By Chris Budd…
Life is all about risk, and the management thereof.
Going back centuries, this risk was about staying alive. Now that we have eradicated or kept separate our natural predators, the word risk these days tends to be most associated with money.
For a business owner, risk is something you learn to live with. The first few years of my business, Ovation Finance, were a daily struggle with whether the business was even going to continue to exist.
Over time, risk becomes something you get used to. I learnt techniques to help me sleep at night, and as the business grows slowly the risk, hopefully, reduces.
And then one day you come to think about selling the business, and suddenly risk is once again at the top of the agenda.
For those lucky (or sensible) enough to have extracted profit along the way and stocked up their pension funds, the sale of the business involves the risk of it not continuing.
For many others, however, sale is the risk of not cashing in the one asset that you spent your entire life investing into.
Given this, it is understandable that an owner would want as much control as possible over the process.
Unfortunately, for most types of business sale, control is the one thing you do not have. Sales to a third-party are almost always on an earnout basis. Common structures might be a third of the value upfront, a third after one year, and the final third after another year.
Whether the second and third payments come through in full, or even at all, will depend upon a whole series of criteria, for example whether clients are retained. For a company that is bought and absorbed into another company, the owner has little or no control over the ongoing service, and therefore little ability to influence whether those clients are retained and they get paid.
The next risk to the business is the owner themselves. Are they the most important person in the business? If so, will the business struggle if they were to leave?
An owner, and especially a founder, wields huge influence over the business, usually far beyond what they realise. Whilst this is a wonderful thing, it is also a major problem if the owner wishes to sell or leave.
The process of weaning the business off the owner (and, for that matter, weaning the owner from the business) is at the heart of de-risking the business.
This process of de-risking takes time. For a business which is entirely dependent upon its owner, we could be talking many years. For a business which the owner has already empowered his employees, has good processes and a clear sense of purpose, it will still take at least a year or two for the owners to be able to fully walk away.
The Employee Ownership Trust (EOT) is the ideal vehicle to allow this to continue beyond the owner. As the business continues but with the employees in control, via the trust, the owner has the ability to remain on the board and therefore oversee the business as it continues as well as allowing oversight over their future payments for the sale price.