Selling a business via an Employee Ownership Trust (EOT) is an increasingly popular choice for business owners who are looking to begin their transition out of their business and to hand over its succession to the next generation of management.
Yet, despite their increasing popularity there is relatively limited conversation had in available guidance about Trustee responsibilities once the EOT is set up and running. From my perspective both as an experienced advisor to owner managers selling to an EOT and, as a Independent Trustee on the Board of Trustees for some of my clients, I set out below what Trustees can expect in that initial period following the creation of your EOT.
The Board of Trustees
Once an EOT is set up, most of the responsibilities of ensuring the success of the Trust fall to the Trustees. Like other types of Trusts such as Charities, Family Trusts, and Will Trusts, EOTs are governed by Trust Law which provides that each Trustee must be responsible for the assets and activities of the trust, on behalf of its beneficiaries. Only, in the case of EOTs the beneficiaries are the employees.
The Board of Trustees is typically made up of, as a minimum, an Employee Trustee, an Independent Trustee, and often one of the vendors will take a Trustee position too. Although, it is helpful to note that the Board is not restricted to one Trustee per representative group. Of particular importance is the balance of the Board; HMRC have concern over any EOTs that are still seemingly controlled by the vendor. An EOT Board needs to be appropriately balanced across the roles and not be under the control of the original owner.
Employee Trustee – The Employee Trustee is appointed to represent the interests and perspectives of the employees. In larger companies, an Employee Council (or multiple, if the company structure warrants it e.g., in the case of businesses that span multiple sites or with distinctive operational departments) may be set up and they will appoint a representative from the Council to sit in the position of Trustee. However, Employee Councils are not a requirement and is at the discretion of the business and its employees to decide. In lieu of a Council, and more commonly in smaller businesses (<50 employees on single sites) an Employee Trustee is typically appointed from among the managers of the company.
Vendor Trustee – The selling shareholders typically appoint a Trustee in order to smooth the transition of ownership; most EOT transactions do not involve a 100% sale of shares on day one, at the very least because an EOT is typically funded in part by vendor loan, so they continue to have a vested interest in the business, and secondly it is a fantastic opportunity for the new employee owners to be able to learn from someone who has longstanding experience in running and growing the business. It is important to recognise that a formerly majority shareholder cannot control the business once acquired through a majority purchase by the EOT, however, it is entirely reasonable for a vendor awaiting deferred consideration to have protections in place whilst some of the share purchase is yet to be settled.
Independent Trustee – The Independent Trustee then sits in the middle as the lynch pin. They are required to provide a truly independent view and maintain a balance of perspectives to ensure that neither the selling shareholder nor employee perspective is over-represented. In this position, a business needs someone who is going to act in a way that is free of conflict; someone who can stay aligned to all parties and none, while ultimately recognising that employees are the people that the EOT is there to serve. An independent trustee is often a professional trustee or the equivalent of a Non-Executive Director but should not be one of the Non-Executive Directors of the trading business.
I believe an informal benefit of also being an advisor for EOTs is that, in my role as a Independent Trustee, as a professional, to some of my clients, I can continue to provide certain levels of advice that ensures the Trust adheres to legislation. It is particularly helpful to be able to remind the Trustee Board of what decisions they should and should not be involved in and manage the expectations of what should be presented to and decided by the Trustee Board, rather than the operational Board of the business.
Immediate priorities
The immediate priorities are not prescribed by any regulatory or legislative requirements – they are primarily cultural. The main priority is to ensure the employees understand the extent to which they now are involved in the Trust and, by extension, the business. Two common challenges that are unique aspects of selling to an EOT that can be trickier for employees to comprehend are that:
Firstly, no individual employee has a share certificate with their name on. The EOT is owned by the body of employees at any one point in time. Understanding this is important for two reasons:
- Employees will need to understand that they do not personally own a percentage of the business (unless they have been allocated shares or options separately to those held in Trust), and
- It is vital that employees understand that they are working for each other's benefit whilst they are in the business, and not just for their personal benefit.
Often this second point is very quickly and easily grasped and is one of the biggest benefits of an EOT to both the business' culture and overall performance.
Secondly, when an EOT is set up occasionally some employees enter a mind-set of 'we can do what we like now' and do not really comprehend that the EOT is about long-term transition of ownership. Whilst from day one 51% of the company's shares are owned in Trust, only a small proportion of the purchase price has typically been paid in those initial stages. Therefore, it is going to be down to the future success and profits of the company that will enable long-term value to be transferred from the seller to the employees in the EOT, typically taking 3-5 years, and sometimes longer.
This second aspect brings about another important priority of the initial stages of EOT establishment. In a significant number of the cases that we have seen, the new employee owners are coming from operational or focussed 'employment' roles. For many, particularly those sitting as Employee Trustees or members of an Employee Council, this is the first time they will have been able to consider the strategy and direction for the business. Therefore, it is important to ensure they have sufficient support in understanding the additional responsibilities and skills required, and how their role will play into the success of both the Trust and the business.
Many of these additional responsibilities will involve the understanding of and decision making regarding financial and strategic aspects of the business. Often the experience of sitting alongside the selling Shareholders on the Trustee board can provide invaluable experience that they can learn from. It can be helpful to consider sending Employee Trustees with management aspirations on suitable training courses to improve their managerial capabilities and financial understanding. This challenge is also particularly relevant if the establishment of the EOT coincided with a partial Management Buyout (MBO) or purchase of shares by managers. In those circumstances, there are additional things to consider in ensuring the new management team are prepared for the undertaking of running the business.
For the business itself, once the original EOT transaction is done, there is an opportunity to be able to return to focussing on commercial and operational matters. Ultimately, the successful performance of the business will secure the success of the Trust, so getting "back to business" is the best thing the business can do.
Ongoing priorities
Once the Trust is established, the main requirements of the EOT Board is to assist with developing and ultimately provide a decision on whether they support the annual business plan or not, as presented to them by the Board of the company. It is expected that the Trust will have, at least, an annual general meeting (AGM) to review the accounts and plans for the coming year.
Beyond that, the day-to-day management of the business should remain unchanged and the EOT acts in a similar vein to a passive investor in the business; receiving reports of how the business is trading against the business plan, approving the annual accounts and annual updates to the plan, and otherwise dealing with reserve matters that require approval. If the business is performing in accordance with the plan set out then there is no need for the Trustees to be further involved (provided repayments to the vendor can be met), as to do so might undermine the management team of the business itself. However, if things are not going to plan or there are growth opportunities available to the business that fall outside of the previously agreed business plan e.g., acquisitions for growth, appointing major employees on high remuneration packages, or major organisational restructures, then the management team/Board of Directors should be consulting with the Board of Trustees on these matters. The general running of the business and any additional expenditure to achieve growth objectives (up to a certain point*) remains within the remit of the management team/Board of Directors.
*While company spending is broadly at the discretion of the Board of Directors, certain levels of spending need to be reviewed by the Trust, both for good governance and to ensure that it does not impact the Trust's ability to meet repayments to the vendor by restricting the available cash and profits necessary to fund contributions to the Trust for the vendor loan repayments.
Once an EOT is established, the ongoing management of the Trust should be relatively straight forward. Nevertheless, it goes without saying that there is a huge amount of pragmatism required from all parties of the Trust. For employees to have something that is of beneficial value to them, all parties must recognise that it will take time as the EOT is only funded by the success of the business and the Trust's role is look after the investment of interest in the business, not run the business itself.
The exact priorities, challenges and responsibilities for the Board of Trustees will vary from business to business, depending on the nature, size and structure of the business, and the structure of the Trust.
5 Key Takeaways:
- Trustee Responsibilities and Board Composition: The Board of Trustees plays a crucial role in ensuring the success of the EOT. The board typically includes an Employee Trustee, an Independent Trustee, and sometimes a Vendor Trustee. The composition must be balanced to avoid the appearance of control by the selling shareholder.
- Employee Understanding and Engagement: Educating employees about their involvement in the Trust and the business is crucial. Employees should understand that ownership lies collectively within the Trust, not individually, and their efforts benefit the entire workforce, not just themselves.
- Transition Challenges: Employee mindset shifts are common challenges post-EOT setup. Employees may need support adjusting to strategic responsibilities and understanding long-term ownership transitions, which can take years to fully materialise.
- Trustee Development and Training: Employee Trustees may need additional training to fulfil strategic roles effectively. Providing managerial and financial training can enhance their capabilities and contribute to the overall success of the Trust and the business.
- Ongoing Trustee Responsibilities: Trustees primarily oversee and support the business's annual plans and financial performance. They act as passive investors, intervening only when significant deviations from plans or major decisions arise that could impact the Trust's financial commitments.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.