2025: The Year for Business Owners to Act

Why choose an EOT for succession?

EOTs provide a highly advantageous option for business owners who are seeking to secure a seamless exit strategy that also provides benefits and security to their employees. Owners can sell their shares to an EOT and enable a company to become majority-owned by its employees through a trust. This offers several fantastic benefits:

• No Capital Gains Tax: Sellers can benefit from a 0% Capital Gains Tax (CGT) rate on the sale of shares to an EOT.
• Full market value sale: Sellers can achieve a sale at full market value.
• Create your own buyer: There’s no need to market your business for sale externally. Great for businesses that have no third party interest or succession plan.
• Stress free sales process: You negotiate with yourself, not a third party who would look to drive you down on value and seek a raft of warranties and indemnities.
• Go at your own pace: An EOT sale typically takes between 8 to 12 weeks and business owners are in control throughout.
• Legacy preservation: EOTs protect the business’s culture and values by ensuring employee ownership. Reduced risk of a hostile takeover.
• Employee engagement: Ownership fosters a sense of responsibility and motivation among staff, often leading to improved performance and retention. Employees can also receive tax-free bonuses of up to £3,600 each.

With these benefits in mind, the groundwork for transitioning to an EOT is critical. Below are our recommended steps to prepare your business for this transformational process.

Step 1: Understand the qualifying criteria

Not every business is suited to an EOT. We assess our client’s businesses against the key relief criteria, as follows:

• Trading requirement: Your business must be a trading company. HMRC defines a trading company as one whose activities do not, to a substantial extent, constitute activities that are not trading activities. In a nutshell, this means you are predominantly a trading business. This rules out companies whose activities mainly consist of investment holding. Trading companies can hold investment assets and still meet this requirement. We assess this on a case-by-case basis.
• Controlling interest requirement: Business owners must be willing to sell a controlling stake (i.e. more than 50%) to the EOT. The shares sold must entitle the trust to more than 50% of the rights to voting, capital and distributable profit of the company in question.
• Limited participation requirement: When considering the entire employee base of a company (including its statutory directors), if more than 40% of the total employee base also hold more than a 5% shareholding, then the limited participation requirement would not be met. This is also the case where an employee has held more than 5% in the past, or has rights entitling them to acquire more than 5% (such as an EMI option). We can help businesses to navigate this simple, but potentially complex requirement. Special care must be taken in assessing this requirement where companies have a small number of employees, as changes to employee numbers can have a drastic effect.
• All employee benefit and equality requirements: The EOT must be operated for the benefit of all employees and on the same terms. This means that any decisions taken by the EOT must be for the benefit of all employees. If the assets of the trust are distributed to its beneficiaries (the employees), then each employee must benefit on the same terms, by reference to their length of service, level of remuneration or hours worked. Equal shares are always permissible. A combination of these factors is also acceptable, providing each criterion gives rise to a separate entitlement. Care must be taken when drafting the Trust Deed to ensure the trust will meet the requirements.

There are of course finer points to consider when assessing the above criteria and analysis should be done on a case by case basis. We can help you to determine if your business can not only meet these criteria, but continue to do so for many years to come, which is imperative to securing the tax free treatment and avoiding clawbacks of the tax relief from HMRC in the future. This is especially important, now that the clawback period for vendors has been extended following the recent budget.

Step 2: Feasibility analysis

Once it is clear that your business meets the qualifying criteria, a thorough feasibility analysis of your business forms the cornerstone of the EOT process. The valuation establishes a fair market value for the shares being sold to the trust. An independent valuation expert is recommended and will consider factors such as:

• Financial performance, past and present
• Market conditions, and
• Future growth prospects.

Independent valuations should be presented to and agreed upon by the EOT trustee board to ensure transparency and fairness, both for the seller and the employees and to comply with legislative requirements. It is imperative that business owners understand exactly how the sale could look and feel for them and their employees before they commit. We regularly work with business owners to provide them with the bespoke, tailored analysis and insight required to make that decision.

Step 3: Consider communication with employees

Clear communication with employees is critical to the success of an EOT; transparency and effective communication are essential. Employees need to understand:

• The benefits of transitioning to an EOT
• The company’s vision under employee ownership, and
• How the structure will impact their roles and rewards.

Some businesses like to communicate with their employees before the transaction takes place and others do so after completion. There is no prescribed formula, but clear and open communication can really help to motivate and build enthusiasm for the change in ownership among the workforce and this is a positive for any business transitioning into employee ownership. We have a range of resources that can assist with communicating with staff and we regularly make presentations to staff in conjunction with our clients.

Step 4: Structure and execute the transaction

Once a valuation is agreed, the transaction must be structured appropriately. Typically, a sale to an EOT is funded through a combination of excess cash (beyond the company’s working capital requirements) paid upon completion, and deferred payments funded by the future profits of the company, or through a combination of external financing and deferred consideration.

Key considerations include:

• Applying for Transactions in Securities clearance from HMRC
• Settling the trust and appointing trustee directors
• Ensuring the transaction is properly documented and that key documents such as the share purchase agreement (SPA), Trust Deed and Articles of Association for the Trustee company are expertly drafted
• Ensuring protections are built in for the vendors, within the bounds of the legislation
• Establishing a commercially viable repayment schedule for all vendors, and
• Identifying key employees and incentivisation requirements.

Professional advice is essential to navigate these complexities smoothly and ensure the deal is structured commercially. At first glance, the above is very simple, but significant commercial value can be added during the structuring process and we are adept at identifying such opportunities on a case by case basis.

Step 5: Plan for growth under employee ownership

Succession through an EOT doesn’t mark the end of a business’s journey; it’s the beginning of a new chapter. Develop a strategic plan that can:

• Leverage the enhanced employee motivation and engagement
• Focus on innovation and growth, and
• Prioritise long-term sustainability and success.

This article provides a brief overview of the process and key considerations we go through with our clients. An EOT not only secures a tax-free exit for shareholders, but also cements a business’s legacy and galvanises employees to collectively work towards a beneficial and sustainable future within their organisations. If you’re ready to secure the succession of your business in 2025 or wish to understand your options, consulting with experienced advisors is the first step. Our dedicated EOT team has collectively advised over 150 businesses on their sales and we continue to provide ongoing post-sale support to ensure a smooth transition for all of our clients.