The Disappearing Boss - Issue 31

If you want your team to behave more like owners, make them owners.

I’m a firm believer in fairness and equity. So it should come as no surprise that I like the idea of employee-owned businesses.

In fact, I’d now go so far as to suggest that if you’re thinking about increasing employee responsibility and accountability, some form of meaningful ownership should go along with that.

Otherwise, you just won’t get the buy-in you want.

But there are different way to give ‘ownership’, ranging from full-on worker-owned co-operatives to simple profit-sharing schemes, and even performance-related pay.

So how do you choose?

Well, one form of employee ownership that has become increasingly popular, especially among professional service business, is a thing called an Employee Ownership Trust. Usually referred to as simply EOT.

I’m by no means an EOT expert, which is why I had a chat with Chris Maslin of Go EO , who I first met when he was running his own accountancy business. In 2021, after 12 years at the helm, Chris sold a controlling stake to an Employee Ownership Trust.

Chris now helps other small businesses (typically 5-25 employees) do the same, simply and affordably.

In this newsletter, I recap our conversation:

Kirsten: So, why would a business owner consider an Employee Ownership Trust?

Chris: Most business owners will want to sell their shares at some point. That may be due to age or ill-health, you can’t lead it any more. Perhaps you’re bored and fancy a change. Or maybe you still want to lead the business but change the ownership structure, cashing in on what you’ve built to date. The options open to you are:

• A Trade Sale, where you sell to an independent third party.?? Perhaps a larger competitor.?? Typically this will involve your brand being lost, staff “synergies” (aka redundancies), and often price hikes to customers to help the buyer recoup their costs. Plus trade sales are also one of the most stressful things a human can do!
• A Management Buy Out, where you sell to some or all of your senior team.? MBOs used to be fairly common. Your senior team would raid their savings and/or ask family/banks for a loan to buy you out.? However, given wages have been stagnant for ~20 years, whilst house prices have rocketed, your average high flying ~30 year old struggles to get a 5% deposit for a 1 bed flat, let alone raise ￡00’000s to buy out their ~60 year old boss!
• Sale to an Employee Ownership Trust, where you sell the business to a Trust, set up to benefit the employees. An EOT is a great third option, because:The business remains independent.Staff jobs won’t be at any additional risk.No employee has to put their own money at risk.

An EOT allows you to get a reasonable sum for your shares, often with zero capital gains tax.? And stay as involved as you want to be post sale.?You do need to be aware that with EOTs you’re normally paid for your shares out of future profits from the business.? This means that you typically get paid over a longer period than other options, and if the business collapses you may not get paid!

So you need to do your best to ensure a smooth transition.

Kirsten: Ha. Which is why I would say, you want to get your employees used to running the business, before you sell it to them!? So, Chris, that means there are probably some situations where an EOT won’t be the best solution. What are they?

Chris: Well, unsurprisingly given the name, to sell to an Employee Ownership Trust, you need to have employees. There is no minimum number, although in order to gain the tax perks you do need at least 5 employees for every 2 shareholders.

As you’ll get paid out of profits, the business needs to be profitable. Might sound daft, but some fast growth tech companies may be worth lots of money despite making consistent losses. These wouldn’t be suitable for an EOT sale.

We’d also suggest if getting the maximum possible amount for your business is the primary goal, a trade sale may be a better option.

But perhaps most importantly, the business also needs at least someone with the desire and capability to lead it.

Kirsten: It’s interesting you say that. Many times business owners have told me that ‘there’s nobody who could take it over’, or even ‘there’s nobody who would want to take it over’. If that’s genuinely the case, then a trade sale would be the best option.

But is it always genuinely the case?

We humans find it hard to imagine how things could be different from the way they are now.? If your team have never had real responsibility for delivering on the business’s promises, how do they know whether they can do it? How can they know that they might enjoy it? How do you know they won’t, or can’t do it?

This is why I really believe you should gradually enable your team to run the business before you hand it over.

The worst that can happen is that you discover who isn’t going to be good for the business after the transfer, and they’ll probably leave before you do it.

The best that can happen is that you and they discover that your business will actually thrive under its new ownership, and everyone involved will be better off than they expected.

Sorry, I’m obsessed as you know. Let’s move on.

Tell me, how do the finances work?

Chris: In an EOT sale, there’s no external cash coming in. Staff don’t put money in – that’s part of what makes it attractive for them. Also, employees share in profits after the sale. Again, part of the attraction. Yet the founder can also get fair market value for their shares.

Kirsten: Gosh. How does that work then?

Chris: Typically, for some time after the sale the founder gets “first dibs” on profits. So the share of profit available to employees may be modest until the founder’s been fully paid off.? If the company’s got retained reserves from frugally squirrelling away funds in previous years, this can be paid out on day one of the new setup.

This can be a tax planning opportunity if you’re thinking about an EOT for a few years time.?? Keep dividends modest, to build up a cash pot, that you then withdraw as part of an EOT sale. That way you’ll suffer zero capital gains tax, rather than typically ~33% tax on dividends.

I’ve got a detailed example of how finances work on my blog, if anyone wants to take a look: See an example of how finances work in an EOT sale here .

Kirsten: And what about the staff?

Chris: Well, the tax perks of EOTs aren’t just for the selling shareholder. If the company distributes profits to staff, the first ￡3,600 per year, per employee is tax free. Although you would still be liable for NI.??This is done via the payroll, so there’s no extra filing responsibilities for employees.

Kirsten: Sweet. No extra work – apart from for the accountant of course. Now for the critical question, where does the power go? Who's the Boss? Who controls the business after the EOT?

Chris: The best way to explain how this changes with an EOT is to spell out how control works in most cases first.

In many small businesses, the shareholders and directors are the same person/people.? Whoever owns the company also runs the company. Because of this, often people aren’t sure about what the roles/responsibilities/benefits of each role is.

However, with an EOT sale, this distinction becomes important:

• The shareholders own the business. They have ultimate power, and are entitled to the profits. Being a shareholder doesn’t bring with it much legal responsibility, though of course if the value of the business goes down, the shareholders lose out most. ?
• When selling to an EOT, it’s the shareholding that’s changing.? You, as founder, are transferring a controlling stake in the company to the EOT.? It will now have ultimate control of the company and be entitled to profits, not you (though often it will also owe a debt to you that needs to be paid from those profits).
• The directors are put in place, by the shareholders, to run the business. They are in charge of the business day-to-day. They decide on the strategy. They hire and fire employees. They can potentially be held legally responsible if the company acts in a fraudulent/negligent way.? The shareholders can remove the directors from their post if it’s felt they’re not running the business in an appropriate way, though typically this would only be in extreme circumstances.?? Selling your shares to an EOT doesn’t necessarily mean a change in directors, but they can change as a result.

Kirsten: OK. So basically, you are splitting the role that most founders and owners play in their business. Or rather you are making explicit the fact that there are really two roles – shareholder and director. It’s just that when you do both roles, your interests are the same.

Chris: Yes. But with an EOT we have to add in two new concepts as there’s a trust involved.

Effectively the Trust part of an Employee Ownership Trust represents the two sides of the shareholder coin – the profit-receiving side, and the decision-making side that goes with that.

In an Employee Ownership Trust, the beneficiaries of the trust – the people for whose benefit the Trust is set up and run - are the employees.? If the trust has excess profits available, it should use those to benefit the staff.

Commonly this will be in the form of a profit-share payment that goes via payroll. But it can also be investment in the business. Investing money today (hopefully) leads to bigger profits tomorrow. There is zero responsibility to being a beneficiary, it’s purely a good thing. This is the profit-receiving side of being a shareholder.

Kirsten: OK. So there’s more to being a shareholder than just pocketing the cash?

Chris: Oh yes. In a Trust, this decision-making side of being a shareholder is represented by the trustees.??The trustees make decisions for the trust. It’s their responsibility to make decisions in the best interest of the beneficiaries - the employees.

The trustees will want to ensure the directors are making good decisions for the business. Looking after the well-being of the staff. As a whole. Not on an individual basis.

It is not the trustees’ responsibility to get involved in individual disputes. If an employee is underperforming, and the directors wish to remove them, the trustees should not prevent this. Indeed removing a poorly performing employee is often to the benefit of the employees as a collective.

Kirsten: Interesting. A question. It’s easy to see where the beneficiaries come from – they are the employees, possibly including the founder. And the directors might include the founder and some other employees, but where do the trustees come from?

Chris: Generally trustees will come from one of 3 camps:

• The directors – often initially this will be the founder, perhaps until they’ve been paid off their deferred consideration. They should know the ins and outs of the company. How it’s doing financially. What its plans are. ?
• The employees – this should be what we’d call a “shop floor worker”. i.e. NOT someone who’s a director of the trading company. It should be someone who’s well trusted, respected, and prepared to stand their ground (NOT a yes man/woman). They help ensure the staff are looked after.
• Someone Independent – this is often an accountant, or coach. Someone who knows and cares about the business, but doesn’t work there. They can provide balance, a bit of external perspective, and potentially (though hopefully not often) be a deciding vote if the two other trustees can’t agree.

Kirsten: How does that work? Is there a separate board or panel of some kind? Chris:

The most common way of dealing with this is to set up a corporate trustee, i.e. a new limited company, which is legally the one and only trustee of the trust.?

This limited company will not trade. However like any other company, it will have directors and “PSC”s (“Persons of Significant Control”). These directors/PSCs will be the people we informally refer to as “trustees”. So, from a strict legal perspective there are no human trustees, just one corporate trustee.

The people we call “trustees” will actually be directors of the EOT trustee company. The directors of this company get elected by the employees of the trading company.

So to sum up, like any other business, the directors have power over the employees and as an EOT, the trustees have power over the directors. And in turn the employees get to elect the trustees.

This gives a circle of power. Nobody is omnipotent. Everybody is answerable to someone else.

Kirsten: Nice. Now, let’s look at this from an employee perspective. I don’t have to put any money in (yay!), I get to own shares in the business I work in (yippee!). I even get to vote for trustees (hurrah!). But afterwards, how does that work? Can I take my shares with me when I leave?

Chris: Bluntly, no. Although you’re a beneficiary of that trust – you get a share of any profits – you’re not actually a shareholder. In an EOT, it’s the trust that owns the shares. That means that if someone new joins the business, they automatically become a beneficiary.

On the other hand, if you leave the company, you don’t get to take anything with you. But, as I said before, you haven’t had to risk any of your own money to “buy in”, and any profits come through payroll, so your employer deals with all the admin.

Kirsten: Hmmm. I can see that this acts as a good incentive to stay if the company is doing well as an EOT. But also as a disincentive to stay if it’s not. Which I think makes it even more critical that you change how the business is actually run before you do this.

Chris: Yes. There’s no reason a 100% EOT owned company can’t do brilliantly for the long term. It removes any “us vs them”, “workers vs owners”.

However it does mean nobody individually has anything more to lose than their job. Whilst this may sound good, it can be a risk for the business.

Key employees who lead the business may well get great job offers elsewhere. Especially if things are a bit tricky in the EOT business, they may decide to jump ship. There’s nothing financially tying them to the EOT company.

If a few key staff do that, potentially you have a big problem. The company may struggle to function, and it’s tricky to quickly replace key staff.

Kirsten: So how could you overcome that?

Chris: Well, one way is to give direct share ownership to some or all employees. In addition to the ownership they get through the EOT.

That gives them something to lose if the business collapses, it gives them that greater incentive to ensure it goes well.

Kirsten: So you can do that as well as setting up an EOT?

Chris: Yes, There’s no reason why you have to be all one or the other. This is known as “hybrid” share ownership.

Sometimes a founder may want to sell a small percentage of the company to an EOT, but retain control. This certainly can be done, basically, all the EOT is doing is giving a formal entitlement to profit-share for the staff.

However, most of the tax perks of EOTs are only available where the EOT gains control. So founders more often retain a minority stake. Anywhere from a tiny percentage up to 49%. They can then gain the benefit of capital gains tax free sale on the shares they do sell, handing over control, but also retaining some direct ownership.

Sometimes as well selling a controlling stake to the EOT, the business will try to also get some direct ownership in the hands of the staff. This might be a few key individuals directly buying a minority stake from the founder (perhaps alongside the EOT sale), or an EMI scheme.

It could even be for all employees, perhaps via a Share Incentive Plan (SIP), although these can be expensive/cumbersome to run for small companies.

Kirsten: That’s brilliant, because actually you could kind of progress through some of these options as you get more confident in your employees.

You could set up a minority EOT as evidence of goodwill before you start a programme like mine, where you’re gradually handing over the running of your business to current and future employees.

As that handover progresses, you expand the EOT, or combine it with direct share ownership, until you’ve gone as far as you want.

That gives quite a bit of flexibility, and room to change your mind before as owner you finally commit yourself.

I like that.

Thank you so much Chris for your time here. It’s been really informative and interesting, and has got me thinking about how to make what I do even more powerful for the kinds of small business employer I love to work with.

Finally, before we close, tell me a bit about your business, Go EO, and how you do things differently in this space.

Chris: Sure. Historically, Employee Ownership Trusts have been expensive and cumbersome to implement, needing lawyers to set up the trust and deal with the share purchase agreement; accountants to value the business and work out the payment plan, and tax advisers to deal with HMRC clearance and stamp duty submissions.

Each of these firms would charge their own fees, and work in their own (often old-fashioned) way. It’s been a bit of an old boys’ network.

So having gone through the process myself, I decided to change that, and set up Go EO.

We offer simple, affordable packages, including everything you need to sell to an EOT. We use modern technology to make your life as easy as possible, and we include all the email and Zoom support you need as part of the price.

EOTs are now a tried and tested solution. We focus on being efficient, and not re-inventing the wheel, which makes us and EOTs an affordable option for smaller companies.

If you want an entirely bespoke situation, we’re not the firm for you. But if you’re happy following a well-trodden path, get in touch!

Kirsten: Thanks Chris.

If you want to explore the idea of an Employee Ownership trust further, visit the Go EO Website . And if you want to make absolutely sure going EO will work before you hand over your business, talk to me first.

Discipline makes Daring possible.

Ask me how.

As always thanks for reading. And do let me know if you found this useful.

I could happily do more posts like this.

Are you searching for a way to maintain your legacy after you leave?? Do you want to make sure your customers and employees are properly looked after once you've gone? ? Going Employee Owned might be for you.? And if you want to make sure it will work, I can help you make yourself redundant before you actually leave.

Let's talk .

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