​In the U.S., Employee-Owned Trusts Enter the Exit Space

By Evan Edwards, Chief Executive Officer, Project Equity

Originally published in Forbes, this article explores ideas and trends shaping the future of employee ownership. We are sharing it here as part of EO Equals’ commitment to elevating conversations that help business owners, advisors, and advocates learn about ownership-driven solutions.

​It may seem counterintuitive, but it’s never too early to plan for how you will exit the business you created. For many entrepreneurs, the dream is to hand off their business to their children. But what happens when the next generation has different plans?​

The Legacy Question

This was the challenge that one of our members faced when she considered the future of her successful swim school. Although her son had been around the business his whole life, he wanted to pursue a different career path. ​

She also knew that successful transitions require years of planning rather than just months, so as soon as she learned her son didn’t want to take over the business, she began researching her options. She was committed to making sure that her important work—teaching young children to swim can reduce their risk of drowning significantly—remained a service to the community. She also knew that to make this happen, her employees needed to remain invested in the mission and be well cared for in the process. ​

Her research introduced her to a specific form of employee ownership that ultimately benefited her, her employees and the community’s mission. Could this type of ownership help you preserve your business’s purpose and community impact?​

Employee Ownership Trust (EOT): Coming to America​

Employee ownership, through a transition to an employee stock ownership plan (ESOP), is increasingly seen as a viable M&A strategy for those looking to sell part or all of their business.

More recently, the employee ownership trust (EOT) has begun to share the spotlight, which is exactly what our member used for her business transition.

While EOTs are well-established in the U.K. and incentivized in Canada, they are relatively new in the U.S. The emergence of this business succession strategy is particularly important because roughly 6 million small and medium-sized businesses are expected to undergo ownership transitions as Baby Boomers retire in the next decade. ​

Purpose trust ownership, more broadly—including perpetual purpose trusts, employee ownership trusts, stewardship trusts, neighborhood trusts and data trusts—offers a promising exit strategy. These models can preserve business independence, support fair prices for owners and align long-term financial success with shared benefit for workers, communities and other stakeholders. ​

In the United States, however, adoption remains slow and uneven. This is not due to a lack of interest or values but rather to a field that remains fragmented, opaque and difficult to navigate and that has yet to demonstrate that purpose-trust structures can deliver competitive financial exits alongside stakeholder benefit. But they can. ​

Our team worked with the National Center for Employee Ownership to educate on the key components of an EOT, including establishing a specific type of perpetual purpose trust that acquires and holds the company’s shares. These shares are structured to benefit employees in perpetuity. With an employee ownership trust, the business is highly disincentivized from being sold, and employees benefit through profit sharing. This keeps the business intact, and employees benefit from its success while staying true to its mission. ​

Is EOT the Right Fit?

While the buzz around EOTs is growing, it is important to understand how EOTs fit into the unique values and goals for your business. And, like just about everything in business, there is no single solution that is right for every business owner. Business owners who choose an EOT as their succession model vary, but all have one thing in common: They see business as an avenue to bring value not just to their pocketbooks but also to their employees and communities.​

​How Do EOTs Compare with ESOPs?

A few things to know as you comparison shop your exit strategy to an ESOP:

EOTs typically offer lower setup costs and minimal ongoing maintenance expenses. EOTs also offer the potential of a partial sale as an on-ramp to EO; selling a portion of the business is generally easier in the EOT context. EOTs also offer flexibility in governance and can be designed to function similarly to a worker cooperative with a high level of employee participation and voice. Or EOTs can have more management-heavy boards to accommodate a variety of different cultures. EOTs can also work for a wide range of business sizes, from 10-person service provider firms to companies with thousands of employees. ​

One drawback is that EOTs do not qualify for the potentially substantial tax advantages available to ESOPs. Also, in the U.S., business owners must currently navigate a sometimes conflicting array of state rules. Many states now have employee ownership centers that can help point you to specifics in your state. Resources like the Purpose Trust Ownership Network, which two of our team members helped found, can also help.​

Transitions to EOTs in recent years, like those in Texas and Utah, promise EOT as another model to help owners sell all or part of their business—particularly for those who want to see their mission continue after their exit. With an EOT, your legacy remains with those who built it alongside you, providing a stable, permanent ownership structure. ​

​Bottom Line

Employee ownership trusts are another tool to consider when researching your business succession options. Whether you are looking to exit your business in the next few years or have just started your business, understanding your exit options now can help you find the best fit for your business.​