The dos and don’ts of selling to an Employee Ownership Trust
When considering possible exit routes for your business, selling to an Employee Ownership Trust (EOT) can have several benefits, but a word of caution, this is not an exit route that can just be unilaterally imposed on your management team.
I recently met with a business owner who had decided that sale to an EOT was the best way to exit his business and apparently for the twin temptations of paying zero capital gains tax and inflating the sale price. He came up with a generous valuation, drafted transfer documents to suit his own terms and presented all of this to his team to sign without any prior discussion. This didn’t go down well and naturally the team weren’t prepared to sign anything. Thankfully this doesn’t happen often, but there are several mistakes which business owners can make if they don’t take advice on how to approach selling to an EOT.
Not all employees want to become the ‘owner’ of the business they work for. For some it will seem like too much risk or responsibility so you can’t just impose the decision upon them.
The first step needs to be an open discussion around the possibility of sale to an EOT to set out the pros and cons for the business and to give the remaining senior-employee team time to discuss the options available. The time frame for this might be weeks, months or even a couple of years before it takes place to allow everyone time to adjust and plan.
Employees need to have the support of independent legal and financial experts to help them to make informed decisions, which should be paid for by the business.
The next step is looking at what the business is worth so that there is a starting point for negotiations on price. Typically, more than one external valuation should be obtained to facilitate reaching a sensible price somewhere in the middle.
Whilst usually a significant initial payment will be made to the sellers, equally there may be significant deferred payments to be made from future profits of the business for many years after completion. The purchase price and repayment terms must be sustainable to ensure the business can continue to invest and grow.
Those employees that are interested in stepping up and taking on more responsibility need to understand what their new role will be, any legal responsibilities that go with it and how they will be rewarded with an enhanced salary and/or bonus arrangements.
In a well-run process, sellers will take real care to ensure that the senior management team will be stable and well-motivated to make a success of the business following sale, so that the agreed price can be paid in full by the business over the agreed period. There is often provision made for deferred payments to be accelerated or further deferred depending on how the business is preforming after completion.
In some businesses the culture of employees sharing in the success of the business through share ownership is embedded well before the ultimate sale to the EOT in the form of employee share option arrangements. For some owners, sale to an EOT is a continuation of this culture and allows employees to feel more empowered and more invested in the future success of the business. There are studies which suggest that in businesses where there is employee share ownership productivity tends to be higher and long-term sickness and issues around poor performance tend to reduce.
When done well a sale to an EOT can be less stressful than a traditional 3rd party sale for all parties involved as there is usually the continuity of the management team and people stay in key roles. There is continuity for customers, suppliers and other key stakeholders and there is time to adjust to the new arrangements.
Clearly this is a brief summary of the legal issues involved, so if you would like to discuss an EOT sale/purchase, get in touch to find out more.
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The dos and don’ts of selling to an Employee Ownership Trust
