Business management

Employee ownership trusts: your questions answered

Why selling your business to an employee ownership trust could be the perfect next step on your entrepreneurial journey.

Aardman Animations, best known for its Wallace & Gromit films, recently became the latest business to set up an employee ownership trust (EOT). For many SME owners, this is an increasingly attractive method of handing over the company without getting involved in a trade sale, paving the way for perfect ownership succession by selling the organisation to an EOT for the benefit of the employees. But how does it work, what are the benefits, and where do you start? Chris Budd, who last year sold the majority of his business Ovation Finance to an EOT – and helps other SMEs to do the same at the Eternal Business Consultancy – explains all.

What is an employee ownership trust?

“It’s an ‘off the shelf’ version of the John Lewis model, where all employees have a stake and share in profits. The scheme enables owners to set up a trust for their employees then sell all or some of their shares to the EOT for up to the full market value. The shares are paid for from reserves or the future company profits.”

What makes it attractive?

“It’s a great way of succession planning by ensuring the company remains with people who are really committed to its ethos and values. The alternatives – management buyouts and trade sales – both have issues around succession and maintaining the integrity of the company, but EOTs are the perfect way to ensure a legacy. The EOT has at least a 51% share of the business, but the owner can retain a holding. And because it allows employees to indirectly buy the company without using their own funds, you have an engaged workforce completely focused on doing everything they can to make the company a success. Research by the Employee Ownership Association shows companies that set up an EOT enjoy a 15% rise in annual profits.”

Are there any other advantages?

“There are a couple of tax breaks – the sale is exempt from capital gains tax, and employees can each receive up to £3,600 of the profits income tax-free. But the main benefit to owners is ensuring succession and legacy of a business they’ve worked so hard to build.”

Chris Budd, a leading expert on EOTs.

Who decides how much the company is worth?

“HMRC rules dictate the share value is set by an independent market valuation by a qualified accountant.”

Would it suit my business?

“EOTs are ideal for companies from 10 to 250 employees. For owners, this can be a wonderful end to your entrepreneurial story – but you have to understand your future earn-out will come from the future profit of a business you no longer control. It’s also not just about deciding you want to set up an EOT one day and doing it the next – your company needs to be in the right place, with the right ethos, for it to work. To really maximise the benefit, I suggest deciding you want to sell in, say, three years’ time and spending the intervening period doing the groundwork. “

There are a couple of tax breaks, but the main benefit to owners is ensuring succession and legacy of a business they’ve worked so hard to build

Chris Budd
Consultant, the Eternal Business Consultancy

How do I achieve that?

“My programme lists 200 steps to maximise the benefits – but businesses may already have many of these in place. This is about building a real business, and follows a couple of fundamental concepts. You need a flag in the ground – a clear company vision, so everyone knows what it stands for. Your employees need a sense of purpose. They need to believe. You also need a collaborative decision-making structure where employees have a voice, through a council, a forum, so their opinions are encouraged, welcomed and listened to. Employees need to be so engaged that they don’t think: ‘I work for the company’ but: ‘I AM the company.’”

Are there any pitfalls to EOTs?

“Not if you manage it properly. One mistake is to tell employees about the EOT too quickly. You might expect them to go: ‘Wow, thank you!’ but wait until you’re further down the road of getting your company ready. A lack of clarity could make them suspicious of your motives – it’s far better to wait for your company to be in a position where you can show why it’s beneficial for everyone that you go down the EOT route. “

Case study: cracking deal, Gromit

In November 2018, Aardman Animations created an EOT that gave its 140 staff (and its 180 freelancers) a 75% stake in the company. Founders David Sproxton and Peter Lord – whose studio is responsible for Wallace & Gromit and Shaun The Sheep, and movies Chicken Run and Early Man – embraced the idea as soon as EOTs were launched in 2014 – but spent the next four years preparing.

“Aardman was an ideal candidate for EOT,” says Budd, who interviewed Sproxton about the process for his blog . “As a company, they ticked all the boxes – they had purpose, a mission and employees with obvious passion for what they do. They’d worked with Hollywood but then stepped away because they wanted to preserve the ethos of their business.”

Lord and Sproxton did extensive groundwork to prepare. “They joined the Employee Ownership Association, and David set up an EOT project team at Aardman to examine what they wanted their legacy to be, and drew up a legal document about how the company would operate as an EOT. Then they engaged employees in the process, with discussions about how it would work for staff and freelancers.”

Lord and Sproxton also introduced an employee handbook, answering questions about the EOT, and staff have their say through a workers’ council. Sproxton will step back as MD within the next year but continue as a consultant, while Lord will remain creative director for the next five years.

“We’re not quitting yet,” Lord told the Guardian. “We’re doing this because we love the company and think this will be the best thing for it. We always believed independence was our strong suit. We didn’t have to dance to anybody else’s tune.

“This is not about David and I leaving. It’s a continuity deal.”

Budd says Sproxton, too, is confident about the future. “There are plans to replace him but for now he’s happy mentoring young creatives. And he’s happy Aardman is in the hands of those who will look after it in the long term – its employees.”

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