“If the only reason for doing an EOT transaction is that you are attracted by the tax-free element, you’re probably doing it for the wrong reasons,” – Paul Hickey, former group finance director at McGee.
The Employee Ownership Trust (EOT) model is a relatively new concept that has only recently begun to gain greater popularity among predominantly family-owned and operated construction companies, who are seeking a way to keep their businesses trading long after they step aside, while preserving its unique culture and values and serving its incumbent stakeholders.
The initiative was first introduced into UK tax law in 2014 by the coalition government in power at the time, allowing the owners of a construction company to transfer a controlling interest in their business to the workforce, without the burden of paying capital gains tax. And despite changes to the legislation announced in the Autumn Budget last year, the principle remains broadly the same today: owners sell the business to the EOT, debt free, and in return they receive a payment in two separate tranches – the first upon completion of the transaction itself, with the remainder deferred over sometimes many years and subject to the performance of the company over that period.
The longevity of a construction company and its financial health over the course of its lifecycle is a perennial (if not daily) concern for many business owners in the sector who do not belong to a large group or corporation – and so it is perhaps unsurprising that more among them are nowadays seriously considering the EOT model as a viable option for the future of their businesses and employees’ welfare, as it contains within it the dream of enjoying the success of one’s legacy long after it has passed through the hands of the founders.
And while curiosity about its benefaction blooms, perhaps now is the right time to fully explore how it works, what are the pitfalls and benefits of an EOT, what type of construction businesses are making a success of it, and what are the financial risks and rewards. To quote Paul Hickey, who has experience with four EOT transactions to date, and is the former group finance director at McGee, “If the only reason for doing an EOT transaction is that you are attracted by the tax-free element, you’re probably doing it for the wrong reasons.”
A natural exit strategy
“The policy objective was for employees to have a stake in their own businesses,” says Hickey. “And in some ways [the EOT] mirrored the Thatcher era generation of home ownership. There are perhaps three key things that make an EOT different than other transactions: it’s governed by a legislative framework, so it’s only available to trading businesses; as an owner, you can be involved in the business in exactly the same way after the sale as the day before; and thirdly, there is no debt on the balance sheet of the company – the EOT only has an obligation [to pay out to the former owners] to the extent that it receives dividends or capital contributions from the trading business. If it doesn’t get those contributions, it cannot pay.
“I think they’re gaining traction simply because people are becoming more familiar with the concept. EOTs have been here since 2014, [owners] see it as a natural exit strategy for family-owned businesses, beside a [Management Buyout]. They’ve built their business over decades of toil and sweat, put every living minute into them, and they’ve been on that journey with people that they’ve worked with very closely. They can see, if they sell to a third party, the culture of that business gets decimated or not respected. The EOT is a ‘friendly’ structure in the sense you can have the same role the day after the transaction as before. Owners are looking at managing their exit, they still want to be involved, and have valuable contributions to make, culturally and in every other way.”
Paul Reidy, head of construction banking at Arbuthnot Latham, agreed that while the EOT model is potentially viewed by many in the industry as a “tax friendly” option for certain construction businesses, it is also a “hugely personal and highly emotional transaction”, given the type of companies that typically opt in, for example a family-owned and run contractor. An EOT, Reidy said, echoing Hickey, can provide such a business with a clear succession plan, which allows the original owners to remain involved if they wish, while transferring the next phase of growth to a trusted group known to the company.
A lack of understanding
Reidy also addressed the question of how significant, or indeed relevant, is the growing popularity of Employee Ownership Trusts and the increasing number of insolvencies in the UK construction sector. In the 12 months to March this year, 4,111 construction firms went under, the highest of any sector in the UK, with more than half (54 per cent) of those identified as specialist subcontractors. “I think the fact they are EOT companies has little to do with it,” urged Reidy. “We can name plenty of companies that went into administration that weren’t EOT companies. I do get a bit frustrated with the commentary in some of the construction publications where they kind of allude to ‘another EOT’, when realistically the fact they were an EOT structure was little to do with them going under.”
Hickey added: “The common feature around insolvency is not whether you’re an EOT business, or whatever your ownership structure is. There is a lack of understanding in the broader stakeholder market about EOT structures, how they work, and I think people sometimes take a shortcut to say, ‘EOT, insolvency – one equals the other’. What makes great businesses, is great people and great leadership. We’ve all been in the industry long enough to see the peaks and the troughs, and you must manage through that. To me, [EOT is] a fantastic model to drive alignment across the piste – for employees, senior leaders and former owners. Everybody has the same common purpose: the former owner wants to get paid out, therefore, logically, they shouldn’t be putting the business under stress. They get paid out by nurturing and rewarding the leadership, so there’s alignment around performance and reward. If you can align the calculation of that [tax-free] bonus pool to the delivery of profit in the business, and commit to put aside a percentage of profit every year […] so the employees can see, through their endeavours, the business is making more money and as a result they receive a bigger EOT bonus […], you can replace that ‘discretionary nature of reward’ in the construction sector.”
Reidy was quick to urge those construction businesses thinking about implementing an EOT transaction that the quality and calibre of the advisory firms they appoint to provide counsel on accounting, insurance & tax due diligence, and structuring, should be high, with demonstrable expertise and experience in these areas in construction finance, particularly as the popularity of the EOT model continues to increase and therefore more expert advisers potentially come into the market over time. Putting aside the tax-free element for a moment, Hickey, who was also divisional finance director at Skanska UK, and before that spent almost 18 years at John Sisk & Son, also as financial director, added that when considering the EOT structure for the future of a construction company, owners should be focused on protecting and preserving the unique culture of their business; on having open, respectful and honest communication with their employees about what the EOT pertains and how it will affect them; a sincere acknowledgment of good leadership and management within the business by rewarding them with fair compensation as well as assurances; and, by arriving at a fair and realistic valuation of the company and a reasonable timescale for completing the EOT transaction – thus generating the higher likelihood of a mutual positive outcome for the former owners, the new leadership, and the employees.
Source: Construction Wave CFO Summit 2025.
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