By Max Fellows, Founder of allpoints
If you follow business acquisitions and succession planning, you’ve likely seen the rise of Employee Ownership Trusts (EOTs). In the event space alone, we saw a fourfold uplift in EOT transitions last year.
It’s easy to see why. Even with recent legislative changes to the tax structure, selling to an EOT remains an incredibly attractive vehicle for founders, offering highly favorable tax relief compared to the Capital Gains Tax you’d face in a traditional private sale, but as an M&A consultancy team, we are now watching these relatively young vehicles mature.
We are seeing them reach the end of their honeymoon period, and candidly, we are seeing some of them sink. Several have gone into administration over the past 10 months.
I want to make sure business owners have a well-rounded picture of the market. EOTs offer real benefits, but their success depends heavily on the quality of the advice, governance and leadership behind them, and that side of the conversation deserves more attention.
When EOTs go wrong, it usually boils down to a few critical mistakes. Here is what we are seeing in the market right now, and the warning signs you need to look out for.
The Warning Signs: How EOTs Go Wrong
1. Ambitious Valuations – Because of how EOTs are structured, owners have considerable influence over how the business is valued, typically based on net profit. A common early pitfall is setting the valuation too high. Understandably, owners want to be rewarded for what they’ve built, but an inflated price can leave the newly formed trust under financial pressure from day one.
2. Drawdowns and Cash Runway – Once the EOT is in place, outgoing owners are usually paid from company profits over three to five years. In some cases, the pace of those payments can draw heavily on the company’s reserves. A healthy business might typically hold 9 to 12 months of operating runway, while higher drawdowns can reduce that to three to six months. If the business then loses a major client, that cushion can disappear quickly and leave the company exposed.
3. Keeping Decision-Making Focused – An EOT is run through a trust, and some companies involve too many people in the decision-making structure. Rather than relying on a small, experienced leadership team of four or five, they spread governance across a much wider group, sometimes working more like a co-operative. This can slow decisions down and blur accountability.
This creates a “magpie effect”, the shiny allure of being a business owner, but holding 2% or 3% of a trust doesn’t yield the same retention or motivation as a traditional EMI scheme. More importantly, it completely dilutes decisionmaking. If the EOT ever wants to navigate an onward sale to a third party, you often need near unanimous alignment. Getting 50 people to agree on when to sell and for what price is a logistical nightmare.
4. The Illusion of Readiness – We are seeing individuals who have never run a business before suddenly thrust into ownership positions. Being a great Account Manager or Operations Director does not automatically equip someone for board-level financial strategy or business risk management. Some people aren’t made to run a business, they just want to show up and do a great job. Handing immense power to people who are entirely unprepared for it is a recipe for volatility.
5. Market volatility and timing – A business’s suitability for an EOT needs to be assessed against its exposure to market shocks. Heavy reliance on a sector such as automotive or finance, a handful of clients, or a particular geographic region can leave revenues vulnerable to forces outside its control. Where payments to the outgoing owners depend on future profits, a downturn can put pressure on both repayments and the cash needed to run the business. Timing matters: a strong trading year alone is no guarantee that the business can sustain the transition.
The Blueprint: How to Do EOTs Right
I am not anti-EOT. In fact, when done right, they are a fantastic, cost-effective way to preserve your legacy and reward your team. But there are no business decisions without risk, and EOTs require a strict, responsible framework:
- Modest Valuations: Price the business fairly so the company can actually afford to pay you out without distressing its operations.
- Leave a Protective Buffer: Manage your drawdowns. Always leave enough money in the business to comfortably handle market volatility and client losses.
- Curate the Right Trust: Keep the trust to a realistic number of people who actually possess the experience, integrity, and ambition required to sit on a board.
- Prioritise Education and Transition: You cannot just hand over the keys. Incoming leaders must be incubated. Owners have an obligation to commit to a transition period to properly groom the team, helping them understand the legalities, pressures, and limitations of their new power.
Whoever is advising businesses on EOT transitions needs to operate with a conscience. Giving poor advice or pushing a company into a poorly structured trust actively jeopardizes businesses and livelihoods.
EOTs are a brilliant tool, but founders must go into them with their eyes wide open. We need to start talking about the risks, so we can start building better trusts.