E118 | The Mechanics of Employee Ownership Trusts with Chris Budd
What do you do if you want to keep your business going after you exit? What processes can you put in place to ensure your business survives without you? How can you extract maximum value from your life’s work?
Chris Budd is the founder and former CEO of Ovation Finance. He is also one of the UK’s foremost experts in selling your business to an employee ownership trust. Why is he an expert in this? Because this is the route he chose to exit his own business.
“What I wanted, which, at its essence, was to see the business continue. I wanted to be able to exit but not see the business broken up or sold or merged with another company, I wanted to continue because I have a big ego. And I’m proud of the business.”
As well as writing the book on it The Eternal Business, Chris also advises business owners how to follow suit. By creating an employee ownership trust and selling your business to an employee ownership trust, and then moving out the way is how to do it.
But how do you do it successfully? It’s all linked to purpose, culture and happiness, says Chris. This is a fantastic episode, we hope you enjoy it as much as we did.
On today’s podcast:
- Becoming an expert in employee ownership trusts
- What is EOT business?
- The eternal business
- Preparing employees for EOT business
- Management and trustees in EOT businesses
- What do you need to sell your business for
Links:
- www.ovationfinance.co.uk
- www.cbudd.co.uk
- Book – The Eternal Business
- Employee ownership association
- Financial wellbeing podcast
The Mechanics of Employee Ownership Trusts
If you’re wondering how you can ensure your business continues when you step aside, have you considered employee ownership trusts (EOT)?
Chris Budd did.
“What I wanted, which, at its essence, was to see the business continue. I wanted to be able to exit but not see the business broken up or sold or merged with another company, I wanted to continue because I have a big ego. And I’m proud of the business.”
Now he’s one of the foremost experts on EOT in the UK.
“That’s slightly tongue in cheek. I am one of the UK foremost experts in the EOT for small business. Which sounds like a grand statement, but there’s only five of us.’
So what is an EOT, what are the advantages of setting it up versus selling your business and how can you do it for your business?
Employee Ownership Trust
The concept of EOT has been around for over 100 years, however, the government only brought in legislation making them available for small businesses in 2014. If you can’t picture what it is, just think about how John Lewis is owned by its ‘partners’, that’s essentially the same thing.
“What happens is an owner sells their shares, they set up their own EOT, okay, you sell your shares to that EOT. It doesn’t have any money because you’ve just set it up, but it does, of course, now have the future profit of the business, which it uses to pay you out over a period of time.”
So how did Chris set his up?
“I have retained 30%. So you have to sell a controlling interest. So it is up to you to have to give up control. But I retained 30% and I’m still Chairman, I’m not involved day to day. Different companies do it different ways, generally speaking.”
Of course, you can still be involved in the business once you’ve set up the EOT, but, warns Chris, that can create a tricky situation, because you’re giving up control of your business, but you’re sticking around, so really, how much control are you giving up?
“If the employees perceive that you’re not really giving up control at all, then they won’t step up. And you don’t get any of the advantages of employee ownership. And ultimately, the owner can’t leave.”
The Eternal Business
The key to getting an EOT to work is to make sure the business is capable of not just being profitable, but running efficiently without you. This takes time, but when you can step away and trust that it will pay you as it carries on, that will be worth it.
This is the concept of the Eternal Business.
What you don’t want, warns Chris, is for your EOT to act like a privately owned business, in so much as you don’t want the leadership team thinking ‘great, the boss is gone, I get to take over’, because that’s not how an EOT works.
“If you have a leadership team that just steps into the shoes of the boss and starts to run it, like the boss used to, the employees are going to go ‘well, this is rubbish, we’re not gonna have any say at all here’, and they won’t get engaged and things can actually go worse, not better.”
The power of EOT business is in the employees and employee engagement, and them thinking and acting like business owners.
“If you want employees to have a voice in the business, excuse the language, but they’ve got to give a shit. And they’re only going to give a shit if their personal purpose is aligned with the company’s purpose.”
Preparing employees in EOT business
“The one thing that I always say to owners is if you think this might be the thing for you, do not run back to your office and tell everybody, because that’s what I did. And it was a huge mistake”
You have to prepare your story, your argument, your reasons why they should accept it and what’s in it for them. You have to make them see that it’s good for the business, not just for the owner/founder. And be prepared to accept that this solution might not be for everybody, especially if there are employees who thought they’d become the new boss when you leave.
“Since I published the book and set up the business to help other owners, I’ve spoken to literally hundreds of owners. And I say to them, it’s all about engagement and empowering the employees etc. And, you know, there’s that great statistic that 95% of business owners consider their businesses to already be completely empowered. And yet the reality is, of course, completely different to that”
The other thing you need to figure out is your management team.
Establishing the management team
In theory, who runs the business doesn’t need to change. If the business owner dominated prior to their exit, then they need to step aside. The shareholders need to appoint an EOT board. The board might have a leadership team, depending on the size of the business, an employee forum, or the board might go straight to the employees if it’s a small business.
“You get engagement by accountability at all levels of that pathway of control. And that’s how the business is run. It’s still run by the board, you still get the right people making the right decisions. “
And you need to have trustees: an employee trustee, a director trustee and an independent trustee.