The Third Exit: What an Employee Ownership Trust Demands of an Owner-Manager
Photo: Simon Burchell, CC BY-SA 3.0, via Wikimedia Commons
Most owner-managers in the £1m–£10m turnover bracket keep two exits in view: sell to a trade buyer, or sell to the management team. A third route — transferring a controlling stake to an employee ownership trust (EOT) — has moved from curiosity to credible contender over the past decade, helped along by a capital gains tax relief that can make the arithmetic work. But the relief is not a reason on its own, and the structure asks more of a founder than either a trade sale or an MBO.
What an EOT actually is
An EOT is a trust established for the benefit of a company's employees. The seller transfers a controlling interest — at least 51% — to the trust. The company keeps trading; the trust holds the shares; employees do not pay for them and do not own them individually. A trustee board, which must include at least one independent trustee, governs the trust, and the trust must benefit all employees on the same terms.
The structure is designed to be permanent. It is not a vehicle for a quick flip, and a trust deed that leaves the door open to a sale in year three is likely to attract scrutiny.
Valuation: one buyer, different arithmetic
A trade sale sets a price through competition. An EOT has a single buyer — the trust — and the trust can only pay what the company can fund. In practice, EOT valuations for SMEs typically land at a modest discount to a trade multiple, though the gap varies with sector, customer concentration and the depth of the management team below the owner.
Where the discount is narrow, it is usually because the business has clean accounts, a capable second tier and predictable revenue. Where it is wide, it is because the buyer of last resort is being asked to pay for the founder's relationships, not the enterprise.
Paying for it: deferred consideration is the norm
Very few EOTs are funded by cash at completion. The typical structure is a minority of the price paid on day one — often 20% to 30% — with the balance paid over five to ten years out of the company's future profits.
That has two consequences the seller must price in. First, the seller becomes a creditor of the business, and creditors rank behind secured lenders if trading deteriorates. Second, the payments compete with working capital, capital expenditure and any existing debt. A business that is already lean on cash cannot easily service all of them.
Before signing, model a 20% revenue fall in year two and see whether the schedule still clears. If it does not, the structure is being funded by optimism.
The tax reliefs, and the caveats
The headline relief is the capital gains tax exemption on the disposal of shares to an EOT, subject to conditions: the trust must hold a controlling interest, the transfer must be for genuine commercial reasons, and the company must be a trading company. The 2024 Budget tightened the rules — relief is now limited to consideration up to market value, and the trust must be UK-resident — and a consultation on trustee independence and governance ran through 2025.
There is also an income tax exemption for bonuses paid to employees by the company, capped at £3,600 per employee per tax year. That is a useful cultural lever, not a funding mechanism.
Two warnings. The relief is not available on a partial transfer that leaves the seller in control, and it is not a shelter for an inflated price. HMRC has become more attentive to valuations and to structures that look like a tax-driven reorganisation rather than a genuine succession.
Governance: the part that decides the outcome
An EOT changes who the owner answers to. The trustee board, including the independent trustee, has a duty to the beneficiaries, and the company's board must operate within the trust's expectations. That is not a rubber stamp, and the transition period is usually the point at which an unprepared founder discovers how much of the business ran on informal decisions.
The structures that work share three features: a management team already running the day-to-day; an owner willing to step back within a defined period; and employees engaged enough to care about the numbers. Where those are missing, the trust becomes an expensive layer of governance around a business that still depends on one person.
Beware the cultural red flag. An EOT imposed on a workforce that has had no sight of performance, no exposure to the profit and loss account and no history of being consulted will not create engagement by deed. Employee ownership is not a bonus scheme with a trust wrapper. If the culture is command-and-control, the structure will not fix it.
When an EOT is the wrong answer
It is the wrong answer when the owner needs a clean break and full cash at completion. It is the wrong answer when the business is loss-making or has a volatile profit history. It is the wrong answer when the management team is thin, or when the owner's personal relationships are the real asset being sold.
It can also be the wrong answer when a trade buyer is willing to pay a strategic premium. The combination of an EOT discount and deferred consideration can leave the seller materially worse off than a clean sale, even after the CGT relief is counted.
A short decision framework
Ask four questions. Can the company fund the deferred payments from profits under a stress case? Is there a management team that can run the business without the founder? Are employees genuinely engaged, or would the trust be a legal wrapper around apathy? And does the owner want a legacy and a phased exit, or cash and a clean break?
If the answer to the first three is yes and the fourth is legacy, an EOT deserves a place on the shortlist. If not, a trade sale or an MBO is probably the more honest route — and the cheaper one to discover late.
