Employee Ownership Trust Disadvantages

Disadvantages of EOTs for business owners

EOTs are still a relatively modern concept and one which may seem quite overwhelming to some business owners. If not structured correctly, an EOT disposal could see exiting business owners waiting too long for their well-earned consideration.  If not communicated correctly and delicately, and at the right time to staff, this could impact employee morale and cause friction amongst employees and management.

Whilst there are many advantages to an EOT transaction (which are highlighted in our other articles), there can be disadvantages.

It is common in more traditional business sales for the exiting shareholders to receive the majority of their proceeds on completion of the sale, with an EOT transaction this is typically not the case and sellers can have to what many years to be paid in full.

In the case of a trade sale, the buyer may bring additional management expertise and capacity to help an owner-manager retire, again, this is not the case with an EOT which relies on existing personnel.

Disadvantages of EOTs for Employees

If structured correctly, there should be virtually no disadvantages to employees as the change in ownership does not affect their employment contracts and often will not result in a change in management. Even in owner-managed businesses, the exiting shareholders would likely remain in a management position in the short to medium term to ensure a smooth and effective handover of duties to other senior members of staff.

One concern an employee might have is that, if not structured correctly, the business owner could overstate the valuation and extract cash out of the business too aggressively. However, an experienced and competent EOT advisor would ensure that the valuation is at fair market value and would seek HMRC tax clearance approval before proceeding with a transaction.

Aspirational employees may feel their opportunities are more limited under EOT ownership but it can still be possible to recognise individual performance through bonuses and direct share ownership or option incentives.

Role of an EOT Advisor

An experienced EOT advisor is essential in ensuring that the structure is right for the business in order to meet the conditions to benefit from the tax relief. This is to ensure that the consideration receivable for the sale of the company is at fair value and received in a timely manner to benefit both the exiting shareholder and preserve cash for the business to continue. An EOT expert should be on hand throughout the process to explain the complex areas of the transaction and ensure that the exiting shareholders are fully informed at each step of the journey. The role of an EOT lead advisor extends to communicating the plans with senior management and employees at key milestones in the transaction and being on hand to answer any queries and concerns.

Our EOT advisers

We have advised many businesses to complete their transition to employee ownership. Hawsons have been working with businesses on EOTs since they were introduced in 2014, completing our first deal in 2016.

We are a member of the Employee Ownership Association who represent organisations that are employee-owned or transitioning to employee ownership across the UK.

Find out more about our EOT advisory service

Pete leads the Corporate Finance offering across the firm, having has spent much of his career within a large international accountancy firm and corporate banking before returning to Hawsons, where he started. Working with businesses of all sizes, Pete has an exceptional breadth of experience which he brings to the benefit of clients.

An early adopter and passionate believer in good employee ownership, Pete has helped numerous businesses transition to employee ownership and works extensively to promote the employee ownership model.