Are EOTS a silver bullet or shot in the foot for consultancies?
Employee ownership models are continuing to grow in popularity across the UK economy. Roger Esler, corporate finance and M&A partner at Dow Schofield Watts, explores how Employee Ownership Trusts can offer consultancy owners a tax-efficient and culturally aligned succession route, but also why, without the right conditions, they risk constraining growth, value and incentives.
There has been a dramatic surge in the number of private businesses sold to Employee Ownership Trusts (EOTs) since 2020, with transactions more than doubling in three years. This has been fuelled by higher Capital Gains Tax rates and less generous capital tax reliefs, coupled with business owners looking for exits in a climate of rising tax burdens and economic uncertainty.
In some quarters, EOTs are pitched as the neatest possible solution: low transaction risk, low cost, tax free and a way to keep a business independent. Yet, for consultancy owners, the reality is more nuanced. The consultancy sector is seeing growing consolidation by private equity (PE) investors alongside the continued launch of boutiques, so there is no shortage of succession and capital release options for owners.
Before rushing to bank the tax benefits of an EOT, owners need to ask whether the model really fits the dynamics of a consultancy firm - or whether they risk locking into a structure that restricts growth, talent incentives and exit flexibility.
What is an EOT?
An EOT involves selling at least 51% of a company’s shares at market value into a trust for the benefit of all employees. Owners receive consideration in cash and deferred payments, while benefitting from full exemption from Capital Gains Tax and Income Tax.
Employees can share in modest tax-free bonuses, and once the deferred payments are cleared, are beneficial owners of the business through the trust. For consultancy firms with engaged staff and strong cash flow, that can sound appealing. But the sector’s people-heavy business model and partnership-style structures bring nuances that must not be ignored.
What’s in it for consultancy owners?
The headline benefit is that owners escape tax entirely on the transaction, preserving their legacy in a UK-owned business. In theory, employees feel more invested and productivity rises. Owners may also keep a minority stake, benefitting if the consultancy grows.
For consultancies, there are several situations where this structure can be a genuine silver bullet. Firms with flatter hierarchies and a collegiate culture can use an EOT to reinforce independence and collaboration. Where client relationships depend on continuity, an EOT reassures that the firm will not suddenly be flipped to a competitor or absorbed by an international group. For founders struggling with succession, it offers a structured path without the pressure of an immediate external sale. And in smaller boutiques, where each consultant can clearly see their impact on the value of the firm, shared ownership can be a powerful motivator.
When consultancies don’t fit the mould
But due to the long-term nature of EOTs, they can sit awkwardly with consultancy models. Deferred payments take years to clear, and a recent HMRC rule change means selling within four years unwinds the tax relief. Former owners also cannot retain control of either the board or trust.
EOTs tend to work best for businesses that are cash generative, stable and have low staff churn, clear emerging leaders and a culture of employee interaction. While some consultancies tick those boxes, many are pyramidal in structure, with senior partners at the top and high staff turnover further down. In those cases, aligning incentives through direct ownership or options is often more effective.
Why EOTs don’t always work for consulting talent
EOTs are also structurally tax inefficient for employees if the business is eventually sold. The trust pays Capital Gains Tax on the original sale and then employees pay Income Tax and NICs on distributions. For consultants used to performance-related pay and, at senior levels, equity-style upside, this can feel like a very diluted reward system.
Firms with a more mobile workforce also face challenges, for example, many consultants will have moved on before the trust generates any tangible benefit. That can undermine morale rather than enhancing it. For senior teams, a management buyout (MBO) or PE-backed equity structure usually offers clearer incentives.
So are alternative routes a better option?
For consultancy owners, the CGT liability of an MBO may be offset by significantly higher upfront cash. PE funds are actively acquiring consultancies to build platforms, while lenders typically view MBOs as cleaner, more transparent structures than EOTs. Equity participation schemes can also be tailored to reward and retain star consultants who might otherwise leave if the incentive structure feels too flat. Growth capital for expansion or acquisition is core to PE and difficult to access for EOT owned businesses.
If succession is not evident internally, a trade sale to a strategic buyer can also maximise value, reflecting synergies. In today’s market, where larger consulting groups are buying niche firms to fill capability gaps, that can mean premium valuations. Unlike an EOT, such transactions can be staggered or partial, giving owners more flexibility.
Future refinancing risks for consultancy firms
Some EOT-owned businesses thrive long term. Others face challenges as growth stalls or valuations dip. Deferred payments may drag on, refinancing can prove difficult and new investment for acquisitions or international expansion may be harder to raise.
For consultancies, where growth is often driven by scaling teams or expanding geographically, this kind of financing flexibility is vital. An EOT can leave the firm hamstrung if additional capital is needed to compete.
Why consultancy buyers tread carefully
As more EOT-owned businesses approach refinancing or sale, buyers are still unfamiliar with the structures. In the consultancy space, concerns may include how to handle warranties, whether insurance is required and how to ensure employees remain motivated after receiving proceeds.
These issues add friction to M&A processes that are already people dependent. Buyers tend to prefer straightforward equity structures with committed management teams over trust-based ownership.
Avoiding a shot in the foot
EOTs have their place. For the right consultancy - stable, cash-rich, with clear leadership succession and a culture ready to embrace collective ownership - they can offer continuity and a tax-efficient outcome for founders. In smaller boutiques, they can also serve as a powerful differentiator in attracting and retaining talent.
But they are not a silver bullet for all. They are restrictive, long-term structures that demand careful planning and communication. For consultancy owners dazzled by the promise of zero tax, the risk is that the deal ends up limiting shareholder value, constraining growth, weakening talent incentives and making future exits more complex.
In a sector where PE appetite, strategic trade consolidation and boutique launches all offer alternative routes, an EOT should only ever be the result of a balanced, impartial review - not the default choice. For some consultancies, it may indeed be the silver bullet. For others, it could prove to be a costly shot in the foot.
