Setting Up an Employee Ownership Trust: A Complete Guide

Employee Ownership Trusts (EOTs) have become an increasingly popular and commonplace aspect of the business landscape over the last decade. Ever since this innovative shared ownership model was introduced in 2014, more and more companies have embraced this model as a way of giving staff greater control and investment in the future of the business.

If your organisation is considering switching to an EOT model, it can be difficult to know where to start. As with many major changes in business strategy, transferring to an EOT needs to be done with careful planning, in order to ensure that the new structure chosen for the company delivers on the intended goals.

In this guide from the corporate law specialists at Ramsdens Solicitors, we will take you step-by-step through the process of making the switch to an EOT, and highlight all of the factors that you will need to consider to make this transition a successful one.

What is an Employee Ownership Trust?

An EOT is a form of collective ownership structure introduced by the UK’s Finance Act 2014. In an EOT, shares of the business are held in trust by a trustee or trustees for the benefit of the employees, offering them a financial interest in the company’s success. The business remains managed by its board of directors on a day-to-day basis, but all of the company’s employees will now have a financial stake in the future success of the company, for as long as they remain employed by the organisation.

EOTs have proven extremely popular since their introduction. As of December 2022, there were estimated to be around 1,300 employee-owned businesses in the UK, with this number having more than doubled over a two-year period since 2020. This is because of the significant benefits associated with this ownership model, including:

• Increased productivity – shared ownership often leads to greater employee engagement, helping to boost productivity levels and the overall performance of the company.
• Improved employee retention – by giving employees a stake in the business, EOTs can enhance job satisfaction and encourage talent retention, while making the company a more attractive place to work for new staff members.
• Substantial tax reliefs – for business owners, selling to an EOT may enable a completely tax-free exit from the business. Employees, on the other hand, can receive bonuses of up to £3,600 per annum tax-free.
• Smooth succession planning – EOTs allow business owners to plan their exit without the stress of a conventional sales process, as they will be able to place the organisation straight into the hands of their workers and colleagues.

What Factors Should You Consider Before Setting Up an EOT?

Before deciding to establish an EOT, it’s important to consider the best way of approaching the transition, in order to ensure that the move is feasible and well-suited for the needs of your business. This means taking all of the following factors into consideration:

• Choosing the right trustee – any prospective trustee must have the ability to understand the business and make informed decisions, as well as be capable of avoiding and managing potential conflicts of interest.
• Selecting a governance structure – this involves separating the responsibilities of the trustee from those of the board of directors who manage the business. The board of directors will continue to run the business in practical terms, but strategic decisions that affect the employees as beneficiaries of the EOT should involve the trustee.
• Determining how the purchase will be financed – most EOT purchases are funded by the company itself. You should consider how this funding will impact the cash flow and financial health of the business in the short and long term.
• Engaging your employees – since the EOT is designed to benefit the company’s employees, their engagement with the idea and their willingness to participate in the EOT are vital considerations. Open and transparent communication is key to securing employee buy-in.
• Planning an exit strategy – if you are a business owner looking to set up an EOT, you need to carefully plan your exit strategy. While selling to an EOT provides a tax-efficient exit, the purchase price is often paid over a number of years from company profits, so you need to consider how this matches your personal financial planning.
• Ensuring legal and regulatory compliance – setting up an EOT involves navigating a range of legal and regulatory issues. Ensuring compliance will require careful planning and expert legal and accountancy advice.

These considerations underscore the complexity involved in setting up an EOT, and highlight why seeking professional advice is a wise decision when embarking on the process.

What Are the Main Steps of Setting Up an EOT?

Once all of these preliminary factors have been taken into account, your company can move ahead with the process of setting up the EOT. This will involve the following steps:

1. Feasibility assessment: This involves an in-depth review of your business’ financial performance, culture and future business plan. It also includes exploring whether your workforce is likely to be supportive of such a transition, as employee engagement is vital for the success of an EOT.
2. Valuation: Once you’ve determined that an EOT is a viable option, you need to establish a fair market value for your business. This may involve hiring an independent valuer. The valuation will determine the price at which the shares will be sold to the EOT.
3. Trust deed: Next, your lawyers need to draft a trust deed. This is a legal document that establishes the EOT and outlines how it will operate. The trust deed specifies the terms and conditions of the trust, the appointment of the trustee, and the rights and responsibilities of the trustee.
4. Trustee appointment: After the trust deed has been prepared, you must choose a trustee. The trustee can be an individual or a group of individuals, a company specifically established to act as the trustee, or a professional trustee company.
5. EOT structure and governance: Alongside setting up the trust deed and appointing a trustee, you need to structure the EOT and set up the governance arrangements. This includes setting up a board of directors for the company.
6. Financing and purchase agreement: The EOT will purchase a controlling interest in the company (at least 50% of the shares). Typically, the company itself will finance the purchase, creating a ‘vendor loan’; a purchase agreement outlining the terms and conditions of this loan will need to be drawn up.
7. Share transfer: Once the EOT has been established and funds are in place, the legal process of transferring the shares to the EOT can begin. This usually requires the services of a solicitor to ensure everything is legally compliant.
8. Settlement of purchase balance: The final step in setting up an EOT is the settlement of the purchase balance. This is the payment of the full purchase price by the EOT to the outgoing owners. Depending on the financing arrangements, this might not happen immediately, but rather be spread out over several years, with the EOT paying the full total back from company profits over time.

Throughout this process, it is crucial to communicate effectively with all stakeholders, particularly employees. They will need to understand what the EOT means for them and the business, in order to ensure their full engagement throughout the process and beyond.

How Long Does It Take to Set Up an EOT?

The timeline for setting up an EOT varies depending on the complexity of the business and its financial situation. However, on average, it can take between three to six months from the initial assessment to the final legal transfer of shares.

How Professional Legal Advice Can Help with Setting Up an EOT

Professional legal advice is crucial to navigate the complexities of setting up an EOT. Experienced solicitors can help you assess the suitability of an EOT for your business, guide you through the legal and financial intricacies, manage potential conflicts of interest, ensure regulatory compliance, and support a smooth transition.

By working with solicitors and taking a careful and thorough approach at each stage of the process, you will be able to maximise the success of your EOT transition, delivering tangible benefits at all levels of the organisation for many years to come.

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