Understanding the Valuation Process in an EOT Sale

Selling a business to an Employee Ownership Trust (EOT) offers owners a unique combination of succession planning, employee engagement, and generous tax relief. But one of the most important steps in the process is establishing a fair valuation of the company.

Unlike a trade sale, where market competition can push up price, an EOT transaction requires an independently assessed value that balances fairness to the sellers with affordability for the business and its employees.

Why valuation matters in an EOT

The valuation of your business sets the price the trust will pay for the shares. This matters because:

• The figure must be commercially fair — HMRC requires that the price reflects open market value.

• It dictates the financing structure — how much is paid upfront, and how much is funded over time from future profits.

• It reassures employees and trustees that they are not overpaying.

• It underpins the tax relief — ensuring the deal qualifies for the 0% capital gains tax benefit.

The principles of EOT valuation

In most cases, valuation follows standard corporate finance methods. Common approaches include:

• Earnings multiples – Applying a sector-relevant multiple to sustainable profits (often EBITDA) to estimate business value.

• Discounted cash flow (DCF) – Valuing the business based on future projected cash flows, discounted to present value.

• Asset-based valuation – More relevant for asset-heavy businesses where tangible value outweighs trading performance.

Typically, a professional valuer will use a blend of these methods and adjust for the company’s sector, growth prospects, and risk profile.

What makes an EOT valuation different?

While the valuation principles are familiar, the EOT context introduces key differences:

• No competitive bidding – Unlike a trade sale, there is no auction process driving up the price. The valuation must stand independently.

• Affordability – The company itself funds the purchase price, so valuation must reflect what is realistically achievable through future profits.

• Regulatory scrutiny – HMRC expects valuations to be justifiable and evidence-based to qualify for tax relief.

• Employee fairness – The trustees have a duty to ensure employees are not disadvantaged by an inflated price.

The process step by step

1. Engage a professional valuer – Typically a corporate finance adviser or chartered accountant experienced in EOTs.

2. Review financial performance – Historic accounts and forecasts are analysed to determine sustainable profitability.

3. Benchmark sector multiples – Comparison with recent transactions and industry standards.

4. Apply valuation method(s) – Usually an EBITDA multiple adjusted for specific circumstances.

5. Agree the valuation – Presented to trustees for approval as fair and reasonable.

6. Document for HMRC – Clear evidence provided to support eligibility for the EOT tax relief.

Balancing value and achievability

One of the biggest challenges is balancing the vendor’s desire for maximum value with the company’s ability to service the debt. In practice, many EOT deals are structured with an initial payment to the seller (funded by external debt or reserves), followed by deferred payments made from future profits.

A valuation that is too aggressive risks putting strain on the business and undermining employee confidence. A realistic, evidence-based valuation creates a sustainable structure where everyone benefits.

Getting the valuation right is central to a successful EOT transition. It protects the vendor, reassures employees, and ensures HMRC approval for the valuable 0% capital gains tax relief.

At EOT.co.uk, we work with business owners to guide them through the valuation process, bringing in independent experts where required and structuring deals that are both fair and achievable.

If you are considering an EOT transition, understanding the valuation process is the first step towards a secure and successful succession. Contact Us to discuss how we can help.