You may have seen recently the brilliant news that Skout is now an employee-owned business as our founding shareholders, Rob Skinner and Claire Lamb, signed 100 per cent of the company’s ownership over to an Employee Ownership Trust (EOT) which acts on the behalf of our team.
It’s a move that provides great opportunities for everyone connected with the business, from our employees themselves to our clients to everyone we will work with in the future. Though Rob and Claire knew that the formation of an EOT was something that they wanted to do, the road to employee ownership was not always a straight line. Here, we learn all about the process of setting up an EOT and the challenges it involves.
The right partner
“As we progressed with the idea of setting up an EOT, we found that though there were a lot of people technically qualified to help us through the transition, many of them did not have a lot of EOT experience on which to fall back,” explains Rob.
“This is why we chose to partner with Baxendale, because employee ownership is all they do. We knew that working with them would be a speedy, watertight process and that they would be there with us every step of the way,” he adds.
Simon Everingham and Louise Fisher at Baxendale guided team Skout through the transition. “There are some companies which may be better suited to an employee-owned structure than others. For example, companies which already focus heavily on engaging their employees will have a more natural transition into an employee owned structure,” Simon comments.
“We’re seeing a lot of agencies like Skout become aware of employee ownership structures. Their main asset is their people. They deliver value because they make a profit every year, and it should be affordable in a reasonable time period for the business to pay for its value.
“Baxendale offers a tailored process which begins by asking how the company wants the EOT structure to work and making the big decisions upfront, putting the puzzle pieces together as well as the legal elements. We also offer support in communicating to employees more broadly, and providing training sessions with the trust so that everyone knows what they are signing up to and understand that it is in the best interests of the employees,” he continues.
Understanding what employee-ownership actually means
Employee ownership is a hugely positive step for Skout to take, with undoubted benefits for the team such as career progression, tax-free benefits and greater investment of profits back into the company’s benefits and reward. However, it is vital that the transition is communicated clearly at every stage to avoid misunderstanding, especially when describing how a trust looking after the business on behalf of the employees is defined as ‘employee-owned’ as opposed to direct ownership from the employee’s perspective.
“I use the term ‘naked in, naked out’ to describe trust ownership,” smiles Simon Everingham. “You’re ‘naked in’ because you don’t have to reach into your own pocket to buy shares in the company, you’re a beneficiary purely by virtue of being an employee. If you decide to leave as an employee, you also leave as a beneficiary of the trust so you’re ‘naked out’. You don’t have the messy obligation to sell shares back. It’s a clean way of doing things.”
Employee ownership will also mean something different to a founding shareholder of the business than it will to a junior member of the team. When an owner sells their business, they need to approach the process with a dose of realism about what is important to the team as much as what is important to them.
“The sellers need to balance issues as they value their shares because it’s an area in which there’s no ultimate guidance,” says Simon Everingham. “They may wish to sell them for as much as they can, but they need to ensure it is realistically affordable for the company and that it is repayable in a reasonable timeframe. Of course, the current Capital Gains Tax relief under the government’s EOT scheme should also be taken into consideration.
“With many of our clients, it is the founders who come to us and say it is the route they’d like to go down. These businesses often have a real independent streak, and an identity which the owners want to protect going forward. There is often a question of legacy here as well, with owners wanting a business to have a life beyond themselves or any one generation of employees. So, often, they won’t have liked the idea of an alternative like a trade sale. After a move like that, the identity of the business would be lost at the very least,” he adds.
Keep going – and expect the unexpected
The continuity of an EOT is in Simon’s words ‘a gift’ to the employee, certainly in terms of framing it alongside alternatives such as a trade sale or a management buyout. It’s important to demonstrate to staff that if the business continues to perform well, their jobs will be protected for the future. This would be the base level of demonstration to any employees who may be cynical about the transition, with further explanation about how no-one is being asked to sacrifice anything and that remuneration structures would stay as they are.
“There are obviously more positives which have been built into most clients’ structures, including at Skout,” continues Simon. “Employees have real and meaningful representation on the shareholder body as the trust takes decisions in the best interests of its beneficiaries. In terms of the day-to-day, employees will still perform their role as they did the day before you were employee owned but there has been a fundamental change in ownership and when the debt to the founders has cleared, the business will share in the profits it makes. If the team is a small one working in a highly profitable business, that’s a really interesting place to be.”
However, even the best-laid and most detailed of plans cannot always be enough to deal with diversions along the way. Even with a partner offering guidance throughout the process, it is important to understand there will be occasions when you need to find more time to deal with the transition. Added workload and decision-making can all become part of the formation of the trust and must be dealt with at the same time as trying to keep on top of a day job too.
“Be prepared for this and work with your provider to agree timescales and key dates so that you can schedule accordingly,” is Rob Skinner’s principal advice to those embarking on the creation of an EOT.
Advice to ‘expect the unexpected’ is also offered by Simon Everingham. “Managing different interests can be a challenge. There are lots of options to incentivise key senior people who might form part of the ‘next generation’ of management. But a sale to an EOT fundamentally takes the ability for these individuals to own the entire business themselves off the table.
“You can have a hybrid structure where the EOT owns the majority and some individuals have a minority stake which can form a powerful incentive. But, as always, you will need to balance the interests of these key individuals with the collective interests of the employees more broadly – which is the EOT’s primary concern,” he says.
Take your time
As Rob touched on, timings are important when in the process of forming an EOT. As an estimate, Baxendale advises clients that six months should be set aside to deal with formation from cradle to grave. It is a timeframe which allows all stakeholders an extended period to reflect on the decisions they are making, at each stage they make them. It also allows advisers to have adequate time to receive clearance for formation of the trust from HMRC while the company’s senior leadership team are building engagement with their teams and offering opportunities for roles such as trustee directors. It allows time for employees to think about the proposition as a whole and to formulate and ask any detailed questions they may have about their roles in it too, before elections for employee positions and trustee training sessions take place.
Succession plans can then be formed so that everyone has a good idea of what the company’s structure will look like when the founders step away from it. “One of the first things I make clear to a company when coming in cold is that employee ownership will not address management succession. It’s not something that we can help with,” says Simon Everingham.
“Getting the management succession right is arguably the biggest challenge. The more groundwork that can be done on it, the better. An open and engaged culture before the decision is made is important as it allows the new structure to fit in quite easily, in Skout’s case formalising a feeling that was already in place. Whereas at other companies where owners took decisions, employee ownership can feel like a big change, at Skout there will be less of a change in culture and instead, more reinforcement of what was already there,” he concludes.
We’re very excited to set out on our employee-owned journey after navigating the challenges that the transition can bring. Our new ownership will give us further impetus to set the bar even higher for our team and clients alike as we continue to provide great work. We hope you continue to take an interest in our journey.
Learn more about how employee-owned Skout can help your business with its communications
