But still, more often than not the most financially lucrative option will be a trade sale, to a strategic buyer Ie someone who really wants your company, as when combined with their existing business(es), they believe 2 plus 2 can equal 5 (or more!).

In a trade sale, normally the vendor and the buyer have opposing motivations. The vendor wants to sell for as much as possible. The buyer wants to pay as little as possible.

In an EOT sale, whilst this still sort of applies, it’s far less clear cut. Why?

Founder wants staff to do well financially from it

If the sale is for absolute top end price, the business will be sending most of its profits for a long time to the founder. This then means there’ll be little left for the staff to enjoy.

Higher price = higher risk of failure

Most businesses are reliant on their staff to function. Perhaps junior staff may be relatively easy to replace, but senior staff less so.

If the senior staff realise they’ll be slogging their guts out for many years whilst most reward goes to the founder, they won’t be best pleased. There’s typically not much tying them to the business, so they may well decide to leave.

If a few senior staff leave in quick succession, the business may very quickly struggle, or even fail.

If the business doesn’t make sufficient profit for long enough post sale, the founder won’t get paid.

Our post about founder Greedy Greg shows how things can end badly.

Also our real life case study of an EOT gone wrong shows even when the staff managed to make a success of things eventually, they still hugely resent the founder for how things were dealt with. Not the legacy the founder may have wanted!

“Steady Eddy” business

With EOTs, both the founder’s payments and staff profit share will be paid out of profits.

If a business is making nice, regular, reliable profits, that’s great. The founder can be confident they’ll get paid, and staff confident there’ll be something left for them.

Typically a business like this will never massively change the world. It won’t be growing at 1,000% each year. But it can make a very decent living for lots of people.

Cash rich

This certainly isn’t a requirement, but it can make a founder less nervous about an EOT sale.

Why? Because if the company’s sitting on a big war chest, the vendor can typically get most of that out as a day 1 payment.

This means they get lots of cash up front (tax free), and with minimal risk.

Almost always there will be some remainder to be paid out over several years to follow. But with a bigger up front amount, smaller ongoing amounts, there’s less risk to the founder if the business were to flop soon after sale.

Certainly it can be very scary handing over control of a successful business, with just an “IOU” in return! Yes, hopefully you’ve made the business nice and stable, and the staff are well trained/experienced…but it’s still nervous times!

Worth mentioning here that whilst a founder will need to give up control to get most of the tax perks of an EOT, they can still have some power.

The founder can still work full time for the business, possibly remain as Managing Director. This can provide comfort that one maverick employee can’t destroy everything they’ve built!

Stable, confident leadership team

Whilst the founder can remain in the business, it’s important that there’s a strong leadership team. This should be people separate to the founder, who:
– know what they’re doing,
– believe in themselves/the business,
– are prepared to stand up to the founder if required.

If you’re a founder keen to stick around, fine. Potentially that can work well. But it also can cause friction. Read our tale of founder Controlling Connor, and the polite team around him.

“Skin in the game”

If you’re unfamiliar with this term, it basically means the person has something to lose if things go badly.

Most founders will at some point have had sleepless nights. Things were going wrong. It was very stressful. But they didn’t give up, they worked through it.

There will likely be multiple reasons why they didn’t just quit, but often part of it is knowing the business has value, which they own. If they abandon it, they lose that value.

With a 100% EOT company, nobody individually has that. Hence if your star employee gets a great job offer from a competitor, whilst they may have pangs of guilt/loyalty, from a pure financial position, often it’ll make sense to take it.

So what some businesses will do is find a way to get direct share ownership for senior team members.

This could be them directly buying shares from the founder. Possibly they’ll be offered EMI share options. Or maybe they’ll be gifted shares (be warned the tax consequences can make this less appealing for the recipient than it sounds!).

Direct share ownership will add complications, and potentially mixed motivations. But it can help tie some key staff to the company.

Sectors/industries

There aren’t any rules here. However the statistics do suggest some trends.

EOTs prove particularly popular with service based firms. Eg:
– accountants/lawyers
– architects/building firms
– marketing/web agencies

Why? A few reasons we can see for this:

People centric businesses

Often customers will buy because they like the specific people dealing with them. If you’re buying a widget, you don’t really care who made it. But if you’re working with a person on a project, it’s important you get on.

This then means those staff are a bit more important to the business. If they left, some clients that particularly enjoyed working with those employees as individuals, may take their business to wherever the staff member went.

Low barrier to entry

Loosely similar to the above, setting up a business as most of the bullet points at the start of this section is relatively cheap/easy. You’ll likely need a few modest cost tools, a basic website, and you’re away!

Compare that to a manufacturing, or retail, where you’d typically need a much larger cash outlay to get off the ground.

Fragile business value

Both the above mean a lot of the business value is based around key staff continuing to do their current roles. People can be fickle. Things can change. Upset can be caused.

A mass exodus of staff from a service based business can quickly kill a company.

If you’re aware of this as founder, you’ll of course be concerned about treating your staff well generally. An EOT is one way to help with this.

Summary

Any business can sell to an EOT. But things that may make it more appealing include:

Founder cares about business succeeding post sale
Stable business, with reliable (even if modest) profits
Cash rich (not essential)
Reliable, keen, leadership team

More sales do seem to be happening in the professional service sector than others, but that in no way means only those kinds of businesses should consider it.

If you are interested in finding out more about transitioning to an EOT, get in touch with us at Go EO to see how we can help.

Want to find out more about the key people behind Go EO?

What makes a business suitable for an EOT?

Founder more focussed on legacy/staff than maximum cash