Top tips for transitioning to employee ownership
WORK ON THE TRANSITION BEFORE THE TRANSACTION
Chris Budd, Owner of The Eternal Business Consultancy
Preparation is everything
Too busy with day-to-day running of their business, owners often delay making the decision to exit. The danger then is that they find themselves at the point of needing to sell the business without having put in the preparation. This can limit the options and lower the potential valuation achieved. “Most problems happen because owners have been impatient or haven’t recognised that there are potholes ahead that they can’t see. There is a tendency to think ‘I know what I’m doing, I’ve been running this business for years’ without recognising that EOT structures have a different way of operating,” says Budd. “Essentially, you need to work on the transition before the transaction.” For most EOT sales, the owners are primarily paid based on the future profits of the business – it is therefore very much in the owner’s interest to make those cultural changes before the sale occurs. Ideally, this transition process could take around two years but very few take that amount of time, says Budd. That is not to say that you can’t continue to work on the cultural change after the formal transaction has taken place, he adds. “If the cultural change takes around two years but your sale happens after about two months don’t stop working on that change – it’s absolutely crucial.”
Create an engagement plan
Within that transition, there are several key areas to assess. The first stage is to consider how this news will be shared with the leadership team. “Prepare an engagement plan, which will consider the wants and desires of the key people in the business. How are they going to hear this message? Deliver it in the most positive way possible – for each of them. You might not always get the joyous response you think you will get,” says Budd.
Map out the company fundamentals
In the majority of cases where there is a succession problem, it is the owner that is at least part of that problem. “The transition process is really all about the transition of control,” explains Chris Budd. “It’s very difficult to let go of your baby.” Decide what is important about the business when you step away from it. Imagine yourself no longer involved - what cannot be changed (for example a strong purpose, its core values)? Without these in place the owner will not let go of control.
Recognise the different style of leadership required
Talk to the leadership team before the wider workforce. The leadership can then begin to work with the owner on making initial changes to the business (for example if you don’t yet have a functioning board) preparing the way to involve all employees. It’s important to avoid a power grab – often when an owner/manager leaves the business there will be one or more of the leadership team expecting to take over as boss but in an EOT this does not happen – there is no new boss. Instead, the ownership of the business moves from a minority to being owned by a trust fund for the benefit of everyone. Leadership and ownership will be separated by the sale of the business to the EOT. A new style of leadership is required; one that engenders employee empowerment and engagement.
Involve your employees at the right time
The next stage is where all staff are involved, making changes to the business which will ultimately allow the owner to step away and sell to the EOT. But focus on your delivery – this needs to be about the employees, not the owner. “Lots of announcements of the plan to sell to an EOT are introduced by the owner as ‘I’ve found my perfect exit!’ It’s easy to do,” says Budd.
Choose the right trustees
Closer to the transaction date, key decisions need to be made, including the selection of the trustees. The trustees of the EOT act like the shareholders of the business, holding the board to account and representing the interests of the employees. Choosing the right trustees is therefore crucial.
The Eternal Business Consultancy recommends three types:
1. Employees - so the interests of employees are heard
2. Director (not the owner) – it can be very tempting for the owner to appoint themselves or a close contact as trustee but this is not a good idea if you want to maximise employee engagement, explains Budd. “It’s about handing over control. If you’re putting yourself or your close contacts in key positions then you are not doing that and engagement will not follow.” While this is perfectly understandable given that owners will invariably be paid out of the future profit of the business, their interests can be amply protected by legal means through the sale and purchase agreement, he adds.
3. Independent - external to the organisation.
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