Employee Ownership is an enormous field. Go to the annual EOA conference and you’ll be amazed at the variety of topics and opinions being discussed.
There are however a few key things that need to be done well for a smooth EOT transition. We discuss these below:
Senior staff given power
One thing that’s become very apparent to us is people actually having power, and people feeling like they have power, can be totally different things. The latter is at least as important as the former!
You’ll likely think actual power is more important than perceived power? Often the situation in an EOT makes this tricky.
Typically the founder was main/sole director, as well as shareholder. They were supremely powerful within the company. They knew it, all the staff knew it. Hopefully they were also nice/respectful etc so this wasn’t a horrendous situation(!)
Post EOT sale, this changes. It will vary whether the founder disappears swiftly at one extreme, to them staying around as full time managing director at the other extreme. Either way, they’re no longer supremely powerful. Even if they remain MD, the staff do have the power to remove them, albeit it won’t be quick or straight forward.
More commonly some other key employees will be elevated to a senior position, equal to or potentially above the founder. It can however be problematic getting both sides to behave like this is the case.
When someone’s been your boss for ages, potentially trained you up etc, it can be very hard for you to suddenly act like their boss.
Equally for the founder, whilst they may say they understand it’s not their company anymore, and they’re no longer in charge, habit may lead them to behave like little has changed!
Example of failure where founder can’t let go – Controlling Connor blog post
Make sure that the reality people experience matches up with the legal situation. Otherwise staff can quickly lose faith.
Senior staff given incentive
It needs to be worth key employee’s time & effort to make the business work. This can be a tricky one.
With a 100% EOT owned company, there isn’t much financial incentive to keep people there when the going gets tough.
They have minimal “skin in the game”. Sure, they get a salary & are entitled to share of profit…but if profits are modest, and/or spread across many staff, this may not be significant.
If things take a downward turn, and they get a decent job offer elsewhere, what’s to keep them at the business?
Short answer can be “not a lot”, which can be a big concern. If a few key staff leave, does anyone else have the drive and capability to step up to replace them? Potentially small businesses can quickly die.
Whilst not appropriate for every situation, it’s worth considering routes for key staff to get directly owned shares.
Whilst these won’t prevent them leaving, it’s a carrot of reward if the business thrives, or at least survives. If they leave, and/or the business collapses, they’ll lose out financially.
Senior staff given support
A different spin on the first point. Perhaps these people have supervised juniors for a while, but it’s a big step from that to having overall responsibility for the success of the company.
You can’t just thrust someone to the forefront and expect them to run with it brilliantly. They’ll of course need to actually want it (always worth double checking before you press ahead!), but they’ll also need support.
Many business owners learned how to run things the hard way. Learn by doing, occasionally failing, then improving. They can therefore expect others to do the same. However, typically the founder learned over a prolonged period, whilst the business was small.
Typically an EOT transaction is only done with a more established business. Hence putting someone in charge with little leadership experience can be dangerous.
It’s worth considering any training courses they may benefit from. Or perhaps other employees, or external consultants which may be able to help cover areas where they’re weak.
Example of failure where key staff member didn’t want it – Terrified Terry blog post
If you don’t already have one, it’s worth considering getting a coach involved. A good coach can potentially help with both the above issues. Ensuring that the founder and senior team understand their new roles, and behave appropriately. But also probing them for any concerns they may have.
Modest valuation, enabling staff to benefit financially
This can be an area of contention with founders. Inevitably everybody likes to think their business is immensely valuable. It’s their baby, that they’ve nurtured for many years. Perhaps they’ve also done forecasts that show it rocketing to further huge success.
However, opting for a top end sale price gives staff an uphill battle. They need to continue to run the business well, ensuring it makes good profits, just to pay off the founder.
“But that’s fair, the founder built the business, created that value, as well as the employees’ jobs. They shouldn’t be expected to gift the business!”
Yes, we’d agree. Whilst you can gift your shares to the EOT, that’s rare. More commonly they are sold. The potentially contentious issue is how much they’re sold for.
The higher the figure, the more you as founder get (all being well), but the longer the time period the staff have to give a large chunk of profits to you.
A more modest valuation is better for the staff. It means they have a more realistic chance of getting non-trivial profit share bonuses in the foreseeable future.
However it also can be better for you as founder (and not just in a warm fuzzy “I feel good doing a nice thing for the staff” way!).
Where you’re being paid out of future profits, it’s critical that the business goes on to make profits for long enough you get paid out. It will be the staff running the business, hence they’re the ones best able to ensure profits are made for the foreseeable future.
If the sale price is too high, you run the risk staff decide it’s not worth the effort. Things will be tough at times. If key staff decide slogging their guts out for another 5-10 years, for most of the reward to go to you, doesn’t appeal, they may well get jobs elsewhere. If a few critical staff do this, you may quickly find the business dies a death, meaning no further repayments to you.
Example of failure due to high valuation – Greedy Greg blog post
Put simply, it’s better to get 100% of £1million than 10% of £2million. The latter can be what happens with an overly aggressive valuation.
Other ways founders can fail their team
Under each of the four key points above we’ve linked to blog posts with anecdotes on how it went wrong for hypothetical founders who mucked up each one. Below are a few other less common issues where a founder can inadvertently cause issues for both the staff and (either directly or indirectly) themselves:
- Disappearing too quickly post EOT sale, without being contactable – Vanishing Vanessa blog post
- Talking about employee ownership before you’ve thought it through – Premature Pete blog post
- Being too generous(!) to staff with the EOT deal – Generous Jenny blog post
These tales aren’t here to put you off. Typically each transaction will have some mild traits of one/more of the above, but often they can be worked through, especially if people are open and communicative!
Summary
For an EOT transition to be successful, staff need:
- power to make it work
- support to make it work
- belief it’s worth the effort
If they’ve got these 3 things, the business has a great chance of not only paying the founder off in full, but going on to achieve great things indefinitely!