Greg tried to grab it all, but got very little
NB names and details are fictional. Any resemblance to actual persons or events is entirely coincidental!
Background
Greg got multiple separate parties to give him valuation figures. Most were around the £1 million mark, ranging from £750k to £1.3m. It’s normal for some variation.
He managed to find one individual prepared to sign off a valuation at £2 million. Greg was delighted. In his eyes, his extra efforts had doubled the business value, doubling his pay out.
Greg could have a wonderful retirement with £2million. Clearing his mortgage, living the high life, with plenty left to invest for old age/to pass on to kids.
The payment terms had to be very aggressive to enable this amount to be paid off even within a decade. £16.7k/month for 10 years, when profits were typically £18k-20k/month.
So circa 90% of forecasted profits every month were to go to Greg, for 10 years.
The independent trustee showed some discomfort at this. But the valuation was signed off by someone independent. Maybe they’d seen some jewel in the business the independent trustee couldn’t. The employee trustee did as they were told by Greg, their boss. So all three trustees, including a very happy Greg, signed off on the deal.
What happened
The first couple of months went ok. The staff worked hard, forecasts were just met. From these, the business made the agreed payments to Greg, with a few pounds left over.
A few more months passed. Stress levels rose. The forecasts were optimistic, and managers found themselves working evenings and weekends to try to meet the figures. This enabled the business to just make payments to Greg.
Greg was around, but had limited interest. His view was he’d sold the business, it was the staff’s problem now. They should knuckle down and make the business more successful. After all, they’d reap the rewards of any increase in profits above his pay out.
5 months in, one of the senior employees called an emergency meeting. They were burnt out from pushing the business, just to meet payments to Greg. 9+ more years of this didn’t appeal.
Greg told the remaining team they’d need to buck their ideas up or the firm could go under, and they’d all be out of a job.
The remaining senior staff considered their positions. They were already struggling. Now they’d lost a key team member. They cared for the business, but cared for their sanity more. Greg was doing little, whilst they were busting a gut, yet it was mainly for his financial benefit.
They considered recruiting someone senior from outside the firm to help. However, even a great candidate would take a while to alleviate pressure on them. Plus it would cost extra money the company could barely afford.
After some soul searching, the remaining senior team left and got jobs elsewhere. Greg didn’t have the interest to turn things back around. The company quickly collapsed.
Greg had received around £100k of the £2 million he was expecting.
No further payments would come, as the business was bust, worthless. He was left with his modest pension, limited scope to earn well again. His dreams of a wealthy retirement were shot.
What he could have done differently
We have heard people say EOTs are great because you can choose your sale price. There is limited truth to this. If you ask enough people, someone will sign off the valuation you want.
However, valuations need to be supported by realistic profit forecasts. They should allow slack for dips in performance. Plus further slack to reward the team for their efforts.
Had Greg accepted £1m instead of £2m, the team would have:
- had spare cashflow to recruit/subcontract in extra help when required,
- been able to afford profit share payments to themselves, to compensate for the extra work/stress,
- been better able to see a viable long-term financial future.
Greg could then have received all of £1m, rather than £100k of £2m. The business would still be going. Staff would be thanking him for the opportunity, not cursing him for setting them up to fail.
Moral of the story
Try to get too much, and you’ll get very little.
The deal needs to work for all key parties, or it won’t work for any of them.
Other Go EO founder flops:
- Vanishing Vanessa
- Generous Jenny
- Controlling Connor
- Premature Pete
- Terrified Terry
- Tracy’s Terribe Trade Sale
Summary
An EOT can be very lucrative for the founder.
- There’s no hard rules on valuations, it’s as much art as science.
- Ask enough people, someone will give the answer you want.
- Higher isn’t necessarily better.
- If there’s nothing for the staff, why would they keep working to pay you off?
- Without them, the business collapses, as does your future payout.
- 100% of £1m is more than 10% of £2m.