An Employee Ownership Trust (EOT) is an alternative business ownership structure with specific benefits to both owners and employees. It involves the establishment of a new trust which holds a controlling interest (at least 51%) in the trading company, for the benefit of all of the employees in the business. The Trustee of the EOT may be an independent professional trustee company or a company incorporated to act as the trustee, made up of directors from within the workforce as well as independent parties.

There are currently over 600 EOTs existing in the UK. Prominent Company founders have commented that amongst their reasons for selling partial shareholdings into an EOT were;

the building of a solid platform for growth; improving job stability; rewarding employees that have contributed to the success and growth of the company; retaining existing cultures; empowering everyone to drive the business forward; and the creation of a legacy for future succession planning.

The John Lewis Partnership has the largest EOT model in the UK. More recent corporates to become EOTs are hi-fi retail business Richer Sounds, with Julian Richer, Founder and MD of Richer Sounds transferring 60% of his shares into an EOT, and organic food retailer Riverford Foods, with founder-owner Guy Singh-Watson transferring 74% of his shares into an EOT.

Leading forecasters have shown that the number of EOTs is increasing at a rate of 40% per annum. With many market leaders choosing this route of succession, there has been a notable spark in the level of interest in this model, and whether or not it could be viable for smaller businesses also.

For business owners; when the EOT acquires the majority of a company's issued share capital, the outgoing members can claim exemption from capital gains tax (CGT) on gains made after disposal of their shares. Furthermore, it is possible to seek advance clearance from HMRC, providing certainty on the tax position.

For employees; qualifying employees of a company may receive income tax-free bonuses of up to £3,600 per person, per annum.

Advantages:

EOTs allow employees to indirectly buy the company from its shareholders without them having to use their own funds - thereby creating an immediate purchaser and addressing succession issues; shareholders can sell their shares for full market value (an independent valuation will be required); not all shareholders are required to sell their shares to the EOT; the directors can remain in situ post-disposal and can continue to receive market-competitive remuneration packages; and the EOT is generally seen as a "friendlier purchaser" which means the sale process may be quicker, with potentially lower fees. Disadvantages:

An important point to be aware of when a company is sold to an EOT is that the purchase price is fixed at the point of sale. Therefore, should the value of the company increase post-disposal, the selling shareholders would not be entitled to any additional consideration; since sales to EOTs are generally financed through the post-tax profits of the trading company, the trading company must remain profitable and cash-generative post-disposal. Should the trading company become loss-making then it may be unable to make payments to the EOT which in turn would mean that the trustee of an EOT may be unable to pay some, or all, of the deferred consideration; external funding may be difficult to attract due to most EOTs being newly formed with very little or even no trading history, and a sale to an EOT is not entirely tax-free; stamp duty will be payable on the acquisition of the shares, and the tax-free annual bonuses still attract national insurance contributions.