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01 July 2024: Selling to Employees: The Employee Ownership Trust
If you’re a business owner beginning to think about the inevitable – the fact that “Every Business That Doesn’t Fail Will Be Sold…Every One!℠” – of all the possible buyers of a business, the most logical place to start the search is often in your own house – your employees.
We’ve discussed this approach in a previous post but that discussion assumed that a single employee or two might be qualified to run your business and was interested in acquiring it. We’ve also discussed ESOPs – Employee Stock Ownership Plans, long available in the U.S. – and noted that, depending on the business, such a vehicle might be a useful tool for succession planning.
But there are other options for how a business owner might structure the transaction when selling to employees and one of them is an Employee Ownership Trust (EOT).
An EOT gives the business owners a great deal of flexibility on a number of issues that are often as – or even more – important than price. This method of transition is especially useful to owners who wish to exit gradually and are concerned about protecting their legacy.
An EOT allows employees to have a significant stake in the company they work for. This model not only fosters a sense of ownership and responsibility among employees but also offers various financial and operational benefits to the business. EOTs have gained popularity as a sustainable and equitable way to manage business transitions, ensuring the longevity and prosperity of the company.
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What is an Employee Ownership Trust?
An Employee Ownership Trust is a form of business ownership where a trust holds a controlling stake in a company on behalf of its employees. This structure ensures that the employees collectively own the business, aligning their interests with the company’s success. The trust is managed by trustees who are responsible for acting in the best interests of the employees.
This form of ownership has been used for many years in the United Kingdom to facilitate selling to employees. It has also become available in Canada and Australia, and has recently made its way to the U.S. However, in the U.S., this is a state issue and, as of this writing, we don’t believe it has been approved in all states.
Benefits of Employee Ownership Trusts
There are numerous advantages to adopting an EOT structure, both for the business and its employees:
- Enhanced Employee Engagement: When employees have a stake in the company, they are more likely to be engaged and motivated to contribute to its success.
- Increased Retention: Employee ownership can lead to higher retention rates as employees feel more valued and invested in the company’s future.
- Tax Incentives: In many jurisdictions, there are tax benefits associated with transferring ownership to an EOT, making it a financially attractive option for business owners.
- Business Continuity: EOTs provide a stable and sustainable ownership model, ensuring the business can continue to thrive even after the original owners retire or exit.
- Improved Performance: Studies have shown that employee-owned companies often outperform their non-employee-owned counterparts in terms of productivity and profitability.
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Courses! Courses! Courses!
Many of you have asked if our Flagship Course, “Learn How to Value and SUCCESSFULLY Sell Businesses“, could be made available on a module-by-module basis. Instead of enrolling in the complete course, could you enroll only in the module(s) you wanted? We’re happy to report that this is now possible.
We’ve broken our Flagship into six separate modules (or module groups) to give you all the flexibility you need to learn only what you want to learn – and we’ve moved them all over to the new Brokers Academy in The Brokers Roundtable℠ . The Flagship is still available but the modules are now available individually.
You don’t need to be a Member of The Brokers Roundtable℠ to access any of these courses but if you are, you’ll receive a 20% discount on any course you enroll in. If you’re not yet a member of The Brokers Roundtable℠, you can learn more – and get access to all the talent and resources – here.
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How Does an Employee Ownership Trust Work?
Selling to employees using an EOT requires establishing an EOT in the first place and that involves several key steps:
- Valuation: The first step is to determine the value of the business. This is typically done by an independent valuation expert to ensure a fair price.
- Trust Formation: A trust is established, and trustees are appointed to manage it. The trustees can include employees, external advisors, or a combination of both.
- Financing the Purchase: The trust needs to acquire the shares from the existing owners. This can be financed through various means, such as loans, company profits, or external investors.
- Share Transfer: The shares are transferred to the trust, making it the majority owner of the company. The trust holds these shares on behalf of the employees.
- Ongoing Management: The trustees are responsible for managing the trust and ensuring that it operates in the best interests of the employees. This includes distributing profits and making strategic decisions for the company.
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Our course, “Learn How to Value and SUCCESSFULLY Sell Businesses“, teaches you how to accurately value and successfully sell businesses.
Challenges and Considerations
While EOTs offer many benefits, there are also challenges and considerations to keep in mind:
- Initial Costs: Setting up an EOT can involve significant initial costs, including valuation fees, legal expenses, and financing arrangements.
- Trustee Responsibilities: Trustees have a fiduciary duty to act in the best interests of the employees, which can be a complex and demanding role.
- Employee Understanding: It is crucial to ensure that employees fully understand the EOT structure and their role within it. This may require ongoing education and communication efforts.
- Governance: Effective governance is essential to the success of an EOT. This includes clear policies, transparent decision-making processes, and regular reviews of the trust’s performance.
The Bottom Line
Aside from the benefits of an EOT listed above, selling to employees allows strategic tax planning by the current owner(s), a gradual rather than sudden exit, a way to assure that your employees well-being is considered a major component in the transfer and the business – the legacy of the founders (or sellers) – is protected from sudden changes that often accompany new ownership.
Remember that, in the U.S., this method of ownership may not be universally approved; it’s a state-by-state process. If you’re a business owner in the U.S. thinking of selling to employees, check with your accounting or legal representation to see if this option is available to you and your employees. If it is, it may be worth considering.
I’d like to hear from you. What topics would you like me to cover? How can we tailor these posts to be more useful to you and your business. Let me know in the comments box, below, or email me at jo*@Wo*******************.com.
If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week.
Joe
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The author is the founder, in 2001, of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 600 in the world. He can be reached at jo*@Wo*******************.com