Friday 26th June has been designated employee ownership day. It is a day for celebrating everything about Employee Ownership.
For my contribution, I thought I would provide a brief summary of why I think the Employee Ownership Trust (EOT) is the ideal exit for many owners.
Which businesses is the EOT best suited for?
Not every business – or business owner – is suited to selling to an EOT.
In my experience, however, many are. In particular, the EOT would actually work for many who think that it wouldn’t (or have been advised that it wouldn’t).
The sale to an EOT gives an owner:
- A fair market value for the business
- The business continue as a legacy
- Employees looked after
The EOT should therefore be considered by any owner who wishes to achieve all of the above.
This can work for any business, however it is strongly advised that the business is prepared. And this gives us a clue as to which businesses the EOT is best suited for.
What does selling to an EOT entail?
Under an EOT, the shares are bought by a trust, and the future profit is used to pay the owner. Once the owner’s payment has been made each year, any excess profit is distributed amongst employees.
Once the owner is fully paid, all profit each year is distributed to the employees. Think John Lewis.
That’s it, in a nutshell. There are many technicalities, but the important principle is that the employees are beneficial owners of the business.
The motivation that this provides is very powerful. However, it takes time both for employees to become fully engaged with the business, and for owners to create the environment that allows this to happen.
Who does the EOT not suit
There is one key aspect to the sale to an EOT, which is that the business pays the owner from cash reserves and future profit. In this way, it is no different from many management buyouts and trade sales (if you take into account warranties).
In order for the owner to feel able to leave the business and see it continue, therefore, the business needs to be prepared. So, for that matter, does the owner!
We always advise owners to try and leave at least two years before they begin to consider the EOT to an expected date of leaving.
People who should not consider the EOT, therefore, might include:
- Owners who need a quick sale
- Businesses with, say, less than 10 employees
And that’s about it.
If you have been advised that the EOT is not for you, and you do not fall into one of those two categories, I would recommend you take a second opinion.
How We Help
We can provide advice to owners on the EOT. This can be in person, or via our online programme.
The Eternal Business Programme takes the principles of the Eternal Business book and goes much, much deeper. It provides a complete pathway for the owner and the business to prepare for the sale to the EOT.