How to plan your exit: selling to an Employee Ownership Trust

Every business owner will one day exit their company – the questions are when this will happen, and how. Whether your goal is to retire, realise the value you’ve built, or protect your legacy, the decisions you make now will shape the outcome for you, your family, and your employees.

I’ve partnered with legal specialists Stephens Scown to create this four-part series, “How to Plan Your Exit: 4 Smart Strategies for Business Owners.”

This is the final article in the series. It explores selling to an Employee Ownership Trust (EOT), an increasingly popular route that enables owners to transfer their business to employees while accessing significant tax benefits.

Exiting your business: selling to an Employee Ownership Trust

Selling to an EOT allows the owner of a trading company or group to sell shares in their company to its employees collectively, rather than to an external buyer or management team.

Here’s how it works:

• A controlling shareholding in the company is sold to a trust, which then holds the shares on behalf of the employees.
• Day to day operational and strategic decision making continues to be the responsibility of the board of directors.
• The purchase price is typically paid through a combination of upfront cash and deferred consideration, funded by the company’s cash reserves and ongoing profits. External finance is also an option.
• Employees don’t buy shares themselves – the trust holds them for the benefit of all.

Why choose this route?

An EOT can be an attractive option if:

• You want to preserve your company’s culture, values, and legacy.
• A third-party sale or MBO isn’t feasible or desirable.
• Retaining and motivating employees is a priority.
• You’re looking for a smoother transition without lengthy external negotiations.

That said, the business must remain profitable to fund the purchase price – otherwise, deferred payments to the seller may be at risk.

An EOT can also be combined with other management incentives such as an Enterprise Management Incentive (EMI) share option scheme.

Tax perspective – why EOTs stand out

There are generous tax advantages where the qualifying conditions are met. In particular:

• Capital Gains Tax relief: No CGT is payable on the sale of shares to an EOT. The transfer of shares to the trust is deemed to take place on a ‘no gain no loss’ basis and a CGT liability will only arise if the qualifying conditions are breached.
• Income Tax-free bonuses: Companies controlled by an EOT can pay employees bonuses of up to £3,600 annually free of income tax (though NIC still applies).

To secure these reliefs, certain conditions must be met – including that the EOT must acquire a controlling interest in the company, operate for the benefit of all eligible employees on equal terms and the number of continuing shareholders who are directors, employees or persons connected with them must not exceed 40% of the total number of employees. 

The trustees of the EOT must also take reasonable steps to ensure the consideration paid by the EOT for the shares isn’t more than market value therefore, obtaining a robust, independent valuation is key.

Breaching these conditions could mean losing the tax benefits, so early planning and ongoing compliance are crucial.

Legal considerations

Dave Robbins, Corporate Associate at Stephens Scown, says:

While the process is usually more straightforward than a trade sale, there are still key legal points to navigate:

• Funding: Most EOTs are seller-financed, with deferred consideration repaid over time from profits. Accurate cash flow forecasts are essential.
• Trustee requirements: The seller and connected parties must be less than half of the trustees. Careful appointments are necessary to ensure tax treatment is safeguarded.
• Deferred payments: Sellers may want protections in the sale agreement, such as limits on further borrowing or excessive management pay, to ensure the company can meet its commitments.

My final thoughts

EOTs are not suitable for every business – their success depends on strong profitability, realistic cash flow forecasts, and careful structuring. Our Advisory specialists work closely with owners to assess feasibility at the outset, ensuring the transaction is commercially sustainable before moving forward.

For those businesses where an EOT is the right fit, it can combine an effective succession plan with a lasting legacy, tax efficiency, and increased employee engagement.

If you’re considering this option, I’d be happy to start the conversation now – so you can make an informed decision and avoid last-minute surprises.

Looking at exiting your business?

Bishop Fleming can help you structure a smooth, tax-efficient transition that works for you and your team. Get in touch today to start planning your exit with confidence.