5 myths to selling your business to employees
Since the Employee Ownership Trust (EOT) was introduced, we’ve spoken to hundreds of business owners about how EOTs work. Here are some of the common misconceptions we encounter and have hopefully corrected:
1. I won’t get full value.
True, if you want to maximise your day one sale proceeds, selling to a trade buyer might be best for you. A trade buyer will offer a high price if they think they can extract lots of synergies from your business, or in plain language, achieve lots of cost savings. In our experience, few business owners want that. They want fair value, not maximum value. And they are uncomfortable selling to a buyer who might integrate the business and slash staff numbers. Because of the tax-free nature of the sale to an EOT, and the interest payable by the EOT to the vendor on any deferred consideration, an EOT can often ending up paying more after-tax cash for a business – albeit over several years – than the charming trade buyer who promises the earth on day one.
2. I’ll lose control.
To an extent, yes. You will be selling a majority shareholding in your company to an EOT. But you can remain a director if that’s what the business needs and wants, you can be one of the EOT trustees and you will have lots of creditor protections if you are selling to the EOT on partly deferred payment terms. So, you are losing control gradually, which is often better for everyone than an abrupt departure.
3. My management team will miss out.
EOTs are sometimes criticised because they have to benefit all employees on equal terms. They are egalitarian in spirit and structure. This can seem like a blunt instrument if your ambitious management team had their hearts set on a management buyout. Of course, management incentives can co-exist happily alongside an EOT. Management and employees can own up to 49% of the share capital in a personal capacity without the EOT losing control (an important requirement to preserve the tax benefits). And shares can be delivered to key employees using any of the HMRC-approved tax advantaged share schemes like Enterprise Management Incentive share options (EMI).
4. My employees aren’t ready for the responsibility.
Founders feel indispensable. They didn’t get to build a successful business without exerting a lot of control over all aspects of the business. Rather like learning to delegate, the positive effect of stepping back is that your team will invariably rise to the opportunity of assuming leadership, sometimes in the most unexpected ways. And if you aren’t convinced by that, step down gradually – see 2. above!
5. It costs a lot to implement.
It costs less to implement an EOT transaction than it does to sell your business to a trade buyer or to a private equity buyer. The sale process is less adversarial, the buyer already knows the business, and the need for draconian vendor warranties falls away if the vendor remains exposed to the business for a time through being owed part of the purchase price. Expect to budget around 2% of the transaction value (more for small transactions because a lot of the buyout costs are fixed). This compares favourably with other types of sale.