By moving the ownership of the business into an Employee Ownership Trust (EOT), founders can realise financial value over time but preserve the company’s culture, values, and independence for the long run.
In this article:
What are Employee Ownership Trusts?
The EOT is a mechanism for transferring the majority of the equity from the owners of the business to the employees, current and future.
The innovative legal framework was put in place by the U.K.’s Finance Act 2014, and over 700 companies have become EOTs since its inception.
An EOT is unique in that it allows the shareholders to sell their equity on day one, but it is paid for gradually by the business through future profits.
It acts similar to a mortgage in that the employees get to own the house on the day they move in and then pay down the mortgage as they earn future income.
The difference is an EOT happens to be a lot more flexible and shorter on repayment schedules than a standard bank mortgage.
For this reason, a crucial step in the EOT process is for a feasibility study to:
assess the affordability of an EOT – could the business repay the loan without there being a financial burden?
assess the criteria to qualify for an EOT.
In order to do this companies will have to to:
- Create a five year growth plan, setting strategic and financial goals.
- Obtain an independent valuation of the company.
- Determine the percentage the shareholders wanted to sell to the EOT (this had to be 51% or greater) which drives the value of the loan.
- Model out loan repayment scenarios based on the current forecasts and the five year plan.
Once the business owners and employees are comfortable that the loan could be repaid in a reasonable amount of time (for example, six years), the EOT then meet the criteria and can gain shareholder consensus on the EOT.
Once this is done, the company will be ready to move forward with the EOT implementation. These final steps will see the company appoint an external Trustee to oversee the EOT and work closely with legal and tax advisors to execute the transition.
Why should companies consider setting up an Employee Ownership Trust?
As the ownership change of the company is paid for with the future profits of the business, and when this transition is complete, employees can expect a share of the profit.
All employees are now a partner in the business, and the management team of the company works for our shareholders, i.e. the employees at the company.
This shift is often reflected by having several elected employee representatives participate in discussions and decisions on the company’s board.
Employee ownership is also an often overlooked tool for businesses to increase employee engagement and productivity.
After two years of a challenging pandemic, fewer workers find meaning and purpose in their job.
There is extensive research to demonstrate that companies where at least 30% of the shares are owned by a broad-based group of employees are more productive, grow faster, and are less likely to go out of business than their counterparts.
What are the benefits of Employee Ownership Trusts?
Distributing business ownership more broadly is also one of the most effective ways to address problems of inequality.
Wealth inequality in modern societies is driven by many factors but the concentration of company ownership plays a large and increasing role.
“Without intervention, the rich will continue to get richer, and everyone else will be unable to keep up.”Thomas Dudley and Ethan Rouen
Expanding employees’ ownership stake in companies can give workers a path to wealth creation, and they will reward the business with increased engagement and productivity.
Other key benefits for transitioning to an EOT are:
- EOTs allow companies to remain independent and to own their own future.
- EOTs help protect a company’s community, values and culture.
- EOTs are an evergreen model which do not require external investment.
Examples of Employee Ownership Trusts
Retailers have realized employee ownership more than other industries.
The John Lewis Partnership, a multi-billion pound brand of high-end department stores and supermarkets operating throughout Great Britain, is an employee owned trust.
Publix Supermarkets is the largest employee-owned company in the U.S. with more than 225,000 workers.