the exiting shareholders, the employees, and the business itself; however, it may not be the right choice for every business.

An EOT works well for those looking to exit from a business, while safeguarding their legacy in the company and taking care of their employees.

Additionally, an EOT sale is a great alternative for those who do not wish to exit through a trade sale or management buy-out.

Business owners who are heavily involved in day-to-day management of the business can gradually transition away, ensuring it continues to trade well, providing an enhanced period for leadership succession to be implemented.

How can Shorts Help?

A sale to an EOT represents a highly significant point in the lifecycle of an owner managed business. We therefore consider it so much more than just a tax exercise.

It is a project that requires a holistic approach that considers not just the immediate transaction but ensures a successful future for the business and a well-planned transition to retirement for the previous shareholders.

The Shorts team will guide you through the whole process, including an initial review of your objectives in the context of an EOT sale, a feasibility and valuation range study, structural advice, and ensuring the future working capital and investment requirements of the business can be met.

Shorts is proud to be a member of the Employee Ownership Association.