Like the concept of EOTs but unsure where to start?
There’s two main sides to consider:
The legal/financial side
You’ll need a professional firm to take you through this. Go EO can oversee the whole transaction, with fixed price packages, summarising what they’ll do.
The soft/personal side
A lot of this you’ll want to think through yourself. You/senior staff may benefit from formal coaching, but it’s not a formal requirement.
This page focuses on the latter. Areas to ponder before transferring.
Do things in the right order
1) Ensure it’s appropriate and what you want
It’s critical you’ve got the key points figured out before you discuss with staff.
Don’t let the cat out of the bag too soon!
2) Discuss with senior staff
They’ll be leading the business going forward, so it’s absolutely critical they’re on side.
If you can’t convince them it’s a good idea, keep trying, or it’s back to the drawing board!
3) Discuss with remaining staff
More junior staff will have negligible extra responsibilities. Negative impacts should be minimal.
It is still a big thing to get their head round, and very relevant for them.
4) Become employee owned
This is a big, multi step process in itself.
Key reason for including here is to ensure you don’t jump the gun!
As a minimum you need to ensure senior staff are on board before transferring.
5) Tell the world
Make it public. Most will consider it great news!
What to consider before moving to an Employee Ownership Trust
Is your company viable?
Oversimplifying, your company needs to:
– be stable
– be profitable
– be trading (not an investment company)
– have at least 2.5 payrolled workers for every shareholder
If it’s not profitable, even if it has significant intangible value, you’ll struggle to get paid.
If it doesn’t have at least 2.5 employees per shareholder, you’re unlikely to meet the qualifying criteria. NB for this purpose being closely related (e.g. spouse/immediate family member) of a director/shareholder will also hinder you.
Read up on EOT participator fraction here if you want further details re this.
Are you sure you want it?
Ok, EOTs sound modern, trendy, progressive. The tax perks sound good. What’s not to like?
Do remember to gain all the tax benefits you have to sell at least a controlling stake in the company.
It will not be “your” company anymore.
Do ensure you’re ok with that. There is no reversing the transaction once done.
You can potentially stay on in the company, but given you won’t control the company, you could be ousted against your will further down the line.
Do the numbers stack up?
Part of the process will involve an independent valuation. However, you may well have an idea of what your business is worth.
Is that sufficient for you to lead the life you want to lead?
Remember you’ll likely be paid slowly, over multiple years. Plus, there’s a risk the business collapses and you don’t get paid at all.
Some founders will be looking to retire shortly after selling to an EOT. They may not have a great pension, as they considered the business to be their pension.
Others may have plenty of scope to continue to earn well post EOT sale, or be wealthy from other sources so this isn’t a concern.
What will you do post transfer?
Do you intend to continue to work in the business?
We’ve got a fuller webpage on founder’s role post EOT transfer here.
If you do intend to continue working significantly in the business, then perhaps not much will change for the employees, junior or senior.
However, especially if you want to step away quickly and fully it’s vital that you consider…
Are staff up to it?
Not everyone is capable of leading.
Leaders need to:
- inspire those around them
- develop sensible strategies
- deliver impressive results
These don’t all have to come from the same person. It’s important leaders are able to do at least one of the above, and work with others who do the remainder.
Are staff up for it?
Not everyone wants to lead.
Every brilliant leader has excellent right hand men/women. It’s easy to assume given the chance they’d want your role.
Even if you think they’re capable, forcing them to lead can end badly. Confidence and desire is as important as ability.
By being a founder, you’re clearly happy making decisions and taking risks. Don’t assume everyone else is.
Read the sad tale of Terrified Terry
Staff may not immediately love it
People fear change. Transferring ownership from founder to an EOT is a big change for staff.
Sure, it’s a huge change for you too…but you’ll have spent a while coming to terms with it. You’ll be springing it on senior staff now as a done deal.
Consider carefully how/when you’ll tell them. Some may initially react negatively.
- they may fear you leaving
- they might not want extra responsibility
- they might decide if you leave, they’ll leave too
There’s a lot to take in. Drip feed bit by bit. Your plans post EOT transfer will be key information for them.
Most staff will grow to love the idea, but don’t expect them to straight away.
Take care with staff expectations
On power
You will no longer be the all-powerful leader.
Sometimes one or more senior (or even junior) employees may think they’ll replace you as the all-powerful leader.
They won’t. Nobody will. EOT controlled companies are different.
They do have leaders, but none are invincible.
Collectively, staff have significant power. More than in a privately owned company. However, individually staff still have limited power. It’s important they understand this.
On finances
Yes, staff will be beneficiaries of company profits going forwards. But only after deferred consideration payments.
Depending upon terms of the deal, this may mean profit share payments to employees are modest for a while.
Indeed, potentially if the business doesn’t perform well, there might never be profit share payments to staff!
Employees are used to salaries being paid reliably, and only ever going up.
Yes, talk about profit share, but ensure you set realistic expectations.
What to watch out for when moving to Employee Ownership
Don’t assume everyone wants to lead
It’s easy to assume this.
Your brilliant employee X has been with you many years. Reliable as can be. Great at what they do. Your right-hand man/woman.
They’ll relish the opportunity to take over the reins as you step back, right?
Possibly, but not always!
There are many amazing employees who don’t want to lead. They thrive supporting others.
Some people don’t cope with or want the pressure of things ultimately being on their shoulders.
Don’t publicise it too soon
Transitioning to an EOT is great news, we’d encourage you to shout it from the rooftops!
BUT…spread the word sensitively, and step by step.
As mentioned before, be confident in it yourself, then discuss with senior staff, then junior staff.
We’d recommend you only mention to clients once all staff understand the concept.
You don’t want them to panic. Consider it from their perspective:
– Did they have a personal relationship with the founder?
– How will that change?
– Can you comfort them service won’t degrade?
Don’t miss the chance to enjoy the day!
Transfer day should be a special day for everyone, but especially for you as founder.
It really is the end of an era, start of a new one.
Hopefully you’ll have done all the potentially stressful planning in plenty of time beforehand, so make transfer day a celebration.
Consider it up there with marriage, birth of a child etc. It’s a big, momentous day!
Enjoy it, savour it, capture it, publicise it!
Don’t expect too much from staff too soon
Legal transfer is quick, cultural transfer is slow
The transaction happens on one day. There should be big celebrations!
Staff may find it an anti-climax when they come in the day after, with all the same work to do.
“Everything’s changed, nothing’s changed”
An oft used mantra for EOT transitions!
Don’t expect staff to change their mentality overnight, and suddenly act like business owners.
It will take them a while to get their heads around:
- what extra responsibilities they have
- what extra power do they really have
- realistic expectations of profit share
Expect minimal change first year post transfer
To transition successfully to employee ownership, a business needs to be stable and profitable.
The founder wants that to continue. If the business fails soon after transfer, they may not get paid.
The employees will be nervous. They’ve been handed a business, and have lots to learn.
Big changes are risky. Everyone should understand that.
The financials/legals of the transfer
This is something you’ll need a professional firm like Go EO to assist with.
We’ll run through the various steps required.
Examples of how financials can work in an EOT sale here.
Even straight forward transfers will require a couple of months.
Our pricing page gives rough details of what’s involved in our transfer packages.
Summary
Key steps in brief are:
- Ensure your company is suitable & finances stack up
- Ensure you’re mentally ready
- Take care with expectation setting
- Get key staff are on board first, then other employees
- Liaise with suitable transfer firm like Go EO
- Discuss possible problems, resolve/minimise them
- Go Employee Owned & tell the world!