Employee ownership has many advantages for sellers, businesses, and employees. It's essential to have a well-thought-out plan for the transfer of shares if you want to benefit the most from this.
Learn about best practises for selling your company to an employee ownership trust (EOT) in this video guide from Co-operative Development Scotland (CDS), a division of Scottish Enterprise.
It examines the crucial actions, such as determining the business's value, managing the transfer project, and negotiating the deal. Additionally, you'll learn about potential future changes to the company.
1. Tips for getting ready for an EOT transaction
There are certain helpful steps you may take to assure success before an EOT transaction starts. In this first video, learn more:
Key Points
There are certain helpful steps you may take to assure success before an EOT transaction starts. In this first video, learn more:
- Contact CDS – its advisers can guide you to sources of advice, support and knowledge.
- Check if you qualify for a CDS Succession Review and Employee Ownership Feasibility Study. This report will provide you with some potential models.
- Ensure the transaction meets the requirements to access the tax benefits of the EOT model.
Other factors to consider at this stage include:
- How much equity you want to sell
- What to do with any assets
- How commercial contracts will be affected
- Whether to include the bank in discussions
2. Business valuation and financing an EOT sale
Before the sale can go ahead, all parties must agree on a price. This video looks at how to arrive at a number that suits everyone, and how companies usually finance the transaction:
Key Points
Some tips on business valuation and funding the EOT sale:
- There’s no best way to value your business – the task is often seen as more of an art than a science.
- Find a price that’s acceptable for the seller and comfortable for the buyer.
- Many factors can influence valuation, including the company’s reputation, the current economic climate and leadership changes.
- The Trust is the buyer of the shares, with the company usually providing the funding. Most often, a repayment schedule is calculated to ensure timely payment to the seller without putting undue stress on the business.
- If you’re the seller, it’s wise to take advice on personal finance and tax planning, so you can gain the most benefit from the payments.
3. The EOT transfer project: making it happen
The EOT sale is workable, and a price has been agreed. What’s next? Find out in this video:
Key Points
When starting an EOT transfer project, here’s what businesses tend to do:
- Create a project team of specialist advisers, including an employee ownership specialist, an accountant and legal counsel.
- Hold a project launch meeting, bringing these advisers together to discuss desired outcomes and to allocate tasks.
- Try to inform employees as soon as possible – but be wary of involving them too soon. This could risk raising hopes when the seller is still looking at other options.
- You may also need to inform certain stakeholders.
- Your employee ownership specialist can help you develop the right messaging. An EOT sale is a significant PR opportunity. It’s worth making the most of it.
4. Creating a successful EOT transaction structure
An EOT is a highly flexible model. This video looks at how the transaction can be tailored to fit the needs of the sellers, the company and the employees:
Key Points
You have several options when designing the EOT transaction:
- Some companies implement a Corporate Trustee (a company formed with the sole purpose of holding the shares). Others choose to have appointed Trustees (individuals who usually hold the post for a fixed term).
- The simplest approach is to have 100% of the shares transferred to the EOT.
- However, some companies prefer employees to have a more tangible stake in the business, opting for a hybrid model that combines the EOT with a shareholding scheme.
- Overall, it’s best to keep things simple. You can include a clause in the Deed of Trust that outlines the visions and values of the business – meaning any future leadership must keep the business on the right track.
- It’s vital to note that the Trust does not run the company. It exists to make sure that the Board of Directors works in the interests of the employees.
5. What does an EOT-owned business look like?
What’s unique about an employee-owned company? Find out in our final video:
Key Points
When an EOT takes majority ownership, businesses typically see some of the following changes:
- The sellers will no longer be majority shareholders. Former owners often become employees of the business (at least for a transition period).
- Leadership must be addressed. It’s crucial to put a succession plan in place as soon as possible. This could mean identifying and nurturing internal skills or looking for external talent.
- For employees, jobs will remain largely the same. But they’ll have a stronger voice within the organisation and more control over their future.
- Trustees will typically meet two to three times a year, getting reports from the Board on the company’s performance and plans.
- There may now be reserved matters that need Trustee approval to go ahead, such as capital expenditures or the purchase of another business.
