Selling your business to an Employee Ownership Trust (EOT) offers the chance to secure your legacy, reward your staff, and get a decent payout for yourself too. But one concern for founders is cost. How much will the process actually set you back? It’s important to understand both the obvious and hidden costs involved, so you can budget realistically and avoid nasty surprises.
Transaction vs transition
Before drilling into the different costs of an EOT, it important to understand the distinction between these elements of an EOT sale:
Transaction. The technical bits. Dealing with the accounting, tax and legal requirements of the sale. This is Go EO’s specialism.
Transition. The human side. This is the wider journey of the business moving from founder-led to employee ownership. It can include support with for you personally, as well as for your business. Your adviser(s) supports you across a wide range of areas, from communication to leadership.
Stamp duty
Not always mentioned during discussions about EOTs, but stamp duty can be a significant cost in your EOT transaction. In percentage terms, it’s small – 0.5% of the sale price. But do be aware it’s payable within a few weeks of completion, and is based on the full sale price (even though you’ll be paid over multiple years to follow). So definitely bear this in mind when considering your cash flow projections.
Adviser fees
An EOT involves more than a legal and financial transaction. Alongside the technical details, there are personal, leadership, and communication changes that have a huge impact on the success of the transition.
Your advisers will support you through the wider aspects of the transition. They can help to guide you and the business through the change, and work with you to prepare for life post-sale. Every business is different, which means every EOT sale is different. Your adviser will provide a bespoke service that suits your situation.
We work closely with your adviser throughout the transaction, providing a streamlined EOT sale process, while they lead the wider transition.
Capital Gains Tax (CGT)
If you meet the criteria, CGT is only payable on 50% of the EOT sale price, typically leading to an effective 12% CGT rate on the sale. CGT is due by 31 January following the end of the tax year in which the sale completes. Depending on when your EOT sale completes, this can mean anywhere from 10 to 22 months between completion and when the tax is payable.
It’s important to plan for this, as EOT sale proceeds are usually paid over several years (often five years plus). This means that in many cases, CGT may be payable before you’ve received a large proportion of the sale proceeds.
Where payments are spread over more than 18 months, it may be possible to apply to pay CGT in instalments. This isn’t automatic, depends on your individual circumstances, and isn’t always desirable.
CGT is a personal tax matter, not payable by the business, so it’s not something Go EO get directly involved with. Discuss your position with your accountant, tax adviser or professional partner to ensure you know what’s payable and when.
Calculate the CGT on your EOT sale
Trustee and governance setup
Once the sale completes, the EOT must be properly established and governed. Costs here include appointing trustees (which may involve paying independent trustees a fee), holding meetings, and setting up reporting systems. These costs are often overlooked, but they are important for ensuring compliance and building staff confidence in the new ownership structure. They’re also generally “ongoing” costs, rather than “one off” costs of the transaction.
Financing costs
Most EOTs are vendor financed. This means there is no formal financing in place, so there won’t be any associated costs. This isn’t always the case though, so if you do seek external funding to pay for the shares, ensure you factor in costs relating to this.
Accounting costs post sale
Ignoring transaction costs, you may find your accountancy fees increase a little post sale. Three potential areas for this:
- Payroll – the profit share payments (as/when made) may require some manipulation of your payroll software to ensure the first £3,600 per tax year per employee is tax free (but not NIC free), and anything above that is fully taxable.
- Trustee company – whilst this company should remain dormant, it will require an annual confirmation statement and dormant accounts. Neither are big jobs, but they’re still little extra tasks the accountant didn’t have to do before.
- Lack of familiarity – this shouldn’t necessarily lead to increased fees, but not all accountants fully understand how EOTs work. Things like how to treat the deferred consideration payments and profit share payments in your trading company’s accounts, what impact these have on corporation tax etc.
None of the above are individually huge, so they shouldn’t lead to vast increases in fees. But it’s not unreasonable for your accountant to charge a little more, as your affairs have become more complex.
As a broad guide, the transaction side of an EOT sale starts at around £10,000. This covers the core technical work required to complete the sale, including the accounting, tax, legal documents and setting up the trust. The final cost of the transaction will depend on the size, complexity and share structure of your business. More complex arrangements will require additional work and may increase the overall cost.
The transition costs will also vary depending on the level of support and length of time your adviser works with you and your business. Your adviser will work with you to develop the right approach and develop the level of support that suits your situation.
Conclusion
The total cost of an EOT sale varies depending on the size and complexity of your business, and the advisers you choose. At a minimum, you should expect to budget for professional fees covering business advice, valuation, tax clearance, and legal documents, plus governance and trustee costs after completion. By approaching the process with eyes open, you can avoid surprises and ensure your EOT delivers value for you and your employees alike.