What is an Employee Ownership Trust (EOT)?
An Employee Ownership Trust, or EOT, is a legal structure that allows business owners to sell a majority stake in their company to a trust. That trust then holds the shares on behalf of the company’s employees.
Really simply: it means the business becomes employee-owned, without every employee needing to buy shares themselves. The trust owns the shares collectively, and employees benefit as a group. When employees start their roles, they’re included as beneficiaries of the trust. When they leave, they’re removed as beneficiaries.
EOTs have become increasingly popular with established business owners looking for a different kind of exit. Not every owner wants to sell to a competitor or get lost in the scale of private equity. Not every family has the next generation ready or able to take over. An EOT offers a more balanced route. A way to realise the value they’ve built in the business, while protecting its roots.
How does an EOT work?
Egalitarian as it might sound, this is a serious and complex transaction. An EOT needs careful planning, a fair valuation, the right legal structure and a clear picture of the deal’s funding.
A trust is a legal entity that holds and manages assets on behalf of another party. In an EOT, the trust becomes the controlling shareholder in the business on behalf of, and for the benefit of, its employees.
The owner may sell all their shares, or just enough to give the trust a majority shareholding. To qualify for the main EOT tax reliefs, the trust normally needs to acquire more than 50% of the company.
The process typically moves through four stages, which we’ll outline below.
The EOT sale process
Most EOT transactions follow a fairly clear path.
Check the fit
The first step is working out whether an EOT makes sense for the owner, employees, and business. EOTs usually work best where the company is profitable, well-managed, and has a team that is genuinely important to its future.
Value the business
An independent valuation sets the sale price. This needs to be fair, realistic and properly evidenced, because HMRC can scrutinise EOT valuations closely.
Set up the trust
The trust is created and trustees are appointed. The trustee board may include employee representatives, senior leaders and independent trustees.
Agree the funding structure
The trust needs a way to pay for the shares. In many cases, this is funded over time using future company profits. Some transactions also use growth finance facilities* (like the kind you can get from Allica), particularly where the seller wants to receive more of the sale price upfront.
Complete the sale
Once the legal documents, valuation and finance are agreed, the shares transfer to the trust. The business then becomes employee-owned.
Step four – the funding of the deal – often needs the most careful thought. The business needs to retain enough headroom to continue trading, investing, and growing after the transaction.
It requires a detailed review of cashflow, debts, debt-to-equity ratio, and any short-term finance needs. From there, the business’ capacity and options for funding become clearer.
EOT structure
It’s worth repeating: the company’s employees do not usually own the shares directly in an EOT. Instead, the trust owns the shares on behalf of the employees as a collective. This is a key distinction.
The board of trustees is responsible for acting in employees’ interests. Every employee is not suddenly making every business decision. Leadership teams usually continue to run the business day-to-day, with the trust providing a long-term ownership structure around it.
Employees may benefit through profit-sharing bonuses, greater transparency, stronger engagement, and a clearer sense that they have a stake in the company’s future.
What are the tax benefits of an EOT?
When done properly, selling to an EOT can be one of the most tax-efficient exit routes for a business owner.
Specifically, an owner selling their shareholding to an EOT may pay less in Capital Gains Tax than to another buyer. HMRC explains it as follows:
“From 26 November 2025, 50% of the gain on disposal to the trustees of an Employee Ownership Trust will be treated as the disposer’s chargeable gain for CGT purposes. The remaining 50% of the gain will not be chargeable at the time of disposal but will continue to be held over to come into charge on any future disposal of the shares by the trustees of the Employee Ownership Trust.”
HMRC Policy paper (Capital Gains Tax — Employee Ownership Trusts relief reduction)
The rules are detailed and the tax treatment depends on the business meeting the relevant conditions. Owners should always get specialist legal and tax advice before moving ahead.
EOT valuations: how is your business valued?
Valuation is one of the central pillars of an EOT transaction. It sets the price the trust will pay, but it’s one of the first points for measuring whether it’s a fair arrangement.
A good valuation needs to be fair to the seller and sustainable for the business. If the price is too high, it could leave the company in a bad place after the deal. Too low and the seller won’t be receiving fair value for their contributions.
Valuations consider factors like profitability, future earnings, cashflow, assets, debt levels, customer concentration and market conditions. Commercial property owned by the business may need separate consideration, too.
The valuation needs to stand up to scrutiny. A generous number might look good on paper, but the real test is whether the business can afford the transaction and keep moving forward afterwards.
Is an EOT right for your business?
Employee ownership isn’t a black and white question – it comes down to the specifics of each business. Your company, employees, and personal ambitions all affect whether an EOT will be suitable.
Ian Flaxman, our Head of Growth Finance, believes:
When the management team are already closely involved in the running of the business, it makes the ownership transition much smoother. It’s a great way for the current owner(s) to pass on the business to the existing employee base whilst still getting fair equity value.
It may be less suitable where the business relies too heavily on the exiting owner, has weak profitability, or lacks a leadership team ready to take the company forward.
EOT vs other business succession planning options
Compared with a trade sale, an EOT can help protect independence, culture, and jobs. Compared with a management buyout, it can avoid putting too much financial pressure on a small group. Compared with family succession, it balances legacy with long-term sustainability.
The main trade-off with an EOT transaction is that the seller is often paid in instalments. As a result, they retain a vested interest in – but no control over – the future performance of the business.
That is why financial planning is so important. An EOT sale isn’t a path to quick cash and cocktails on a faraway beach. It’s a choice for dedicated business owners who want to leave the business on a strong footing. You may be handing over your shareholding, but you’re not handing over your personal interest in and care for the business.
How Allica Bank can support your EOT journey
Amongst all the talk of EOTs as legal transactions, the financial element is also critical. The business may need to finance the purchase – whether that’s to protect cashflow, manage existing debts, or fund investments throughout and after the transition period.
Products like our Growth Finance are built for established businesses planning their next big move. That includes a major change in ownership and structure. We’ve funded Employee Ownership Transactions in the past and understand both their value and complexity.
Ian Flaxman explains further:
When planning for funding an EOT it is important to have a structure which gives the business a manageable debt burden after the transaction.
We take the time to understand the cash flows within the business, so that we can design a funding package that works for that specific business.
The support of a relationship manager can make a huge difference in a complex transaction like this. You’ll have direct access to a bank manager from the start, who’ll help you fine-tune your application and stay in touch throughout the process.
When you’re planning the future ownership of your business, the last thing you need is a lender that adds to the complexity with jargon, red tape, and a one-size-fits-all approach.
An EOT puts your business into the hands of dedicated, caring employees. It’s only right that the lender supporting this transaction treats it with the same importance.
Frequently asked questions
What is the difference between an employee-owned company and an EOT?
An EOT is a formal structure used to hold shares on behalf of employees. Compared to an employee-owned company, the difference is mostly a phrasing issue. While all EOTs are employee-owned companies, not all employee-owned companies are EOTs.
How long does the EOT sale process take?
EOT transactions are complicated and complex. They often take several months and can take even longer than that. The timeline depends on the valuation, legal structure, tax advice, funding arrangements and complexity of the business.
Can any business set up an EOT scheme?
No, there are specific qualifying criteria a company must meet to be eligible for EOT ownership. Businesses that successfully set up an EOT scheme are often profitable trading businesses, with strong management teams and engaged employees.
What happens to employees in an EOT business?
Mostly, their day-to-day work carries on as normal. The main difference is that they have a greater say and stake in the company’s future. Employees may benefit from profit-sharing bonuses, stronger engagement, and a voice in the company’s future plans.
* All lending subject to status, lending criteria, and satisfactory credit assessment. Terms and conditions apply.
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Disclaimer: This is information – not financial advice or recommendation
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