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Anyone considering going employee owned?

Interested in things preventing/delaying you doing it

Didn't find your answer?

Are any of your own firms, or your clients, considering transferring a controlling stake in their Ltd Co to an employee ownership trust (EOT)?

If yes, but something's stopping it happening now, what's the hurdle?

I appreciate for many businesses it simply isn't viable (eg no staff), but if it's theoretically an option for you, but you/your clients aren't interested in it, why not?

Keen to hear stories of problems/things putting people off.

Replies (11)

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ghm
By TaxTeddy
30th Aug 2021 09:30

I have seen this considered a couple of times but in each case the owner backed away from the process due to a lack of trust.

It seems there is a balancing act between an owner who wants to take more of a hands off approach and the reality of handing over power to employees. This is understandable because someone in an employment role can work extremely well, but are they capable of taking the business forward?

I think it's probably a question of the Peter Principle in action.

In each case, I think the owner was probably right to ultimately back away from the process but that's not to say there is never a situation where it couldn't work well.

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Replying to TaxTeddy:
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By Hugo Fair
30th Aug 2021 12:34

I suspect the other key factor is size/age of the business.

Like so many aspects of managing a business, growth is not a smooth continuum - and for each 'step change' there's a need for more management controls.
If the business is big enough it can afford to populate the Trust with professionals who ensure the shareholders (employees) are kept focussed ... and if it's small (or young) enough then the requisite capabilities will evolve (or die) naturally.
But throwing a medium sized practice (that has operated on at least a degree of hierarchical control) into an open 'democracy' will fail as often as not.

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Replying to Hugo Fair:
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By 1 2
31st Aug 2021 12:03

Just to mention being EOT controlled doesn't mean all staff are equal when it comes to running the business. You'll still most likely have a hierarchy, managers in charge of juniors etc.

There will be some decisions that are purely democratic (and junior staff member's vote just as valid as the most senior staff member), but these are few and far between, and won't tend to relate to the running of the business itself.

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Replying to Maslins:
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By Hugo Fair
31st Aug 2021 13:32

Better explained than my post might have lead others to understand ... but you're (mostly) talking about operational management I presume?
When I referred to "growth is not a smooth continuum" I was trying to focus on strategic management issues (investment, acquisition, changing course, rebasing resources, etc) ... which tend to be easier to agree with small/new businesses or with fairly large/structured ones.
The analogy would be finding yourself in a boat facing an oncoming iceberg ... which size craft would you rather be in, and with what chain of command?

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Ivor Windybottom
By Ivor Windybottom
14th Oct 2021 15:47

Seen this with professional practices (architects, etc.) where the existing owners want to step away, but felt they would still be needed to help run the show as employee owners did not have enough experience. Their investigations with another practice who had completed the EOT change proved their suspicions as the EOT business said the work involved in changeover was horrible. Not a function of the EOT per se, more from the transition of management.

If you can find good new managers an MBO is probably better all round anyway (apart from the exiting shareholders tax break).

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Replying to TaxTeddy:
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By 1 2
31st Aug 2021 12:01

Hehe, the dilemma of the owner who wants to be more hands off, but perhaps doesn't fully trust anyone else to be more hands on...or still wants to be able to veto any decisions they don't agree with (which they can't post EOT transfer, or at least will likely have staffing issues if they attempt to).

Ok so in short sounds like management/the soft skills side of things was the main problem, rather than anything more technical/cost based?

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By buttercup books
02nd Sep 2021 15:32

One of my clients is now EO. When I first heard about the concept I thought it was bonkers. Having worked through the initial investigations and the process, now 3 years down the line I agree it was the best possible solution to a number of problems.

Our first port of call was the Employee Ownership Association who put us in contact with a local business who had already gone EOT.

They were a family owned 150 employee manufacturing company. The owners wanted a tax efficient exit strategy to enable them to retire, but still guarantee job security for the loyal workforce and prevent an asset stripping take over with production moved to the far east. For this scenario EOT was perfect.

The current client, a software developer, again the owner wanted an exit that would protect the business and staff. There were several interested parties that were not offering enough to justify the inevitable staff cull, from a buyer that only wanted the client base and the product, not the staff.

With this client, the MD is still the MD, he is still the driving force. He and all staff are simply employees, drawing a monthly salary at the appropriate rates. The business, an LTD is "owned" by an LTD trust. Employees become "owners" of the trust company when they start and cease ownership when they leave employment.

It actually works very very well, isn't much bother in terms of running it. I would strongly recommend getting advice from the E O Association and strongly recommend a specialist firm of solicitors who know exactly what they are doing and who set it up correctly. Wasn't cheap but was a very good result. BB

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Replying to buttercup books:
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By 1 2
03rd Sep 2021 13:04

Thanks, good to hear.

I'm basically trying to narrow down a "pros and cons". There are some reasons why it won't be suitable for an owner wanting to exit. Eg those needing lots of cash ASAP. Also of course you need some staff who are happy and capable of taking on the responsibility. However, it does seem like lots of situations it could be suitable to, but is still fairly rare. I'm trying to understand why.

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Replying to Maslins:
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By Hugo Fair
03rd Sep 2021 14:28

I don't mean to sound cynical (for a change), but when the option last came up in front of me ... the two reasons that you've just listed for not proceeding were front of the queue (although actually in reverse order).

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By HerbieM
14th Oct 2021 14:31

We are just in the process of setting up an EOT. Company has currently 3 directors paid via PAYE/Dividend by virtue of a class of share, each director owing 1 A share. The company ownership is split between 7 shareholders (the 3 above included) with 60,000 ordinary shares between them.

The current Directors will be retiring and from the point the EOT is set up they will no longer be drawing Dividends themselves (surrendering their A share).

The intention is to set up the EOT and the new board will be paid using the award of 1 A share to allow the mix of dividend and PAYE.

The trust will own greater than the 51% required of ordinary shares (probably 100%).

The only item we cannot seem to find a definitive answer to is:

Is it allowable to have A shares used for the purpose of paying the management team via Dividends when there is an EOT in place.

Various references to it being allowed can be found but no real clarity to allow us to proceed.

Can anybody point me in the right direction for a more definitive answer?

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Replying to HerbieM:
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By Bobbo
14th Oct 2021 19:03

Start a new question.

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