A guide for Trustees of an EOT - financing employee ownership

This guide is designed for those considering or who have recently set up an Employee Ownership Trust (EOT) for their organisation. It is primarily aimed at Trustees of the EOT to provide them with an overview of their responsibilities as Trustees, the key financing considerations to the successful implementation and ongoing management of the EOT, and to provide some guidance on how best to communicate this to employees across the business. However, it is useful to anyone involved in an employee-owned organisation to understand some of the financial intricacies of employee ownership.

Within the guide, we do not just discuss the financing aspects of employee ownership, we begin by reaffirming the roles and responsibilities of Trustees to ensuring the company operates in the best interests of the employees.

These include involvement and approval of:

• Decisions off course from the approved business plan
• Proposed M&A activity
• The appointment of key senior personnel or changes to senior employees’ terms of employment
• Approval of annual accounts
• Approval of annual budgets and business plans
• Approval of any expenditure.

In terms of their financial responsibilities, these include timely repayment of vendor loans for share purchases and defining the structure of employee bonuses, among others.

There are both financial and non-financial benefits realised by EOTs. On an individual employee basis, employees can benefit from an annual bonus (of up to £3,600) plus the proceeds in an exit event (e.g., future sale), provided they are still employed by the business at the time of exit. Regarding non-financial benefits, these will vary depending on the business and the circumstance. In our experience these include, first and foremost, the positive impact that employee ownership has on culture, closely followed by the positive impact that improved employee voice can have.

It is also powerful to engage with employees with updates on performance and achievement of strategic goals. Ensuring that this is communicated effectively is very important to the success of employee-owned business. Within the e-book we provide further guidance on how growth can be best communicated for all involved.

Financing an EOT

When it comes to financing an EOT, most EOT transactions include an element of cash consideration and usually not an insignificant amount of vendor loan. The vendor loan is generally a good option and can provide great flexibility in comparison to commercial loans, albeit it should still be structured on commercial terms. A bank may also lend money to the business to enable contributions to the EOT to fund the acquisition – we discuss this in further detail within the e-book.

Above all else, it is vital that the Trustee Board of the EOT and the Executive Board of the company are clear and set expectations and governance around how and when any loan will be repaid.

The e-book was created August 2021. The e-book and article were reviewed 19 March 2024.