Employee ownership: The guilt free exit strategyby
Contractor firm Maslins has followed the example of John Lewis and moved towards employee ownership. Founder Chris Maslin explains how and why he transferred a controlling stake in his firm to an employee ownership trust.
The ongoing pressures of running an accounting firm, coupled with never-ending compliance headaches, has prompted many accountants to consider throwing in the towel.
While some practitioners sell to the highest bidder Chris Maslin opted for the “guilt-free” option of an employee ownership trust (EOT).
Like every firm, the long-time AccountingWEB member would get letters from brokers. But whenever he considered his exit strategy the BBC comedy The Office would often play on his mind.
In the scene that preoccupied Maslin, Ricky Gervais’ cringe-inducing David Brent announces to his team that he has some good news and bad news. The bad news is that the Slough branch will close, meaning some people will lose their jobs and the rest will have to relocate to the Swindon office. But, without skipping a beat, the Wernham-Hogg middle manager breaks the news that he’s getting promoted. “So, every cloud…”
“A lot of exit strategies would be along those lines,” said Maslin. “I would walk off into the sunset. Whoever bought the business would want to recoup their money, get rid of the staff… and that didn’t sit well with me.”
The guilt-free option
Over the past few years consolidators have swept up smaller firms, and having seen the effect acquisitions have had on his direct competitors, Maslin was concerned about his staff and clients.
“If you sell to a bigger firm your brand will be merged or tarnished quickly,” he said. “A few of our direct competitors were previously respected, but they got bought and prices went up, staff went, and the brands were tarnished.”
A management buy-out would have been another option. It was getting to the point where some staff members were more interested in pushing the firm forward than he was. But then the staff would have had to find money and most are in the early stages of their careers without any equity.
That’s when Maslin settled on EOT as a “guilt-free way of stepping back” and ensuring staff wouldn’t have “to put their hands in their pockets”.
The firm still has the same team and same name above the door, but from the start of the summer a controlling stake is owned by an employee ownership trust.
EOT is not a new concept. Department store John Lewis is the most famous example of an employee-owned business; other notable companies using the EOT model include Richer Sounds and Aardman Animations.
As anti-capitalist sentiments get louder, driven by criticisms of Silicon Valley’s space-exploring billionaires, Maslin expects EOT to be a growing trend for businesses with 10+ staff that see the approach as a marketing differentiator to deliver long-term business viability.
How will EOT affect staff?
The big winners of this model are obviously the staff. Previously staff would receive informal benefits such as discretionary bonuses and a generous pension scheme, but the move to an EOT formalises the employees’ rights and rewards.
By the staff having a controlling stake in the company, the thinking is that employers would see around a 10% boost in productivity.
As the main financial beneficiaries, the staff are incentivised to be more loyal and care more. Maslin explained that the news has gone down well with clients and has been successful in differentiating the firm from some of its competitors.
Beyond the financial benefits, the transition to employee ownership means the firm can offer staff growth opportunities. Maslin has seen the three staff members in the leadership team step up and make more decisions and expects them to gradually take on more legal responsibilities.
Letting go of the business
But Maslin isn’t going anywhere just yet. He is legally tied to the firm for four years and has retained a minority stake. This is not only to ensure the future success of the business, but an EOT wouldn’t have a sudden influx of cash to pay him.
“After that I am no more important than anyone else,” said Maslin. “It’s a case of do I provide?”
With an EOT you can sell 1%, but there are tax perks if you sell over 50%. Maslin opted for the latter, but means he doesn’t legally own the business anymore. If he wants to do something and the rest of the team wants to do something else, he will get outvoted.
This can lead some owners backing 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,” AccountingWEB member TaxTeddy said in a recent Any Answers discussion. “This is understandable because someone in an employment role can work extremely well, but are they capable of taking the business forward?”
Maslin points out that an EOT doesn’t mean that all staff are equal. There will still be a hierarchy, and while there will be some decisions that are democratic, these are few and far between, and won’t tend to relate to the running of the business itself.
“It’s a little scary,” he admitted. “But in practice I am not sure it is a big change. Previously when I owned 100% if I made a decision everyone thought was terrible they might leave. So it’s good to take on board what they say.”
What’s next for the founder?
Since the firm became employee-owned from 1 July 2021, Maslin said it “feels like a weight lifted off my shoulders”.
All that’s left for him to decide is what he’s going to do next. He’s keen to step away from the client-facing work where you feel more tied to the business. This would enable him to focus more on practice management work, which he can do at his convenience. Maslin has other projects to keep him busy like his liquidation business MVL Online and planning a homeless shelter in Tunbridge Wells.
“There are no rules in transferring to an EOT. Some founders stay full time and have a specific role, but we’ve gone for an awkward halfway house. I’m not at retirement age or have anything awesome to take up my time.
“Because the senior leadership team is young it’s nice for them knowing that I am there like a comfort blanket. But I have warned them that I don’t want to be that bad smell that won’t go away. ”