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Journey to exit — employee ownership advantages & challenges explained

AuthorsStephen Hadlow

7 min read

Corporate, Employee Ownership, Journey to Exit

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One key succession challenge for many business owners is how to achieve an exit in a way that recognises the full market value of the business yet allows it to retain its unique identity and cultural integrity. By selling to an employee ownership trust (EOT), owners can protect the independence of the business while safeguarding and incentivising staff who’ve helped to build that success. This ensures that a strong legacy is carried into the future.

Here, Stephen Hadlow explores EOTs as a route to exit and details the associated benefits and challenges.

 

What is employee ownership?

The most common form of employee ownership involves the sale of a majority shareholding to an EOT. The EOT holds the shares for the benefit of all employees of the business, both now and in the future. Since the shares are held in trust, EOTs represent ‘indirect’ employee ownership. This means that employees don’t hold shares in their own name. Rather, the shares are held via a trustee. As employees join the business, they automatically become beneficiaries of the trust until they leave the business.

The EOT acts as the custodian of the employees’ ownership. However, this doesn’t mean that the trustee or the employees are responsible for the day-to-day management of the business. The board of directors of the trading company retains control of management decision-making but they do so in a way that reflects, supports and promotes a strong EO culture.

Where a business owner is looking to retire, it’s common for the EOT to purchase 100% of the shares. However, the EOT only needs to hold a controlling interest for the tax benefits to apply. Selling shareholders can therefore retain up to 49% of the shares.

This may be appropriate:

Since the EOT legislation was first introduced in 2014, a sale to an EOT has become an increasingly popular form of shareholder exit. Now, over 2,500 business in the UK have adopted the EOT model and there are in excess of 400,000 employee owners. High street retailer The Entertainer is one big name to have recently adopted the EOT model, joining other well-known brands including Lush and Richer Sounds. 

 

Employee ownership — the advantages

In an uncertain tax climate, a key benefit to an owner selling to an EOT is that no capital gains tax will be payable on the sale proceeds. Employees of employee-owned businesses will also be able to benefit from an income tax exemption on bonuses paid to them. Employee ownership can therefore deliver financial advantages to the business owners and allow employees to share in future financial success.

The favourable tax regime reflects continuing Government support for employee-ownership as it helps to promote stable, profitable and resilient businesses where ordinary workers have a share in their success. In June 2025, the Secretary of State for Business and Trade reaffirmed the Government’s stated aim of doubling the mutuals economy in the UK — encompassing EO as a core component of that sector ambition.

The advantages of employee-ownership in the wider economy has been evidenced in the People Powered Growth report — a landmark study commissioned by the Employee Ownership Association. 

The report confirmed that employee-owned businesses:

Another key positive of employee ownership is that it introduces a new dynamic and sense of shared mission. Staff in employee-owned businesses stand to financially benefit through the tax-free EO bonus. Employees therefore tend to be more entrepreneurial and committed to the company and its success. Since all employees have a stake, employee-owned businesses are better at recruiting and retaining talented, committed staff.

 

Employee ownership — the challenges

One key challenge is how an exit to an EOT is funded. The purchase price to be paid to the owners must be funded out of the after-tax profits of the business. It can therefore take several years before the owners are able to receive the full market value for their business. External funders are becoming increasingly active in the sector and can significantly help to de-risk the transaction for owners. 

Even where external debt is involved, the affordability for the business is an important consideration and one that requires careful planning. Owners of well-run and profitable firms will see employee ownership as a more achievable and straightforward exit route compared with owners of firms facing a potentially more uncertain future.

The purchase price for the shares acquired by the EOT is based on the market value as objectively determined by an expert valuer. Over-valuing businesses will jeopardise the favourable tax treatment available to the owners. Those businesses that require an injection of capital to bring about growth or where third-party buyers will pay a premium value to reflect commercial synergies should therefore think very carefully whether employee-ownership is right for them. 

Strong future management is also a key area to get right. A leadership succession plan is needed for owners who are currently integral to the day-to-day operations of the business but looking to step back. However — unlike a trade sale where change is far more rapid — under an EOT structure the retiring owners will be able to structure and manage the handover of responsibilities (typically over a number of years) to allow for a smooth and gradual succession.

Hybrid EOT models are becoming increasingly popular as a solution to this challenge. Granting senior management growth shares or share options is seen as key to keeping SLT members incentivised.  The ‘buy-in’ of the leadership team is key to sustaining and growing the profitability of the business, which in turn will help to safeguard the payment of the vendor debt to the former owners.

 

When should I consider selling my business to an employee ownership trust?

As with any important business decision, it’s key to weigh up all the relevant factors carefully. Employee ownership must be the right fit for the business and its owners.

Employee ownership can be the right succession solution where the current owners are looking to retire but an exit via a trade consolidator or an internal buy-out is undesirable or unachievable. 

This may be because:

Given the recent increases in CGT rates following the Autumn 2024 Budget, there also financial advantages that may well encourage founders to look more closely at employee ownership as an exit route.

 

Talk to us

Recognised as specialist advisors by the Employee Ownership Association, our employee ownership team has advised over 80 businesses in transitioning to employee ownership. We’re perfectly placed to guide your entire exit strategy and help you start your journey to employee ownership.

Start your journey to exit today — talk to us by giving us a call on 0333 004 4488, sending us an email at hello@brabners.com or completing our contact form below. 

Stephen Hadlow

Stephen is a Partner in our corporate team. He's actively involved in structuring disposals to Employee Ownership Trusts.

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Stephen Hadlow

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