Employee Ownership Trusts ("EOTs") - Post transition top tips

The number of companies transitioning to employee ownership has reached an all time high in the UK with over 1,400 UK businesses now being employee owned.

As an adviser, it is very easy to look forward to the next transition rather the consider what steps an EOT and its trading company may want to do after the transition.

Here are our top 10 tips on how to make the continuing journey of employee ownership a success:

1. Celebrate the transition

Do make a big thing about the transition. It is a major milestone in the history of the company. Your customers and suppliers may have their concerns about the future of the business. You have the opportunity to explain the benefits for the company and its employees and why the transition is good news for the customers and suppliers. It may be an opportunity to update your website to include a section on being employee owned.

2. Get back to the day job

The transition may have taken up a lot of management time and effort. It can be easy to miss a drop in business performance.

3. Establish any new financial and contractual controls/policies

You may have to satisfy some controls regarding the operation of the business set out in the Share Purchase Agreement (“SPA”) to protect the position of the previous shareholders in terms of the receipt of deferred consideration. Check what consents are required by the SPA and when you have to send financial information to the sellers. Make a diary note for the deferred consideration payment dates.

4. Establish a role for the sellers

If the sellers are continuing in the business, they may need to be supplied with a contract of employment which can be a shock to individuals used to doing “their own thing”. The sellers have to get used to the fact that they do not have the final say – even if one of the sellers remains as the managing director, they are still answerable to the EOT board.

5. Check any regulatory requirements

Checks should be made on signing authorities and bank mandates. Do you need approval of a change of control for the Financial Conduct Authority? What about more mundane approval of waste transfer licences, ISO certificates or major contracts and updating any organisational charts.

6. Establish terms of reference for the EOT board and the trading company board

Establish who is responsible for what and how does the trust board carry out its supervisory role without the EOT trust directors becoming shadow directors of the trading company. Establishing good governance at the outset is a good habit to embrace. You may want to diarise future trustee meetings to avoid them being missed.

7. Review the terms of business/contracts

The founders may have had a higher appetite for risk and may not have concentrated on the terms of business and contractual terms. An employee owned business may have a lower risk threshold.

8. Consider trustee training

It would be very unusual for employees to be aware of their full responsibilities and rights as a director of the EOT trustee company. Training and support may be required to ensure that all the trustee directors are able to fulfil their responsibilities. An increasing range of formal and informal training is accessible. Trustees may be able to join an EOT trustee network to discuss issues that may be relevant to a number of EOTs.

9. Update employment contracts and employee handbooks

It may not be necessary to carry out wholesale changes to the terms of employment. A few drafting “tweaks” could reflect the new employee ownership regime, for example, an extra day’s holiday on an employee’s birthday.

10. Continued employee engagement

Effective employee engagement can be very difficult and can require considerable effort once the initial honeymoon period of the transition has ended. Regular updates and newsletters can be effective in addition to the payment of an EOT bonus.

How can we help?

At Geldards, we offer trustee training courses for EOT trustees as well as regular EOT forum meetings to allow trustees to discuss topics and areas of concern with other EOT trustees. If you would like to hear about future events or would like to discuss trustee training for your EOT trustees please contact either Andrew Evans or Debra Martin.