Why an EOT Can Be a Smart Exit Strategy for UK Business Owners
What Is an Employee Ownership Trust (EOT) and How Does It Work?
An Employee Ownership Trust (EOT) is a special kind of trust that buys a controlling stake in your company and holds it on behalf of all your employees. In practical terms, it means you (the owner) sell over 50% of your company’s shares to a trust, which then becomes the majority owner. The trust is run by trustees, and every employee becomes a beneficiary of the trust – much like the model used by the John Lewis Partnership where a trust holds the company for the benefit of employees.
Importantly, individual employees don’t have to spend their own money to “buy” the company; instead, the purchase is typically financed by the company’s own profits or a loan, often with the former owner getting paid over time (via vendor financing from future earnings). The end result is that the business is now indirectly owned by its employees, ensuring continuity in ownership, culture, and mission even as the original owner steps back.
The EOT model was introduced by the UK government in 2014 specifically to encourage employee-owned companies. It’s essentially like a management buyout – but instead of just the management team, all employees get a stake (through the trust). For business owners, an EOT provides a succession solution that allows you to hand over the reins to your team in a controlled, gradual way.
You can even retain up to 49% ownership if you wish, staying involved in the business to support the transition, while the trust owns the controlling 51%+ stake. In this way, an EOT helps preserve your company’s independence and values by keeping ownership internal, rather than selling to a third party with potentially different goals.
Tax Benefits of Selling to an EOT
One of the biggest draws of an EOT as an exit route is the generous tax incentives it offers to owners. If you sell a controlling interest in your trading company to an EOT and meet the qualifying conditions, you will pay 0% Capital Gains Tax (CGT) on the sale. In other words, any gain you make from selling your shares to the trust is completely tax-free – a relief introduced in 2014 to reward founders for choosing employee ownership.
By contrast, a conventional business sale would normally attract CGT of 10% to 20% on the gain (even with Business Asset Disposal Relief, only the first £1 million qualifies for 10%). This 100% CGT relief can represent a huge saving. For example, an owner selling a business for £5 million might avoid a six-figure tax bill by opting for an EOT sale instead of a trade sale. Additionally, transfers into an EOT can be exempt from Inheritance Tax – no IHT is charged on gifts or sales of shares to an EOT, and the trust itself is free from certain ongoing IHT charges that other trusts face.
It’s not just the exiting owner who enjoys tax benefits. Under an EOT, the company can pay its employees an annual income tax-free bonus up to £3,600 per person. This means once the trust is in place, you can reward your staff with profit-sharing bonuses each year without them paying income tax on that money (National Insurance still applies). The business also gets a corporation tax deduction for those bonus payments. This is a great way to share the company’s success with the employees now at the helm, boosting morale.
Of course, to reap these tax rewards, certain conditions must be met. The trust must acquire more than 50% of the company (so the former owners are genuinely passing control to employees). The business must be a trading company (not an investment shell), and the EOT must benefit all employees on an equal basis (you can’t exclude the rank-and-file or concentrate ownership in just a few individuals). These rules ensure the tax breaks are earned by genuine broad-based employee ownership. When done properly, an EOT sale lets you sell your shares for full market value without incurring any CGT, income tax, or IHT on the transaction – a very compelling advantage compared to most other exit routes.
How Does an EOT Compare to Other Exit Options?
When planning your exit, it’s wise to compare an EOT with the other common routes – such as a trade sale, private equity investment, or a management buyout (MBO). Each path has its pros and cons. Below we break down how an EOT stacks up against these alternatives:
Trade Sale: A trade sale – for instance, selling to a competitor or larger industry player – can often deliver the highest price, especially if multiple bidders are competing, and it usually provides a clean break and a quick exit for the owner. However, the downside is the loss of your company’s independence and potentially its identity. The acquiring firm may integrate your business, which can lead to restructuring or redundancies; your employees might face job uncertainty under new ownership. The culture and vision you built could get diluted as the business is absorbed into the buyer’s agenda. In short, while a trade sale may maximise the immediate payout, it often comes at the cost of continuity for your team and business ethos.
Private Equity Sale: Selling to a private equity (PE) firm means bringing in an investor who typically buys a significant stake (often a majority or even 100%) for a lump sum upfront. PE buyers can offer substantial capital and strategic expertise, and they usually aim to grow the business aggressively for a future resale, which can be attractive if you want the company to scale up quickly. This route can give you a high initial payout and sometimes the chance for a “second bite” (if you retain a minority stake for the next sale).
On the flip side, private equity will drive the business toward investor priorities – meaning culture and priorities may shift rapidly. You, as the founder, might be required to stay on for a few years under new terms, but decision-making control will largely pass to the new owners. Employees can feel unsettled as the internal culture changes to meet PE’s focus on ROI. In essence, PE can be lucrative, but it often means trading long-term autonomy for short-term gain.
Management Buyout (MBO): In a traditional MBO, your existing management team buys the company from you, often with the help of loans or investor backing. The appeal here is continuity – the people who know the business best take over, ensuring a smoother transition and preservation of know-how. An MBO can be faster and quieter than an external sale since the buyer is already identified and due diligence is simpler. It also lets you hand-pick your successors (typically a few key managers), which can be a way to reward loyal leadership.
The challenges is that management teams usually need significant financing to afford the buyout, which often means the company taking on debt that the business will have to service. Because of these financing constraints, owners often get a lower price in an MBO than in a competitive trade sale. In terms of tax, an MBO doesn’t have the special reliefs of an EOT – selling shareholders might qualify for Business Asset Disposal Relief, but that only covers a limited amount at 10%, whereas an EOT sale can be entirely tax-free. So while an MBO keeps the business “in the family” with known faces, it may not maximise value or tax efficiency for the seller.
Employee Ownership Trust (EOT): Selling to an EOT is essentially an internal sale to all employees, not just a few managers. The advantages include preserving the company’s legacy and values, and rewarding the entire workforce by making them collective owners. You avoid bringing in an outside buyer with a different agenda, which means your company’s culture, brand, and way of doing business remain intact. Owners have a lot of flexibility in setting the sale terms (since you’re not haggling with a third-party buyer) and can even stay involved in the business in a minority role if desired. Crucially, as discussed, the sale can be highly tax-efficient (no CGT on the sale), potentially netting you as much or more after-tax than a higher-price trade sale would net after taxes.
Employees benefit from ownership by being more invested and engaged, which can drive performance. The trade-offs? Typically, an EOT sale is financed over time – you might get a portion of the price upfront and the rest via future profits of the company (the trust essentially pays you out over several years). So if you need a big lump sum immediately, an EOT might feel slow. You also need a capable leadership team in place to run the business post-sale, because the trust is a passive owner; management still needs to lead day-to-day operations.
Furthermore, by law an EOT must benefit all employees, meaning you can’t concentrate ownership only among select individuals. While this broad-based approach is great for fairness and morale, it means you’ll use other incentive tools (like share option schemes for key managers) if you want to reward specific people on top of the all-employee trust. Lastly, similar to an MBO, an EOT-driven deal usually won’t spark a bidding war, so the headline sale price may be more modest than a strategic trade sale – but remember, what you keep (post-tax and in legacy impact) is often more important than the sticker price.
Employee and Cultural Benefits of EOT Ownership
Choosing an EOT doesn’t just offer tax perks; it can fundamentally improve your company’s workplace culture and long-term performance. When employees become owners (via the trust), they often feel a greater sense of pride and responsibility in their work. Instead of just being staff, they are now stakeholders in the business’s success, which can supercharge engagement and morale. Studies in the UK have found that employee-owned companies tend to achieve higher productivity and profitability than traditionally owned firms, likely due to this alignment of interests and increased motivation. In fact, surveys show significantly higher job satisfaction among employees of employee-owned businesses, and turnover rates can drop as loyalty increases – one analysis noted up to a 50% reduction in staff turnover after a move to employee ownership. Simply put, people stick around when they have skin in the game.
From a continuity perspective, an EOT helps safeguard jobs and the company’s legacy. Your employees don’t have to worry about a new corporate parent coming in to slash headcount or merge the firm away. There’s a strong element of security and stability – knowing the business will carry on and jobs are secure fosters confidence and creativity in the team. The business can continue to operate with its mission and values unchanged, which is especially important in sectors where client relationships and reputation are built on trust and consistency. Many owners also find that becoming employee-owned is a reputational boost – clients and partners appreciate that the company is forward-thinking and treats its people as true partners.
Additionally, because all employees share in the upside, an EOT company can implement profit-sharing or bonus schemes that reach everyone. Under the UK rules, companies controlled by an EOT can pay each employee an annual bonus (up to £3,600) free of income tax, which is a tangible way to share the wealth and say “thank you” for hard work. This kind of broad reward system can be a powerful motivator and helps to maintain positive morale. Employees often develop a more long-term outlook when they are owners – they care about sustainable success, not just short-term results, which can make the business more resilient.
Indeed, employee-owned firms have been noted to be more robust during economic downturns, bouncing back faster than peers. For all these reasons, transitioning to an EOT can ignite a virtuous cycle: engaged employees drive better performance, which leads to higher profits, which then benefit those employees, further reinforcing their commitment.
Is an EOT Right for Your Business?
An Employee Ownership Trust offers a unique exit strategy that balances financial reward with legacy. For many UK SME owners an EOT can be a compelling option. It allows you to reward your team, preserve the culture and reputation you’ve built, and still receive full market value for your business (potentially more net value thanks to the tax breaks).
Of course, an EOT isn’t a fit for everyone. If your top priority is a maximum immediate payout above all else, a trade sale or private equity deal might yield a higher upfront number (albeit with taxes and strings attached). And not every company is ready for employee ownership – you need a stable business model and a management structure that can thrive without the founder calling the shots day-to-day.
However, if you care about the long-term welfare of your employees and the legacy of your business, an EOT could well be the ideal exit. It provides a ready-made succession plan – you’re effectively selling to a “buyer” that already knows and loves the business: your employees. The government incentives make it financially attractive, and the growing number of success stories in the UK show that it can lead to a win-win outcome for sellers and staff alike. Transitioning to an EOT does involve careful planning (valuation, legal trust setup, financing the buyout, etc.), but with professional guidance it can be executed smoothly without the uncertainty and disruption of an external sale.
Bottom line: an EOT is worth serious consideration as you map out your exit strategy. It’s an opportunity to go out on a high note – cashing in your share of success while empowering your team to carry the business forward in the spirit it was founded. If that vision resonates with you, now is the time to explore it further.
At Wreath Hall Strategic Partners, we help business owners evaluate whether an EOT is the right fit – offering clear, commercial guidance, valuation support, and introductions to specialist advisors as needed. From early-stage thinking to helping you move toward a transaction with confidence, we’re here to support key steps of the journey.