Aardman Animations; Riverford foods; and we can now add Richer Sounds to the list of high-profile companies which are being sold to an Employee Ownership Trust (EOT). If you missed it (it was in the Guardian, after all!), here’s the article announcing the sale.

This is great news for the employee ownership sector, as the idea of selling to an EOT gathers momentum and becomes an essential consideration as part of succession planning.

I do, however, have a few issues with the article itself. Allow me to explain.

Market valuation

Possibly because the article is in the Guardian, it is rather coy on the subject of the valuation of the business. It says that Guy Singh-Watson “gave over” shares, and David and Peter of Aardman “passed” their shares.

We need to be absolutely clear on this. When an owner sells their shares to an Employee Ownership Trust, an independent market valuation is obtained. The owner is able to sell at that valuation, or may choose to sell below.

They do not give or pass shares to the EOT. They sell their shares.

Selling to an EOT, therefore, is not something that is only for generous people, or those who are already wealthy. Selling to an EOT makes good commercial sense and is an ideal way for an owner to exit their business, realise the value and see it continue.

What is a fair price?

The article also states that Mr Richer would have “raked in” more cash if he had “hoisted a for sale sign” (again, very Guardian language!). I cannot comment about this particular deal, however, it is again important to stress that the sale to the EOT is based upon an independent market valuation.

Take the financial advice sector. Some owners have told me that they can sell the business for more, for example to a consolidator. It is true that the initial price offered may well appear to be more than the independent market valuation. However, there is one simple way of proving that that initial offer will not translate into money received: if it did, then the independent market valuation would reflect that figure!

Of course, there may be exceptions where a business is to be bought for a price higher than the market would suggest, for example, where a product provides a particularly good fit for the acquiring firm. In general, however, an independent market valuation gives exactly what it says.

Shareholders

The EOT is actually rather unfortunately named. Employees do not actually own shares. However, the term Employee Indirect Ownership Trust is not as catchy!

Whether he has been accurately quoted, I am unsure, but Mr Richer states that the employees are shareholders. In fact, employees do not own shares. This means they are not required to come up with any money in order to benefit from the future profit of the business.

I am currently involved with some academic research on employee ownership companies. One of the findings has been that the careful use of language is essential when talking to employees about the new ownership structure. For example, some employees had asked when they were going to be given their shares. Others were expecting to have a vote in business decisions, as shareholders.

The Good Stuff

The article does touch on some of the positive steps that Richer Sounds had taken. For example, Mr Richer has been preparing for this sale for the last two years. They have established clear principles for the trust, and are setting up an Employee Council.

Conclusion

There is lots to do in order to prepare a business to sell to an EOT. The biggest tip that I can give an owner who is thinking of their succession planning is: get on with it!

Set aside time in the diary, work out what you need, and then begin making the changes to the business.

The Eternal Business Consultancy was established to help owners work towards their succession plan. This can be personal consultancy, or by following the online programme. If you would like to know more about whether the EOT might be the ideal succession plan for you, get in touch.

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