How is an employee ownership trust valued?
There is no buyer to negotiate with, but there is a trustee with a legal duty not to overpay. Here is how the number is actually reached.
An EOT sale has no buyer negotiating the price down. That sounds like an advantage until you understand what replaces it: a trustee with a legal duty to the employees, and a statutory requirement not to overpay.
The price is not whatever you would like it to be, and since 30 October 2024 that is a matter of law rather than good practice.
The requirement
Trustees must take reasonable steps to ensure the consideration paid for the shares does not exceed market value. The legislation does not prescribe a particular form of report, but in practice a trustee managing their own risk will want an independent valuation review before committing.
Getting it wrong matters twice. It is a breach of the trustees’ duty, and an overvalue risks the conditions of the regime, which brings the clawback into play.
Why the trustee is not on your side
Not hostile, but not aligned either. The trustee acts for the employees. Paying you more means the company carries a larger debt for longer, which reduces what can be invested in the business and what can be paid out as bonuses.
So the trustee has a genuine interest in the price being right rather than generous. That is the tension that replaces a buyer’s negotiation, and it is why the valuation has to stand up on its own terms.
How the number is actually reached
The same way as any other trading business.
- Start with adjusted earnings. Usually adjusted EBITDA, with the owner’s remuneration normalised to what a replacement would cost rather than added back in full. Our adjusted EBITDA calculator works through this.
- Apply a multiple. Based on the sector, the size of the earnings, and the specific risk profile of the business.
- Adjust for cash and debt. Surplus cash added, borrowing deducted, working capital normalised.
The valuation calculator will give you a range and show which factors are driving it.
Why an EOT valuation is usually lower than a trade sale
Three reasons, and none of them is anyone being difficult.
No strategic premium. A trade buyer may pay for synergies, for your customer list, or to remove a competitor. A trust has no synergies. It is buying the business on its own merits.
Affordability constrains the price. The trust pays out of future profits. A price the business cannot service is not a price, however well supported by a multiple.
The owner is leaving control. Any valuation has to reflect a business that will be run without you, which is the same discount a careful trade buyer would apply.
A rough expectation: an EOT price often lands somewhere at or a little below what a financial buyer would pay, and below what a strategic trade buyer with a real reason to want it would pay.
Where an EOT price usually sits
Same business, three different buyers.
Affordability is part of the valuation, not separate from it
The question is not only what is this worth. It is what can this business pay, over what period, while still funding itself.
Take post tax profit, take off what the business genuinely needs for capital expenditure and growth, take off debt service, and what is left is the annual capacity to pay you. If the resulting payment period runs beyond seven or eight years, the price needs to come down or the structure needs rethinking.
Owners sometimes push for a higher headline figure and then find the payment period stretches so far that the present value is worse than a lower price paid faster. That trade is worth modelling rather than assuming.
What strengthens your position
- Three years of clean, consistent management accounts
- An adjustment schedule that is documented rather than asserted
- Contracted or recurring revenue rather than one off project work
- A management team already running the business day to day
- No single customer carrying a large share of revenue
- Capital expenditure that has actually been made rather than deferred
These are the same things that move a multiple on any sale. The difference is that on an EOT they also determine whether the business can afford to pay you, so they count twice.
Getting it right
An independent valuation protects everybody: the trustees from breaching their duty, the employees from a business loaded with debt it cannot service, and you from a disqualifying event that withdraws your tax relief years later.
We prepare the valuation and the affordability model, and work alongside a legal practice and an accountancy firm so the trustee review, the clearances and the deal are handled in one place. More on the route generally on the EOT overview.
Answered.
Can I just decide what my business is worth?
No. Trustees have a statutory duty to take reasonable steps to ensure the price does not exceed market value, in force since 30 October 2024. An unsupported price risks a breach of trustee duty and the conditions of the regime, which brings the clawback into play.
Will I get less than a trade sale?
Usually somewhat less, because there is no strategic premium and the price is constrained by what the business can afford to pay out of future profits. Where no strategic buyer exists the difference can be small.
Who pays for the valuation?
Typically the company, as part of the transaction costs. The trustee may want their own independent review of it, which is normal and worth expecting rather than resisting.
What if the trustee disagrees with the valuation?
It gets negotiated, the same as any price, but on evidence rather than appetite. A well documented valuation built on clean accounts and a defensible adjustment schedule is far harder to argue with than a number arrived at by hope.
What is it worth, and can it fund itself?
Both questions have to be answered before an EOT is a plan rather than an idea. A free valuation costs nothing.
Get a free valuation