Selling an owner-managed business to an employee ownership trust (EOT) has become increasingly popular as an exit route in the past decade, following the introduction of EOT legislation in 2014. The Employee Ownership Association estimated last year that there were more than 1,650 EOT-owned businesses in the UK. The sale of a business to an EOT enables founders to realise some value for their endeavour and risk-taking, and set in motion a handover to the next generation of management.

But that is just the start. Once an EOT is set up, many responsibilities for ensuring its success fall to trustees. Like other forms of trust – such as charities, family trusts or will trusts – EOTs are governed by Trust Law, which provides that the trustees are responsible for the assets and activities of the trust, on behalf of its beneficiaries. In the case of EOTs, the beneficiaries are the employees.

Trustee board

As a minimum, a board of trustees should have an employee trustee and an independent trustee; often one of the vendors (quite probably a former owner-manager) will take a trustee position, too. A board is not restricted to one trustee per representative group. Of particular importance is the balance of the board. HMRC will be particularly concerned by an EOT that is still seemingly controlled by a vendor. An EOT board must be appropriately balanced across roles and not be under the control of the original owner or owners.

An employee trustee is appointed to represent the interests and perspectives of employees. In larger companies, an employee council (or perhaps multiple councils, if there are multiple sites or distinct operations) may be set up and a trustee or trustees appointed. Such councils are at the discretion of the EOT business and for its employees to decide on. In smaller businesses an employee trustee is typically appointed from the management team.

A vendor trustee is typically appointed by selling shareholders to smooth through the transition to employee ownership. Many EOT transactions do not involve a 100% sale of shares on day one and they are typically funded in part by a vendor loan. The seller therefore has an ongoing vested interest in the business. That aside, it is an opportunity for the new employee owners to learn from those experienced in running and growing the business. While former majority shareholders cannot control a business that an EOT has acquired a majority shareholding in, it is entirely reasonable for a vendor awaiting deferred consideration to have protections in place. 

An independent trustee should be truly independent and maintain a balanced perspective to ensure that neither the selling shareholder nor the employees are over-represented. It is an important role, requiring someone who is free of conflict and can remain aligned to all parties and none, ultimately recognising that the EOT is there to serve the employees. It is often taken up by a professional trustee, the equivalent of a non-executive director.

Trustees must be aware of the decisions the EOT board should and should not be involved in and what is the responsibility of the operational board of directors of the business. The immediate priorities are not prescribed by regulation – they are primarily cultural. The main initial priority is ensuring that employees understand the extent to which they now are involved in the trust and, by extension, the business. 

Immediate priorities

The first common issue that needs explaining to employees is that no individual employee will have a share certificate with their name on it. The EOT holds shares in the business for the body of employees at any one point in time. Understanding this is important as employees need to understand they do not personally own a percentage of the business through the EOT. Of course, they may have shares allocated separately to those held within the EOT.

It is vital that employees understand they are working for each other’s benefit while they are in the business, and not just for their own personal benefit. Grasping this leads to perhaps the biggest benefit of an EOT culture and performance.

Second, sometimes in an EOT-owned business some employees think they can ‘do what they like’ now. But the EOT is about long-term transition of ownership. While from day one at least 51% of the company’s shares will be owned in trust, only a small proportion of the purchase price will have typically been paid out in those initial stages. It is therefore the future success and profits of the company that will enable long-term value to be transferred from the seller to the employees. This will usually take three to five years, and sometimes longer for the full value to accrue to the EOT.

There is another important priority for the initial stages of EOT establishment. Often the new employee trustees are from operational roles and for many, particularly employee trustees or members of an employee council, this will be the first time they have had some responsibility for the strategy and direction of the business. It is therefore crucial to ensure they have sufficient support in understanding those responsibilities and the skills required, and how their actions will play into the success of both the EOT and the business.

Understanding the financial and strategic aspects of the business and the decision-making around that will improve with the experience of sitting alongside and learning from the vendor shareholders on the trustee board. Employee trustees with management aspirations should take suitable training courses to improve their managerial capabilities and financial know-how, but recognise that it is not the reponsibility as trustees to run the business – that is the role of the directors of the trading business. This is particularly relevant if the establishment of the EOT coincided with a partial MBO or purchase of shares by managers. In those circumstances, additional training for the new management team should always be on the agenda, but differentiating the role of manager from shareholder representative.

For the business itself, once the original EOT transaction is done, it can return to focusing on commercial and operational matters. Ultimately, the successful performance of the business will secure the success of the trust. Getting ‘back to business’ is very important.

Longer-term role

Once established, the main requirement of the EOT board is to assist with developing and supporting (or potentially not) the annual business plan, as presented to them by the board of the trading company. The trust as majority shareholder will be expected to have an annual general meeting to review and approve the accounts and plans for the coming year.

Day-to-day management of the business should remain unchanged. The EOT should act in a similar vein to a passive investor, receiving trading reports of performance versus 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 performs to plan there is little need for the trustees to be further involved. Indeed, to do so might undermine the management team.

However, if things are not going as expected or there are growth opportunities available to the business that fall outside of the previously agreed business plan – unplanned acquisitions for instance, or recruiting important new employees on high remuneration packages, or major organisational restructures – then the management team and board of directors should consult the trustees. The general running of the business and, up to a certain agreed point, any additional expenditure to achieve growth objectives, remain within the remit of the management team and board of directors where within the agreed business plan.

Once an EOT is established, ongoing management of the trust should be relatively straightforward. Nevertheless, it goes without saying that there is a huge amount of pragmatism required from all parties. For employees to have something 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. The trust’s role is to look after the investment in the business, not run the business.

The exact priorities, responsibilities and challenges for the board of trustees will vary from business to business, depending on the nature, size and structure of the company, and the structure of the trust. Clarity around that is key for trustees.

Simon Blake, partner and head of strategic corporate finance, Price Bailey, is based in Cambridge and advises businesses across the UK, including East Anglia and London. He is also on the board of various EOTs.