The advantages, challenges and method of achieving Employee Ownership Trust status.
EOT is a new way for owners to transfer power and ownership to their employees, we think it's great and something that agency leaders should consider as their organisations mature.
Employee Ownership Trust (EOT) offers a new way for owners to transfer power to their teams, exit their formal leadership role, and still remain an active part of the organisation; all while making a quick sum of cash.
I feel it’s a solution to the mythological ‘Big Sell Out’ exit strategy many agency owners aim for but never quite achieve.
A number of the agency owners I’m in conversation with are looking for a new way to transfer power and I believe the EOT framework offers this.
The advantages of the EOT framework
Achieving EOT status is a tax efficient and fast moving way of selling your agency. It’s (usually) faster than selling to a third party and can happen within 12-16 weeks. It’s a way of facilitating your team to take ownership of the organisation and it’s direction. And let us not forget, it’s way for the owners to release some cash from the business into their pockets.
I see this new legal structure as a way for emergent leaders within your organisation to take hold of the power and to make more influential decisions. No doubt this will be engaging and motivating for them; will improve productivity and could event reduce attrition rates of your best employees.
The challenge of achieving EOT status
In order to achieve EOT status you need to prove to the HMRC that the transference of power is real. This means; drafting trust deeds and beginning to enact them, creating new articles of association and organisational memorandum documents, empowering new trustees in their roles, all of which will help ensure a successful handover of power.
Alongside these technical challenges I foresee a complex set of related human and behavioural challenges involving egos, power and trust issues. A high-performing team with well established psychological safety will be in a better position to adopt new power dynamics. One in which authority, decision making, and accountability have been previous issues will no doubt face some growing pains as this new shape will require some significant internal (as well as external) changes for the people involved.
What’s needed for EOT to actually happen
You’ll need a willing team and a willing leadership. You’ll need a quality legal team in support for the drafting of official documents. I also foresee a need for cultural support (anybody know any culture consultants around here!?) as new leadership capacities will be asked of people. It’s a great developmental opportunity for everybody involved; for the current owners to release power and ownership, and for the team of new trustees to raise into this position of authority with grace and skill.
Harper James are the kinds of legal team you could call on to support with the EOT. They can support the transactional aspects of the EOT including the drafting of a share purchase agreement (SPA). They are a new breed of commercial law firm designed exclusively to champion ambitious and entrepreneurial businesses, enabling them to access expert legal advice at an affordable cost when they need it most.
Ian Fraser, Senior Employee Incentives Solicitor at Harper James commented:
“We have found EOTs to be very attractive to shareholders looking to pass businesses on to the next generation in a tax efficient way, especially when linked to on-going equity incentive arrangements which provide the individuals taking control of the business with immediate or future ownership interests. In addition to the tax efficiency for selling shareholders, a major attraction of EOT sale transactions is that trustee arrangements or employee councils can be structured to bring employees in to provide new leadership while allowing the selling shareholders to remain involved and to continue to pass on their experience and guidance.”
I’d offer that ourselves at Treeka are well placed to help you handle the complex human dynamics that’ll unfold around such change in structure.
Through our developmental lens we’d construct this change process as an opportunity for everybody to learn and to grow. We’d help your team have the challenging conversations necessary, we’d support your new trustees to rise into their position of leadership, and we’d create feedback mechanisms within your team that’ll help you monitor the changes as they’re happening.
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