If you have spent years building a successful business, deciding how and when to step away can shape the future of both the business and your own future. Selling to an Employee Ownership Trust (EOT) may offer a way to pass the business on, but the deal must also give you enough financial security for the next stage of your life.
What is an Employee Ownership Trust (EOT)?
An EOT is a trust that holds a controlling interest in a company for the benefit of its employees. For business owners considering retirement or succession, an EOT provides an alternative to selling to a competitor or private equity investor. It can allow an owner to realise the value they have created while transferring control to a structure designed to benefit the workforce.
An EOT sale may offer tax advantages compared with other forms of business sale, provided the relevant conditions are met. The rules can change, so owners should take specialist tax advice on their circumstances. However, the tax advantages are only part of the decision; the EOT must also work for the seller and support the life they want after the sale.
Will the sale give you the financial freedom you need?
Sarah, aged 57, owns a successful veterinary practice that she has spent 25 years building.
Sarah is considering selling the practice to an EOT. She wants to protect the practice’s independence rather than sell to one of the larger corporate groups consolidating veterinary practices across the UK. Additionally, she likes the idea of giving the team who helped build the business the opportunity to benefit from its future success.
The practice is independently valued at £3 million, so Sarah may appear well placed for retirement. However, the headline sale price does not tell her how much money she will receive at the outset, when the rest will arrive or whether those payments will support the life she wants.
An EOT may not pay the full purchase price straight away. The initial payment might be funded from cash already held by the company or from external borrowing. The remaining amount may then be paid to the seller over several years from the business’s future cash flow. Sarah could therefore agree a £3 million sale without having anything close to £3 million immediately available for retirement.
Financial planning before the transaction
This is where speaking to a financial planner before the sale can add real value. For Sarah, the starting point would be her personal objectives rather than the business valuation:
- When does she want work to become optional?
- What lifestyle does she want in retirement, and what will it cost?
- Does she have debts to repay?
- Does she want to help her children financially?
- What larger expenses might she have later in life?
With these questions answered, cash flow planning can establish a financial plan that brings together Sarah’s existing finances and the proposed EOT payments.
Planning a gradual step back from the business
Sarah may not want to walk away from the practice immediately. After 25 years building the business, she might prefer to gradually reduce her involvement before eventually retiring altogether. Cash flow planning can model that transition.
Different scenarios can then be explored and stress-tested. Could Sarah move to three days a week immediately? What would happen if her deferred consideration took longer to repay than expected? Would receiving more upfront, but less later, give her greater flexibility?
The aim is not to predict exactly what will happen. It is to understand how resilient Sarah’s plans are if things do not go exactly as expected and identify potential problems before she commits to the transaction.
It can also help establish how much Sarah needs upfront, how comfortable she is receiving part of the sale proceeds later and how long she may want to remain involved with the practice.
Planning what happens after the sale
Before the EOT, much of Sarah’s wealth is concentrated in the veterinary practice she has spent 25 years building and understands intimately. Afterwards, her position may look very different, with cash, pensions and investments to manage alongside money still due from the EOT. Having spent her career building and managing the practice, she may not have the same confidence when it comes to managing her personal wealth. This is where having a clear plan for the proceeds becomes important.
- How much should she keep in cash?
- How should the proceeds be invested?
- Should borrowing be repaid?
- How can her pensions and sale proceeds provide an income in retirement?
- What does her new position mean for estate and inheritance tax planning?
Making those decisions as part of the exit planning process can provide much greater clarity than dealing with the questions after the event.
An EOT transaction will naturally involve specialist legal, tax, valuation and corporate finance advice. Financial planning serves a different purpose: helping you understand whether the proposed business exit works for you personally.
For someone like Sarah, an EOT may offer a better outcome for the business and its employees, even if another buyer might offer more. Financial planning can give her confidence that she has enough to achieve her own goals, allowing her to make that choice without compromising her financial security.
After decades of building value in your business, your exit plan and personal financial plan need to work together. The best outcome is not always the highest sale price. It is one that supports the future of the business and gives you the financial freedom to live the life you have worked towards.
