I recently heard an accountant expressing concern about Employee Ownership Trusts (EOTs).
He had helped several clients sell to an EOT, but felt that they had not worked out particularly well. There had been a culture clash, he had reported, especially after some of the employees present at the time of the sale had left.
This is rather like leaving your front door open and wondering why the dog has run away.
Who Needs Most Help
For a transition to an EOT to be successful post sale, you need to prepare pre sale. You need to unlock the potential that employee ownership offers. This potential doesn’t come from the owner, as they are the ones who are leaving and handing over control (at least they should be).
The potential from employee ownership lies with the employees.
Accountants and solicitors advise the owner. The tax structure and the legal framework, rewriting company documentation, how to protect the owner if things go wrong, and so on.
What is also needed is advice on the employees. But this is not something that accountants and solicitors can provide.
Why Does This Matter?
Most owners selling to an EOT are in doing so at least in part to see their businesses continue beyond them. Legacy is a common factor in choosing the EOT; looking after employees and looking after clients.
There is one entirely selfish reason, however, that owners should not just take advice about their own needs: their earnout will be coming from the future profit of the business.
In this case, the outcomes that the accountant described are entirely predictable, as they are what so often happens when you only take advice on the EOT deal from an accountant and a solicitor.
How Could This Be Avoided
There are many aspects to the transition of a business for sale to EOT. The comments made by the accountant give us a hint as to what was not done in these companies.
The fact that some of the employees present at the time of the sale have already left suggests that the messaging may have been focussed on the benefits of the business, rather than the benefits to the employees.
Another explanation might be that the owners continue controlling the business post sale. The employees hear that they are now (indirect) owners of the business, but then nothing changes; no control is handed over. Disillusionment sets in; people leave.
Possibly the repayment period was short, allowing the owner to take most or all of the profit in the early years, but leaving little for distribution to employees. Having been promised profit share, none arrives; people leave.
The mention of a culture clash suggests that the culture may not have been defined. What is the purpose of the business (what we at the Eternal Business Consultancy call ‘the flag’)? Has it been clearly communicated; have the employees been involved in bringing it to life within the business?
What is the induction process, and does it include time spent on The Flag? Were behaviours that align with The Flag fully explored with all employees, both initially and on an ongoing basis. This might explain the culture clash.
We might look at the governance structure, in particular the trustees. Do they include an independent trustee? Do the employees feel represented on the trustee board? Is the owner, or a friend of the owner, a trustee, and if so is there a time limit to their tenure?
These are just a few of the areas that need to be worked on prior to the sale to an EOT, and which might have prevented the problems described by the accountant.