Employee Ownership Trusts: Is This the Future of Business Exits?

What if your endgame isn’t to sell to a stranger or an institution that would change the dynamics? We’re seeing more established business owners looking at Employee Ownership Trusts (EOTs) as an alternative to a traditional sale.

But what exactly is an EOT and why are they becoming so popular?

Put simply, an EOT enables business owners to transfer a controlling interest to a trust for the benefit of its employees. The owners retain the running of the business in-house. – So, like an employee share scheme, but here it goes beyond monetary value its shared rights, shared ownership and, more importantly, shared control in its future.

For a founder or family owner, it can provide an exit/retirement route while allowing the business to remain independent of them, but still preserving the culture they have spent years building. With the next generation or known staff keeping it running the way it is. It is necessary to optimise value, but keep the people and dynamics as envisioned.

For employees, it can mean a genuine financial stake in the future success of the business, alongside greater involvement and engagement. That commitment makes profit and longevity possible, rather than management-only buyouts or PPE rounds where new people and new agendas can cause turmoil and lose crucial staff. That’s not to say these structures don’t work, but not everyone wants to explore the same exit routes.

We’ve seen EOTs work particularly well in family businesses or those where staff and managers have been there 20+ years.

One of our clients, for example, had built their business over 30 years. Their children had grown up around the business, but ultimately their children didn’t want to take it on. The owners were ready to step away, but selling to a third party didn’t feel right and starting the sale process drove them back into the business to regroup.

The business had become much more than a business; it felt like a family, and the employees were invaluable. Some employees had been there for 20 or 30 years. They were part of the history, the relationships and the culture that had made the company successful.  An EOT provided another, and for them, a more suitable option.

The owners could achieve their exit, while the business could continue with its existing identity, its people and its culture, and we also agreed a slower buyout so as not to drain the company of cash flow and to have the owner committed to a full, smooth handover.

The employees didn’t simply become numbers in a larger corporate structure, and the founders could walk away knowing they had created a route for the business to continue.

But is an EOT right for everyone?

Not necessarily.

There are important questions to consider:

• How will the purchase of the shares be funded?
• Has the business been properly and fairly valued?
• Who will control the business once the founder steps away?
• What happens if profits fall?
• Is the management team ready?
• Do employees understand what employee ownership actually means?

Importantly, an EOT isn’t simply a tax planning exercise; it’s a genuine takeover.

The tax rules have also changed; founders must seek advice on CGT structuring during this process.

Where does the lawyer come in?

An EOT involves much more than just setting up a trust.

Depending on the transaction, you are likely to need advice and documentation covering the trust structure, share transfer, valuation, governance, financing, deferred consideration, shareholder approvals, articles and  finalise the founder’s exit arrangements. You must review and  amend employee contracts, along with policies associated with this.

Getting the structure right at the outset is crucial, particularly because certain conditions must continue to be met after the transaction and the sustainability of management and staffing needs to be drafted into the agreements.

So why are we seeing more EOTs?

For many founders, the choice isn’t simply “sell or don’t sell.”

They may want to exit the business, protect the culture, reward the people who helped build it and give the company the best chance of continuing successfully. Now more than ever, people are being offered different choices, and as the new younger generation builds to sell, the outgoing generation wants to see their business continue.

So we ask:

1. What do you want to achieve post-exit – lump sum, slow income payout, no involvement whatsoever, or to remain active?
2. Is employee ownership the right future for your business in terms of whether the people are committed and ready to take this on?
3. Does the business have cash to buy you out; does it need funding; is it in profit; basically, do the numbers align with your financial projections??

There are many more questions, but that’s a conversation worth having with your founders, staff, management, spouse well before you even consider you want to exit.

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Allin1 Advisory is a company that provides a range of business and legal services, with a focus on emerging technologies and international expansion. They offer services like company formation, virtual offices, website creation, and company searches. They also have expertise in areas like commercial law, investment advice, and international debt recovery. The company has a presence in London and is also expanding into the Middle East and Gibraltar.

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