EOT Preparation: What you need to make it happen

Are you a business owner looking to sell your company to an Employee Ownership Trust (EOT)?

This relatively new, but increasingly more popular, approach to succession planning can bring numerous benefits to you, your business, and your employees. In this article, we will guide you through the essential areas of preparation and consideration before, during and after the process.

In brief: EOT Preparation video guide

Review your exit options

Before the process begins, the first step is to conduct a strategic review of the options that are available to you. There are several ways to exit a business, and each has specific advantages and disadvantages depending upon the business type, circumstances, and the goals of the exiting shareholders.

An EOT presents an excellent opportunity when it is an appropriate route, but it may not be right for every business. There are several important pros and cons which must be properly considered before making the decision to proceed. Of course, if an EOT is not the best course for you, there are some great alternatives, such as:

• Management buy-out
• Management buy-in
• Trade sale

Selecting an exit route is a big decision with far-reaching implications, so we recommend consulting an expert to review your exit strategy options before any transaction is planned.

Tax and legal structuring

Another essential element of EOT planning relates to legal and tax structuring. The legal structure of the EOT needs careful consideration and involves drafting trust documents that outline the governance, rights, and responsibilities of the trust while ensuring a clear framework for decision-making.

In addition to this, understanding the tax implications is crucial for both the business owner and the employees. EOTs can offer notable tax advantages, but navigating the complexities of tax law requires professional expertise.

Establishing the business valuation

Determining the value of your company is a critical step in the EOT process. Accurate valuation ensures fairness for both existing owners and employees, while also guiding the financial aspects of the transition. An accurate independent valuation is particularly important for an EOT because the seller is guaranteed to receive the full market value of their shares, providing the right conditions are met.

• Try the free Shorts Business Valuation calculator

Plan for any required funding

Funding an Employee Ownership Trust transaction can be done in several ways. A combination of different methods will often be used, depending on the company's financial situation and the goals of the shareholders.

It is common for exiting shareholders who sell their shares to an EOT to receive some or all of their payment as deferred consideration over a longer period of time, allowing the company to allocate funds to the EOT gradually.

• Read more: How to fund an EOT

Communicate with stakeholders

Transitioning to an Employee Ownership Trust involves multiple stakeholders, including the company employees, its existing owners, and also potential investors.

Ensuring open and transparent communication is key to gaining buy-in and ensuring a smooth transition. A qualified Corporate Finance advisor can assist you in producing all the necessary communication documents to ensure all relevant parties are kept in the loop.

It may be helpful to promote open dialogue and involve employees in decision-making processes to create a sense of shared responsibility. It is also a good idea to clearly communicate the benefits of the EOT to employees, such as profit-sharing, improved job security, and a stronger voice in the company's overall direction.

Consult an expert on EOTs

Transferring ownership of a business to an Employee Ownership Trust is a highly complex process, with lots of important steps which must be done correctly. We therefore strongly recommend consulting with a qualified Corporate Finance advisor and legal specialist to advise and guide you through the process. This will help you reduce the risk of costly errors, poor tax or financial planning, or unforeseen legal implications.

Our dedicated Corporate Finance team has helped several notable companies successfully transition to EOT ownership, and we would love the opportunity to discuss your exit plans with you.