How to: Become employee-owned

An Employee Ownership Trust (EOT) is a way for employees to collectively own a business, through a trust that holds shares on their behalf. Under the EOT structure, the company’s shares are typically held by a trustee (a board), with the employees as the beneficiaries of the trust. This gives employees the ability to influence decisions and share in the company’s profits, without having to buy shares.

The key features of an EOT are:

• Employee ownership: Employees gain a stake in the company and, often, the right to influence how it’s run.
• Trust structure: A trustee holds shares on behalf of employees, with the aim of ensuring fair distribution of profits and decision-making.
• Tax advantages: Businesses that transition to an EOT can benefit from significant tax breaks, including relief on capital gains tax for owners selling their business to an EOT – and employees can receive an annual tax-free bonus.

1: The history

EOTs as a business model were introduced in the UK in 2014, but are not a novel idea.

In the UK, the John Lewis Partnership, a department store, has been run employee-owned since 1929 and is a well-known example of how the model can work. Staff are not employees, but partners in the business, entitled to a profit share and a say in the business’ future – without the need for them to invest money.

EOTs allow more businesses to transition from private ownership to employee-owned, with a stake in the business and, potentially, benefits like a sense of shared responsibility, higher productivity and increased engagement.

According to the Employee Ownership Association (EOA), there are now more than 2,000 employee-owned businesses in the UK and growth continues at a fast rate.

2: What are the benefits?

There are plenty of benefits to adopting the EOT model, for both owners and employees. Employees can benefit directly from the business’ financial success and can share in the profits, either via profit-sharing or bonuses.

But, more than this, they have a voice in the running and future of the business, leading to more engagement and involvement in the business which should lead to improved morale and sense of ownership and accountability.

For owners, the model creates an alternative exit strategy to a private sale, which can be very expensive and may not secure a business’s future in the way an EOT might.

The company can be sold to the trust without extensive and expensive negotiations with potential buyers; and it allows owners to take some tax-efficient money out of the company, leaving the values and culture of the company intact.

3: Preservation and protection

Lunya – a restaurant, bar and deli in our home town of Liverpool – provides Catalan and Spanish food and drink with friendly service across its two sites. It’s recently adopted the EOT model as Peter Kinsella, who has co-owned Lunya with his wife Elaine since it opened in 2010, sought an alternative to a private sale as they both approach retirement. In October 2024, Lunya became fully employee-owned.

“We wanted to try something different that would preserve what we had created as well as protect our staff in the long-term,” he says. “We looked around at other businesses that had gone through the process, including Riverford Organic Farmers and Aardman Animations, and thought that an EOT model could secure and preserve Lunya’s future as the much-loved establishment it has become. In doing so, we’ve become the first restaurant to go through the process. It is legally complex and expensive – although we spent in the region of £150,000 less in professional fees than if we went through a traditional private sale. But we felt the positives for us and the staff far outweighed any negatives.”

By becoming employee-owned, Peter felt Lunya’s core values would remain intact. “Our mission has always been to showcase the very best of Spanish food and drink, alongside providing the best service and quality. The new structure not only rewards the hard work and dedication of the staff but also empowers them to play a direct role in the restaurant’s continued growth and innovation as we retire gradually. Importantly, in the future, they will financially benefit from Lunya’s success.”

4: The first step

The EOT model is not right for every business and has some legal constraints – for example, under British law, owners must be long-term UK residents. The first step is a full evaluation of the financial health of the business, involving independent lawyers and accountants with relevant knowledge of the model, who make sure appropriate advice and guidance is given. It’s a process that has to consider the impact on both the business and its employees.

Once it’s confirmed that the organisation meets the criteria, then the trust is set up. Trustees must be appointed, including staff, senior managers and independent professionals. The Kinsellas transferred their shares across to the trust, so they are no longer the owners, although they do maintain some influence in the business for now, through a minority position on the EOT board.

5: Money talk

Financing the purchase of shares may prove more complex as the shares need to be bought from the owners. This can be done using company profits, loans – or both. At Lunya, the sale of the Kinsella’s shares will be funded from company cash flow and distributable profits over the next seven years or so.

“It’s not always about the money though” says Peter. “We wanted a process that meant we could receive a fair deal for our shares, which funds our retirement, whilst ensuring the continued financial success of the business. Over the next seven years or so up to our retirement, the staff will have more and more influence in the business, as we slowly step back.”

6: The people part

Getting staff buy-in is the most important part of the process. It’s essential they understand the changes, because, as owners, they will have more democratic involvement in the business. The Kinsellas found that, by starting this process way ahead of the actual transition and by being communicative, open and transparent with them, it allowed the staff the opportunity to appreciate the process. “We’re gifting Lunya to our staff, via this trust. It is a fantastic present and it is free to them,” smiles Peter. “We really wanted them to understand that. Lunya has some very long-serving staff, including one who has been here since day one.”

Ongoing communication is essential as the trustee board is formed. A staff committee is created at the same time, with a legal requirement for staff representation on the board allowing staff the say in decision-making they have been promised. It also ensures appropriate governance of the set up is maintained. The leadership team at Lunya remains the same, but now, they have more say in the day to day running of the business and its future direction.

7: Just deserts

“Becoming employee-owned brings so many benefits to Lunya and its staff,” admits Peter. “Increased employee engagement should bring better retention and recruitment, service and productivity as staff have a stake in the business now.

“We’ll be able to maintain the very culture we founded Lunya on and employees will be entitled to tax-efficient financial payouts in the future. But, more than anything, we hope that becoming employee-owned ensures Lunya’s future stability in a very challenging market.

“For now, at least, Lunya is being taken over by local people we trust to take Lunya from strength to strength in the future.”

You’ll find a flavour of Lunya’s delicacies at lunya.co.uk.