EOT Glossary
Employee Ownership Trust transactions involve a lot of technical language. This glossary explains key EOT terms in plain English so business owners and advisers can understand the practical meaning behind the jargon.
Use this page as a working reference point when reading about valuation, funding, trustees, governance, tax, process, and employee ownership.
Why this glossary matters
EOT planning often becomes confusing because owners encounter legal, tax, and governance terms that are easy to misunderstand. Words like "controlling interest," "disqualifying event," "participator fraction," and "trustee independence" can sound daunting when seen for the first time, yet understanding them is important before committing to a transaction.
A clear glossary helps owners and advisers understand the structure before making assumptions. This page is intended as a practical guide, not a substitute for professional advice.
This glossary explains terms in plain English. It is not a substitute for legal, tax, or transaction advice.
Glossary terms
Affordability
The practical ability of the business to support the EOT transaction financially over time. A valuation may look fine on paper but still be unaffordable in practice.
Read more: EOT Funding →All-employee benefit requirement
A core EOT condition requiring the trust to operate for the benefit of all eligible employees on an equitable basis, subject to the statutory rules.
Read more: EOT Tax Changes →Articles of association
The constitutional document governing how the company operates. In an EOT context, the articles may need to be reviewed or amended to reflect the new ownership structure and trustee rights.
Bonus scheme (income tax-free)
Qualifying EOT-owned companies may pay income tax-free bonuses of up to £3,600 per employee per tax year, subject to the usual conditions. National Insurance contributions still apply.
Read more: Why Consider an EOT? →Business valuation
The process of assessing what the company is worth on a market based and supportable basis for the purpose of the transaction.
Read more: EOT Valuation →Capital gains tax
The tax that may arise on the sale of shares. In an EOT context, owners should not assume the old full relief position still applies.
Read more: EOT Tax Changes →Cash generation
The ability of the business to produce surplus cash after operating costs. Strong cash generation is often essential for supporting deferred consideration and post-completion obligations.
Clawback
A mechanism introduced from 30 October 2024 under which CGT relief may be clawed back if a disqualifying event occurs within four years of the disposal.
Read more: EOT Tax Changes →Completion
The point at which the transaction legally takes effect and ownership passes into the EOT structure.
Read more: After an EOT Sale →Consideration requirement
The rule requiring trustees to take reasonable steps to ensure that the price paid for the shares does not exceed market value, and that any deferred interest stays within a reasonable commercial rate.
Controlling interest
A key EOT condition requiring the trust to hold a controlling stake in the company.
Read more: EOT Advisers →Deferred consideration
Part of the purchase price that is paid after completion rather than all at once on day one.
Read more: EOT Funding →Disqualifying event
An event that causes the EOT conditions to fail after the transaction, potentially affecting relief and creating tax consequences.
Due diligence
The investigation and verification process carried out before the transaction completes. In an EOT context, due diligence typically covers financial performance, contracts, employees, legal compliance, and any issues that could affect valuation or post-completion sustainability.
Earn-out
A mechanism where part of the purchase price depends on future business performance. Earn-outs are less common in EOT transactions but may feature where valuation and affordability need to be reconciled over time.
Employee engagement
The process of involving employees in the transition to employee ownership. Good engagement supports trust, retention, and cultural continuity after the EOT is established.
Read more: After an EOT Sale →Employee Ownership Trust
A specific type of trust that holds a controlling interest in a company for the benefit of employees as a whole.
Read more: What is an EOT? →Excluded participator
A category of person who is restricted under the EOT rules, including for limited participation and trustee independence purposes.
Feasibility review
An early-stage assessment of whether a business is likely to be a credible candidate for an EOT, covering suitability, valuation, affordability, management depth, governance, and funding.
Read more: EOT Feasibility Report →Founder transition
The process by which the owner reduces or ends day to day involvement after the EOT sale, whether immediately or over time.
Governance
The framework for how decisions are made after the transaction, including the roles of trustees, directors, employees, and any continuing founder involvement.
Read more: EOT Trustees →Heads of terms
A summary document setting out the key commercial terms of the proposed transaction before full legal documentation is prepared. Sometimes referred to as a letter of intent.
Independent trustee
A trustee who is not there simply to represent the former owner and who helps support credibility, balance, and proper governance.
Read more: EOT Trustees →Indirect EOT
A structure where the EOT holds shares in a holding company rather than the trading company directly. This is common in group structures and requires careful consideration of the qualifying conditions.
Key person risk
The commercial risk that the business depends too heavily on one individual, usually the founder. High key person risk can undermine an EOT's credibility, valuation, and long-term sustainability.
Read more: Readiness Checklist →Limited participation requirement
A rule designed to prevent too much of the benefit of the trust from being concentrated among participators and those connected with them.
Read more: EOT Tax Changes →Management depth
The strength of leadership below the founder. It is often one of the biggest practical indicators of whether an EOT is workable.
Read more: Readiness Checklist →Market value
The realistic supportable value of the shares for transaction purposes. Trustees must take reasonable steps to ensure the agreed price does not exceed it.
MBO
Short for management buyout. This is where the management team buys the business rather than ownership passing into an employee trust.
Read more: EOT vs MBO →Non-disclosure agreement
A confidentiality agreement used to protect sensitive business information during early discussions with advisers, potential trustees, or other parties involved in the EOT process.
Participator fraction
A calculation used in the EOT rules to test whether the limited participation requirement is met.
Post-completion
The period after the transaction has completed, when governance, repayment discipline, trustee effectiveness, and communication all matter.
Read more: After an EOT Sale →Reasonable commercial rate
The level of interest that may be charged on deferred consideration without exceeding what could be justified commercially.
Retention
The ability to keep key employees in place through and after the EOT transition. Employee ownership can support retention by giving staff a genuine stake in the business and its future.
Share purchase agreement
The legal contract governing the sale of shares from the owner to the EOT. It sets out the price, payment terms, warranties, completion conditions, and other key obligations on both sides.
Succession planning
The broader process of planning for ownership transition. An EOT is one succession route among several, and should be considered alongside trade sale, MBO, and other alternatives.
Read more: Exit Options →Suitability
Whether the business is genuinely appropriate for employee ownership when considering valuation, cash generation, management depth, governance, and founder objectives.
Read more: Readiness Checklist →Trade sale
The sale of a business to an external buyer, typically a competitor, strategic acquirer, or investor. Often compared with an EOT as an alternative exit route.
Read more: EOT vs Trade Sale →Trading requirement
A core EOT condition requiring the company or group to meet the relevant trading test.
Read more: EOT Advisers →Trust deed
The legal document setting out the rules of the trust, including trustee powers and how the trust is to operate.
Trustee independence requirement
A post-30 October 2024 rule requiring enough independence in the trustee body so excluded participators do not dominate or control the settlement.
Read more: EOT Trustees →Trustee residence requirement
A post-30 October 2024 rule requiring the trustees to be UK resident as a single body of persons for the relevant period.
Read more: EOT Trustees →Valuation
The process of deciding what the shares are worth on a supportable basis, taking account of performance, risk, affordability, and commercial reality.
Read more: EOT Valuation →Vendor loan note
A formal debt instrument used to document deferred consideration. The vendor effectively lends part of the purchase price back to the company or trust, to be repaid over an agreed period.
Read more: EOT Funding →Warranties
Contractual statements of fact given by the seller in the share purchase agreement. In an EOT transaction, the scope and extent of warranties may differ from a trade sale because the trust is buying from the existing owner.
Working capital
The cash and short-term assets available to run the business day to day. Adequate working capital is important after an EOT sale, particularly where deferred consideration creates ongoing financial obligations.
Related guidance
This glossary is most useful when read alongside the wider guidance on valuation, funding, trustees, process, and EOT suitability.
Talk to the Employee Ownership Experts
If you would like help understanding EOT terminology and how it applies to your business or your client's situation, we welcome confidential enquiries from owners and advisers.
Contact UsRelated EOT resources
Continue your research with our core guides on Employee Ownership Trusts.
Read the EOT 101 guide
A plain-English introduction to Employee Ownership Trusts and how they work in the UK.
Compare UK exit options
EOT, trade sale, MBO and private equity weighed up across price, speed, risk and culture.
Get an EOT feasibility report
An independent assessment of whether your business is a strong candidate for employee ownership.
Browse the EOT Insights hub
In-depth articles on valuation, funding, governance and life after an EOT transition.