Succession planning has always been one of the most challenging moments in a business owner’s journey. Traditional approaches, selling to a competitor, private equity, or internal management, often create uncertainty for both founders and employees. But with the introduction of the Employee Ownership Trust (EOT) structure in Canada, a new option has entered the landscape, one that combines tax efficiency, business continuity, and long-term employee engagement.
What is an Employee Ownership Trust (EOT)?
An Employee Ownership Trust is a special trust that holds a controlling interest (at least 50% + 1 share) of a business on behalf of its employees. Instead of employees buying shares individually, the trust itself owns the company, and employees become beneficiaries of that trust.
The model has been widely adopted in the U.K. and U.S., and Canada has now introduced its own EOT framework to support long-term, employee-centric business transitions.
At its core, an EOT is built on three principles:
- Broad employee benefit - all eligible employees participate.
- Long-term stewardship - the business operates with continuity and stability.
- Fairness and equity - profit sharing and benefits are allocated through a transparent formula.
How an EOT Works
The typical EOT transaction follows these key steps:
Step 1: The EOT Purchases the Business
The trust is formed and acquires the company’s shares—usually financed through a vendor loan, bank financing, or a combination of both.
Step 2: The Business Repays the Purchase Over Time
Instead of the new owners (employees) paying out of pocket, the company’s future profits repay the loan used to purchase the business.
This means:
- Employees do not buy shares.
- No personal financial commitment is required from staff.
- Ownership is collective and held by the trust.
Step 3: Governance is Structured for Long-Term Stability
An EOT is managed by trustees, typically including:
- A founder or former shareholder
- An employee representative
- An independent trustee
Their role is to safeguard employee interests and ensure the business operates responsibly.
Step 4: Disbursement/Sharing of Profits
Employees share in the success of the business. Because the trust owns the business on behalf of employees, profits can be shared through annual bonuses or other distribution mechanisms, allocated according to a pre-defined formula.
Why You Would Consider an EOT into Your Succession Plan?
For entrepreneurs planning an exit, EOTs offer several compelling advantages:
1. A Fair Price and a Smooth Transition
A sale to an EOT is structured around the fair market value of the business and does not require a disruptive external buyer. This ensures:
- A respectful transition
- Preservation of company culture
- Continuity of leadership and operational stability
2. Access to Significant Tax Incentives
Canadian legislation introduces a $10 million lifetime capital gains exemption (subject to criteria) for owners who sell their shares to an EOT.
This can create a more tax-efficient exit than a traditional sale.
3. Protection of Legacy
Selling to an EOT preserves:
- Jobs
- Community impact
- Business identity
- Customer and supplier relationships
Founders often value leaving their business in the hands of those who helped build it.
4. A Flexible Exit Timeline
Owners can:
- Remain in the business during the transition
- Phase out over time
- Stay involved in governance as a trustee
This avoids the pressure and abruptness often associated with other options such as selling to a larger competitor, private equity, or other typical sale transactions.
How do Employees Benefit Under an EOT
Employees do not become direct shareholders, but they become beneficiaries of the trust, which provides many advantages:
1. Profit Sharing and Annual Distributions
Employees share in the company’s financial success through distributions calculated using a transparent formula. This may include factors like:
- Hours worked
- Base salary
- Years of service
Of note - high earners cannot receive more than 10× the lowest earners’ distribution to ensure fairness, and benefits are tied to employment, not capital investment.
2. Greater Job Security
Because the EOT structure stabilizes ownership and discourages short-term asset flipping:
- Jobs are more secure
- The business is less likely to be sold to external buyers
- Employees can plan their careers with confidence
3. Voice in Governance
Employees often gain representation in:
- Trustee boards
- Workers’ councils
- Engagement committees
This gives staff a meaningful voice without the responsibility or risk of personal equity ownership.
4. A Stronger Workplace Culture
When everyone is rowing in the same direction, businesses often experience:
- Higher morale
- Increased retention
- Better productivity
- A shared sense of purpose
How EOTs Attract and Retain New and Old Employees
One of the most important features of an EOT is that it’s not a closed club. Future employees also participate.Here’s how it works:
1. Eligibility is Based on Clear, Objective Criteria
Most trusts use criteria like:
- Minimum service period (e.g., six months or one year)
- Employment status (full-time or part-time)
- Exclusion of major shareholders or “connected persons”
2. New Employees Become Beneficiaries Automatically
Once eligibility requirements are met, new employees are automatically added to the beneficiary list. They do not buy in, and they do not invest capital.
3. Their Allocations Grow Over Time
New employees begin earning distributions using the same formula as existing employees. Over time, their share increases based on:
- Tenure
- Hours worked
- Role or salary (depending on the formula chosen)
It goes without saying that those who leave the company, they will no longer receive distributions, preserving fairness for the current workforce.
In summary
EOTs offer a unique combination of benefits that traditional exit strategies often cannot match, the greatest and most compelling is the tax efficient exit for the founders, a new structure that shares prosperity of the business for all employees, both new and old.
So, for business owners looking to exit while preserving their legacy, and for employees eager to share in the success they help create, EOTs represent an option worth exploring. Keep in mind, the $10MM capital gains exemption will no longer apply to businesses transferred/sold after December 31, 2026.
