Today is national employee ownership day (EO Day). Employees of companies all over the country are holding parties, picnics and other celebrations of the fact that their business is employee owned.
What is it about employee ownership that makes employees want to celebrate? And how can owners of businesses currently considering succession planning tap into this?
What is the Employee Ownership Trust (EOT)?
Some companies, such as John Lewis and Arup, have been owned by a trust fund, for the benefit of the employees, for a long time. John Lewis call their employees ‘partners’, and engagement levels at Arup are amongst the highest in their sector.
For small businesses, however, the breakthrough came in 2014 with the approval by HMRC of the EOT.
This is how it works:
- The EOT owns a controlling interest in the business (note that owners do not have to sell 100%, but 51% is the minimum to qualify as an EOT);
- The beneficiaries of the EOT are the employees of the business.
- Profits are shared with the employees (up to £3,600 p.a. free of income tax)
- As the EOT controls the business, the employees have an input into the direction of the business
This control aspect needs to be carefully nurtured. Employee owned businesses give the employees a voice, and most work hard to ensure that the employees are as engaged as possible.
It is this engagement that employee ownership brings which leads to the celebrations you see on EO Day.
Motivations of owners
There are two main reasons why business owners are becoming so keen on the idea of selling their business to an EOT. The first is that they can sell for an independently verified market value.
The second is that they can leave their business as a legacy. Other exit routes do not give this combination.
There is a third reason – the proceeds of the sale are free of capital gains tax (as long as an approved EOT is used). However, of all the owners I have spoken to, this has almost never been the driving factor.
When To Start
Like almost all business exits, the sale to the EOT does mean that the payments for the sale of the shares will come out of profits from the business that they no longer control.
It is for this reason that it is best to take time to prepare the business for the sale to the EOT. This is a process that can take several years, and therefore is best started as soon as possible.
Making An Eternal Business
Once I sold majority stake in my own business, Ovation Finance Ltd, to an EOT in March 2018, I wrote The Eternal Business book. I then turned this into an online programme, as well as speaking often on the subject at workshops, seminars and conferences.
I have therefore spoken to and/or worked with literally hundreds of businesses considering or recently sold to an EOT. Certain themes have emerged.
First is the owner who plans to start thinking about succession planning and the EOT, but ‘has a few things to sort’ out first. Virtually every time the issues they wish to sort out have actually turned out to be part of the succession planning process. The message: call me now, not later!
Then there are the many misconceptions. The most common are:
- That the EOT exit is ‘generous’ (it isn’t – the sale price is set by an independent market valuation);
- That certain business aren’t suitable (the EOT is ideal for serviced based businesses such as financial planning or solicitors as well as product sales or engineering – they all just need the right preparation)
- That the business is already in the right shape to sell to the EOT (everything changes once the announcement is made and employees learn of the plan)
- That the EOT route isn’t compatible with the ambition of the management team (as a minimum of 51% of the company is sold to the EOT, this leaves 49% for potential purchase by management team – plus the EOT can give management an exit route)
If you’d like to know more about the Employee Ownership Trust, or to discuss succession planning in general, get in touch! email@example.com