Employee Ownership Trusts – A Smart Exit Strategy

As a business owner, you’ve poured time, energy, and passion into building your company. But when it comes time to consider an exit, the choices can feel overwhelming. Should you sell to a competitor? Pass the reins to a family member? Each option comes with its own set of pros and cons, and today, one path is gaining traction for its unique benefits: the Employee Ownership Trust (EOT).

This article explores common business exit strategies, with a focus on the increasingly popular EOT option. We’ll examine why it’s an appealing alternative and how it could work for your business.

Common Business Exit Strategies

	Pros	Cons
Trade Sale Selling to another other industry player, a competitor, or supplier	Potential for a premium purchase price. Majority of consideration paid upfront. Clear-cut transition with immediate financial payoff.	Loss of control over the company’s future direction. Possible impact on employees, culture, or local economy. Small risk of sensitive information leaking during negotiations.
Management Buyout (MBO) Selling to your existing management team.	Smooth transition due to the team’s familiarity with the business. Continuity of operations and culture. Limited due diligence.	Requires management to secure financing, which can be complex and time consuming. May not achieve the highest possible sale price.
Family Succession Passing ownership to a family member.	Legacy preservation. Strong cultural continuity. Limited due diligence.	Potential family conflict or lack of interest from successors. Limited pool of candidates with the right skills or passion.

Employee Ownership Trust (EOT) – A Different Approach

An EOT offers a distinct path to exit, transferring ownership to employees through a trust structure. Popularised in the UK following favourable legislation, EOTs are an increasingly attractive option for business owners who value legacy and employee well-being.

How EOTs Work

• A trust is established to hold the majority (or all) of the business’s shares.
• The trust operates on behalf of the employees, ensuring they indirectly own the business.
• Owners sell their shares to the trust, typically financed through future profits, external funding, or a combination.

Advantages of EOTs

Legacy Preservation – Owners can transition their business without selling to external parties, preserving the company’s culture, mission, and values.

Employee Engagement – Employee ownership often leads to higher productivity, morale, and retention, as employees feel invested in the company’s success.

Tax Benefits – In the UK, selling a controlling stake to an EOT can qualify for a full capital gains tax exemption.

Gradual Transition – The structure allows for a phased transition, enabling the exiting owner to stay involved during the adjustment period.

Community Impact – By keeping ownership local and employee-focused, EOTs often support the surrounding community and economic stability.

Challenges of EOTs

Financing the Buyout – Unlike trade sales, the upfront cash might be limited, if any. Owners often receive payment over time.

Complex Setup – Establishing a trust requires legal and financial expertise.

Cultural Shift – Employees need to adapt to new responsibilities and opportunities as indirect owners.

 

Is an EOT Right for You?

Deciding on an exit strategy depends on your priorities. If preserving your company’s culture, rewarding your employees, and contributing to your community rank high on your list, an EOT could be a compelling choice. While it may not provide the immediate financial return of a trade sale, it offers long-term stability and peace of mind, knowing your business remains in trusted hands.

Specialist Advice

Exiting your business is a significant milestone, and choosing the right path requires careful consideration. The Employee Ownership Trust model stands out as a strategy that aligns financial, cultural, and ethical goals, making it a worthy contender for modern business owners seeking a meaningful legacy.

If you’re considering an EOT or exploring your options, we can help you weigh up the pros and cons dependent on your own individual situation. We provide support throughout the exit process and beyond, whichever route you choose. To find out more please contact Geoff Pinder: g.pinder@themegroup.co.uk