What is an Employee Ownership Trust?

An Employee Ownership Trust (EOT) is an excellent option for business owners looking to sell or transfer ownership to their employees, and lawyers play a crucial role in making this process smooth and legally compliant. Below is an overview of what an EOT is, how it benefits businesses, and how a we can help businesses implement this structure.

What is an EOT?

An EOT is a legal structure where a company’s shares are held in trust for the benefit of its employees. Instead of selling the business to external buyers or investors, the owners (often business founders or retiring partners) sell their shares to the trust (usually a trustee company, set up for the purposes of the EOT), which is then managed for the benefit of the company’s employees.

The key aspects of an EOT are:

• The trust (i.e. the trustee company) holds the shares of the business on trust for the benefit of all the employees.
• Employees become beneficiaries of the trust, meaning they have a stake in the business and share in its success, usually through profit-sharing or bonuses.
• Management of the business may remain with the existing leadership team, but the trustees represent the employees’ interests.

Benefits of an EOT for Businesses:

1. Succession planning: EOTs are a great way for business owners to exit or retire while ensuring the continuity of the business and preserving its culture.
2. Employee engagement: Employees are motivated to work harder and innovate, knowing they have a stake in the company’s success. (The John Lewis model)
3. Tax advantages: In many jurisdictions (like the UK), there are tax incentives for both the selling owners and the employee-beneficiaries. For example:
   • The selling business owners can benefit from Capital Gains Tax (CGT) relief on the sale of their shares to the EOT.
   • Employee-beneficiaries may receive tax-free bonuses, depending on the structure of the EOT.
4. Firm stability: The company’s ownership remains internal, reducing the risk of it being sold to external investors or large corporations, which can lead to cultural or operational changes.
5. Improved retention: By giving employees a stake in the business, they’re more likely to stay longer and contribute positively to the business.

How we can help setup an EOT:

We have helped a number of clients setup their EOT structures. Our support included:

• Advising on feasibility and structure – initial assessment and customisation of the structure – working closely with client’s accountants
• Setting up an EOT and preparing the trust deed
• Preparing relevant documents to effect the sale of the shares in the business to a trustee company
• Ongoing legal support – for trustees and business owners

In summary:

EOTs are an effective way for businesses to manage succession, reward employees, and maintain long-term stability.

If you are considering establishing an EOT, it’s essential to partner with experienced legal professionals who specialise in EOT structures to ensure the process is executed properly and provides the intended benefits to both the business owners and employees.

Get in touch with Colin Smith or Oksana Howard on 020 3814 2020 or email enquiries@blasermills.co.uk. Alternatively, fill in our contact form.