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In most small companies, the same person (or handful of people) both own and lead the business.
They might be called director, shareholder, owner, CEO, MD, all kinds of things! We’ll tend to call them ‘founder(s)’, as that remains true even post EOT sale.
An EOT sale will inevitably involve a change of ownership. The founder is selling their shares to a newly formed Employee Ownership Trust.
But what about leadership?
How and when does that change?
Is there a ‘correct’ way or time to do it?
Is there a right pathway for EO success?
The short answer is ‘no’. There is no ‘correct’ pathway for EO success. Transitioning to employee ownership is a significant milestone for any business. Just as every business is different, each transition is different. The path to EO can vary depending on leadership structures, financial considerations, and business culture.
One misconception we often hear is that an Employee Ownership Trust (EOT) sale must be tied in with an immediate change in leadership. While a change in ownership certainly takes place, leadership transitions can happen in different ways and at different times.
Leadership before ownership
In some cases, founders choose to step back from leadership before selling their shares. This approach allows them to retain ownership while empowering the senior team to take on more responsibility. Over time, as the founder becomes confident that the business is running smoothly without their direct involvement, they proceed with the sale to the EOT.
This approach can be seen as lower risk, as the founder ensures stability before completing the legal transaction. However, it does come with challenges. The senior team may feel they are carrying all the responsibility and stress without the immediate reward of ownership. The team may also worry about whether the founder will ultimately follow through with the sale.
Ownership before leadership
More commonly in cases we see, the transition to EO starts with the change of ownership. The founder of course ensures they’re happy an EOT makes sense for both them and the team first. They then sell shares to the EOT but retain a key role in the business for a period of time. This allows for a gradual shift in leadership to follow, over multiple years. The senior team members step up and take on more responsibility while the founder remains involved to provide guidance and continuity.
One key advantage of this approach is that employees have confidence. Ownership has legally changed (and there’s no going back). This can encourage them to fully commit to the new structure. For the founder, as their financial interest in the business reduces over time, they may feel more comfortable stepping back. This could be gradually winding down hours/responsibilities over a few years, or more black and white, remaining full time MD until a certain point when their successor is appointed.
The risks of changing everything at once
Some businesses attempt to change ownership and leadership simultaneously, but this approach can present its own set of issues. Major changes in a business take time to implement and ‘bed in’. Completely changing both ownership and leadership at the same time can create significant uncertainty and instability.
Don’t take change in leadership lightly
Regardless of when a founder hands the baton on, it’s a big deal. Whilst it might not be accompanied by much legal paperwork, it’s important it’s given at least as much thought as the ownership change.
There will be a lot of emotions involved. People are complex, and we don’t all think the same way. Involving a leadership coach in this process can be invaluable. They can help with practical things like detailing job roles, to minimise risk things fall through the gaps. They can also help with “translation”, to help ensure the potentially awkward change in power dynamic happens as smoothly as possible, keeping all parties happy.
Read more about Roles and Accountabilities
Practicalities/legalities
Whilst in the real world it will be more nuanced than this, in simple terms:
- shareholders own the company
- directors lead the company
In small privately owned companies, the above distinction isn’t well understood. It doesn’t need to be, as both roles are typically held by the same person. An EOT sale causes these two roles to be more clearly separated, so understanding the differences becomes more important.
An EOT sale changes the shareholders. Possibly a change in directors may also be discussed. But there’s no need for this to happen at the same time. Indeed generally we think it’s a bad idea to do so. Better to let one change bed in, before then looking at the other.
Finding the right path for your business
Every business is different, and there is no one-size-fits-all model for EO. The right approach depends on factors such as leadership readiness, financial planning, and business culture.
A well-planned transition allows the business to adjust at a manageable pace, ensuring long-term success for both employees and the business as a whole.