Douglas Roberts

The Employee Ownership Trust (EOT) is a special type of discretionary trust established by the Finance Act 2014 for the purpose of acquiring a controlling interest in a company for the benefit of its employees. The nature of EOTs allows businesses to retain their unique culture and values, making them particularly attractive to family-owned businesses.

Interest in EOTs has grown steadily since they were first established. Recent statistics from the EOA and WREOC suggest there are now approximately 2,470 employee-owned businesses in the UK, with around 358,000 employee owners. In Scotland, where family businesses form an integral part of the economy, EOTs are particularly prominent and with 69 per cent of family business-owners having no succession plan, EOTs have even been mooted as a potential solution to a looming succession crisis.

It has been suggested by some that the growing popularity of EOTs is based on the tax benefits they bestow on shareholders. It is true that this has been described as “a strong selling-point of the EOT model” by HMRC. However, that is not the main driver for many sellers. Further, reforms to the taxation of EOTs were introduced in October 2024 such as the introduction of a trustee independence requirement preventing selling shareholders from controlling the EOT and an extension of the period within which HMRC can claw back the tax relief from the selling shareholders if the conditions applying to the relief are breached. These do not seem to have dampened demand for EOT transfers, suggesting they are being viewed as a genuine succession option rather than a way to extract value from a business.

The three leading sectors for employee-ownership are professional, scientific and technical activities, manufacturing and construction, according to recent research from the UK EO Business Register. However, it should be noted that the EOT model itself is sufficiently versatile that it is not constrained to any particular industry. The common factor between successful employee-owned businesses is not the sector or industry but rather the underlying culture of a business.

Traditionally, funding from specialist lenders wasn’t always suitable for every situation, leaving sales to EOTs to rely on vendor financing. This meant selling shareholders were often waiting years to be paid out. While the deal terms were usually friendlier than an arms’ length sale, to reflect the risk taken by the selling shareholders in agreeing to unsecured deferred consideration, vendor financing was often a deterrent for shareholders whose businesses were otherwise well-suited to employee ownership.

However, there are signs of positive change. We have recently seen an increased appetite from lenders to work with businesses on their transitions to employee ownership and have worked with numerous banks who have put the time and effort into becoming well-versed on the structure of EOTs. Third-party financing lowers the risk for sellers but can also accelerate deal timelines, meaning employee owners have a shorter wait until what is often called “Debt Free Day” (the point when the selling shareholders have been paid in full and the employee owners can embrace the new structure). This welcome development should lead to more EOTs in the UK. Further, the stringent financial and governance requirements of lenders could also make the EOT model even stronger.

In conclusion, there is no single factor that explains the boom in popularity for EOTs. However, the model has certainly ‘come-of-age’ and, for the right businesses, makes for a very compelling succession option.

Douglas Roberts is a partner at TLT