What is an Employee Ownership Trust?

Understanding the Employee Ownership Trust

An Employee Ownership Trust (EOT) is a unique ownership structure where the shares of a company are held in a trust on behalf of its employees. In simpler terms, it means that the employees become the beneficial owners of the company, usually through a buy-out of the company. This structure allows owners to transfer their business to employees with peace of mind and also aligns the interests of employees with the success of the business to empower them to actively participate in decision-making processes. This consideration becomes particularly crucial when planning your exit from the company. 

Business owners gain several benefits by transferring ownership using an  Employee Ownership Trust. Firstly, it enables owners to preserve their business’s legacy and show appreciation to their workforce. By selling shares into a trust that benefits employees, business owners can provide meaningful ownership without the need for upfront cash payments. This approach fosters a sense of enthusiastic motivation among employees, as they become both workers and part-owners with a stake in the company's success.

EOTs also help sustain a company's culture and core values by ensuring that  it remains employee-owned, allowing for tailoring  based on the company's vision and goals. Additionally, EOTs involve less regulation than other models like Employee Stock Ownership Plans (ESOPs), making them particularly suitable for small to mid-sized businesses. With trustee roles providing some oversight, EOTs facilitate business independence and longevity, while giving special consideration to employees who have dedicated many years of service to the company. 

Implementing an EOT as a part of of your business can bring a many benefits, including:

1. Increased Employee Engagement and Retention

When employees have a stake in the success of the company, they are more likely to be engaged and committed to their work. This increased sense of ownership leads to higher levels of employee satisfaction, productivity, and loyalty. In a recent 2020 study by the Rutgers School of Management and Labor Relations and the Employee Ownership Foundation it was found that employee owned companies are 3x-4x more likely to retain staff. It also helps attract top talent, as prospective employees are drawn to organizations that emphasize shared success.

2. Smooth Succession Planning

For small and medium-sized businesses, succession planning can be a challenging task. An EOT provides a structured and seamless approach to succession planning by ensuring that the ownership and management of the company remain in the hands of the trusted employees and company leaders. This stability can help mitigate any disruptions during transitions and safeguard the longevity and values of the business.

3. Get a fair Exit Price

Selling your company to an Employee Ownership Trust (EOT) can result in a fair market value price for your shares. This is achieved by an independent valuation of the business, ensuring that the price is reflective of the company's true worth. This fair and equitable transaction not only benefits you as the outgoing owner, but also sets a positive tone for the employees who will become the new beneficial owners, as it demonstrates the value and potential of the business they are now part-owners of.

4. Reduce Financial and legal liability and risk

Transferring your company to an Employee Ownership Trust significantly mitigates financial and legal risks. The risk is considerably reduced as the ownership remains within the organization, under the stewardship of committed and familiar employees. Furthermore, the legal framework around EOTs also provides a robust structure to protect the interests of both the outgoing owners and the employees, minimizing potential legal liabilities. By avoiding disruptive changes and maintaining business continuity, EOTs offer a safe, secure and risk-free approach to business succession.

5. Protecting Company Values

Business owners take pride in the culture and values that they have fostered and want to protect their legacy even when new leadership comes in. An EOT can entrust long standing managers with more agency which preserves the leadership of senior managers while providing benefits to the broader employee base. This inclusive environment nurtures a sense of belonging and pride, which ultimately strengthens the company's overall culture.

6. Affordable and Flexible Transaction

The transaction fees are considerably lower than traditional exits.Since the finances for the sale are generated from future company profits, the immediate financial burden for employees is removed. This makes the EOT model a flexible and affordable choice for both the business owner and the employees. Furthermore, a transition to an EOT can be tailored to suit the specifics of the company, allowing for a fully customized approach. 

Implementing an Employee Ownership Trust

Few decisions hold greater importance for business owners than ensuring the prosperous continuation of their company in capable hands. It's a decision that carries immense weight and importance, as the future success of the company hangs in the balance. 

An Employee Ownership Trust is an ownership structure that secures your company’s future, empowers your employees and preserves your legacy. By empowering employees and aligning their interests with the success of the company, an EOT fosters a positive work environment, smooth succession planning, and enhanced company culture. Consider exploring the possibilities of an EOT with Common Trust for your business and pay-it-forward to your employees while preserving your legacy. Check out our free EOT training here.

Learn more about Employee Ownership Trusts on our Common Trust blog and please follow us on LinkedIn for all things regarding employee ownership trusts. 

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