Employee Ownership Trusts (EOTs) are a brilliant succession option. They let founders transfer ownership to employees in a tax-efficient way while keeping the company’s culture and long-term vision front and centre. Those benefits don’t mean the valuation can be relaxed. If HMRC reviews your EOT, they’ll expect the price to hold up exactly as it would in a competitive trade sale. You must get Employee Ownership Trust valuations right, or you could pay later.
Where EOT valuations can slip
- Stretchy growth stories. Ambitious forecasts are great, but they need evidence. Without a track record, sector data, or contracted revenue to back them up, HMRC may view the price as inflated.
- Skipping the benchmarks. Robust sector analysis and relevant transaction comparables are essential. Without them, a valuation can look arbitrary.
- Using the wrong multiples. Lifting an EBITDA multiple from the wrong peer group – or baking in “strategic premiums” from trade deals – pushes values out of step with the market.
- Not adjusting for risk. Trade buyers may pay for synergies an EOT won’t realise. If you don’t strip those out, you overstate fair market value.
- Messy EBITDA adjustments. “Adjusted EBITDA” should exclude one-offs, owner remuneration distortions, and non-commercial items. Miss them and you multiply the wrong base leading to over or undervaluation.
- No external sense-check. In a trade sale, a buyer pressure-tests assumptions. In an EOT, that discipline isn’t automatic. Over-optimism can jeopardise CGT relief for sellers and repayment capacity for the business.
The HMRC standard
HMRC’s benchmark is market value—the price a willing buyer and seller would agree at arm’s length, acting knowledgeably and without pressure.
In practice, your valuation should:
- Apply recognised methods. Relevant transaction comps, listed-company multiples (with sensible discounts), cash-flow analysis where appropriate, and properly adjusted EBITDA—triangulated and cross-checked.
- Be evidence-led. Support every key input – growth, margins, risk – with data: historic performance, sector reports, analyst commentary, and deal databases.
- Withstand challenge. An independent valuer should land in a similar range.
- Be clearly documented. Report as if for a trade sale – transparent methodology, reasoning, and sources.
Why it matters
If an EOT valuation isn’t at market value, HMRC can:
- Deny Capital Gains Tax relief
- Impose additional tax liabilities on the seller
- Levy penalties for incorrect returns
Given the stakes, trade-sale-level rigour isn’t optional, it’s essential.
Best-practice approach
The strongest EOT valuations balance ambition with achievability, and great advisers help you strike that balance. A well-run process will:
- Deliver a fair, defensible price that reflects genuine market value.
- Rest on realistic, evidence-based forecasts the business can hit without strain.
- Motivate employees with challenging but achievable targets that build shared purpose.
- Protect cash flow, so the company can meet vendor repayments and keep investing for growth.
Done well, an EOT valuation is more than compliance, it’s a strategic handover plan. It gives sellers confidence they’ll be paid, gives employees a clear success pathway, and gives HMRC comfort that the deal reflects true market value.
Final thought
EOTs are an excellent route to ownership succession, but they’re not a shortcut around valuation discipline. A robust, defensible valuation protects everyone – sellers, employees, and the long-term reputation of the EOT model.
Thinking about an EOT? Get expert guidance first. Email Partner Geoff Pinder to discuss your options.