Buckingham Group recently became the latest construction company to move to an employee ownership model, part of the growing trend of companies using EOTs.
Last month the contractor transferred 100% of its equity into an employee ownership trust (EOT). This followed similar moves from civils firm McGee, Erith Group, Kilnbridge and rail infrastructure specialist CCS Group (Cleshar).
EOTs were introduced a few years ago by the government. With tax incentives to encourage more companies to give their staff a stake in their businesses.
They are often used by founding directors or the leadership of family-owned businesses who wish to exit or retire from their company. They may not feel comfortable selling to the highest bidder or can’t agree a price with an external party. Instead, they pass the business to the next level of management, who agree to pay for it out of the company’s future profits.
While many consultancies are likely to continue to be sold as bolt-on acquisitions to foreign players, contractors are typically going down the employee-ownership route or selling to private equity.
So why are contractors increasingly using EOTs?
1. Securing a sale
Sometimes an owner or controlling partnership can’t come to an agreement with third parties over the value of a business. This could be due to inherent risks or opportunities. Or the business may be perceived externally to rely on the departing founders. Either way, a group of senior Directors well versed in the outfit having been in-situ for years may be better placed to meet the sellers’ expectations.
2. Protecting legacy and vision
If someone has built a business up over several decades, they may baulk at the thought of a large multinational swallowing it up and changing the firm’s identity. Handing control to trusted managers who the founder has hired, trained and mentored over the years gives peace of mind.
3. Looking after staff
Departing owners might worry about the impact on their staff of a trade sale or private equity takeover. That could bring about a less forgiving approach in how to run the business. In some cases, owners may have family members and lifelong friends on their books and a strong desire to look after them. An EOT provides reassurance of continuity while there is also the opportunity to pay annual tax-free bonuses to loyal employees.
4. Smooth handover
The disruption and stress of a corporate sale can have a significant impact. Retaining ownership within the company’s existing staff can reduce this substantially. Ultimately this all benefits the bottom line and everyone involved. The process can also be more transparent to staff.
5. Financial factors
In some cases, a higher price could be secured for a company on the open market but there are many financial reasons to consider an EOT. A correctly structured sale to employees can bypass capital gains and inheritance tax grabs. Of course, there is a risk as the cash is not all paid up front. But Directors can in some cases continue to take salaries and receive extra income from the realisation of their sale fee over a period of years.
6. Staff motivation
Structured correctly, an EOT will benefit all eligible employees. While senior Managers will still have better remuneration packages, staff lower down the chain will now have a stake in the business. This can bond them to their company’s cause and drive better morale and performance. Increasing productivity should benefit the bottom line and drive quicker repayment of the sale fee as well as act as a positive retention tool.
We’ve looked at the widespread benefits of selling to EOTs but there are also risks. The money isn’t paid up front, and no big investor is parachuting in to grow the company overnight. To make sure you get the model right, it is important for business owners to consider the following:
- Have confidence in the leadership team taking control. If they make a mess of things, and the company fails, you won’t receive your full payment. While various factors above such as staff motivation and protected legacy will become null and void overnight.
- Be sure the business is on a healthy footing. If you know there are problems waiting to surface, there is no point hiding these. You will be affected when things go wrong and there are no profits to pay the bill.
- Appoint the right trustees. You need to be sure that these will fulfil their roles ensuring the company is being run in the right way.
- Structure the new business correctly. You want all staff to be motivated and feel invested in the success of a company, and no-one to feel passed over for a larger stake.