Introduction
An Employee Owned Trust is a trust that is set up to allow the employees to be involved in the running of the business and to benefit from the profitability of the business in the future.
Set up in 2014 by the UK government to increase engagement within businesses, so far over 1500 have now been created and at Mobius Capital, we believe that this method is extremely good for the longevity of businesses and with the additional benefit of our model which can help the businesses to create the trust but also assist the employees in keeping the business growing.
However, as with all good things, there are limitations, employee owned trusts are no exception, and they cannot be used in all circumstances.
Limitations
Staff Experience
Within small businesses, staff are usually hired with the skill set required by the business at the time. With the owner offering management oversight for the business.
When the owner leaves, this oversight is lost, if the staff are not prepared to take the reins of the business it can falter and is at risk of mistakes. The owner who may have built up the business would have year’s of experience and would have made mistakes from which they have learnt lessons at a time when the business was smaller and more agile to recover from missteps.
It is therefore imperative that a management team is in place which is able to take on the management role and is experienced enough to run the business. But most of the staff are not experienced in this so there will need to be support available to them from the owner as they take on additional responsibility.
Staff Numbers
The first limitation is obvious, a business needs to have staff, without employees a business cannot be sold to them. But with the increase in zero-hour contracts and outsourcing this can sometimes leave the business with too few employees to make the employee owned trust viable.
Generally, the more employees the better, with 20+ employees being a sweet spot, however, it is possible to create trust with just 5 employees.
Where the current owners are looking to remain in the business, there are additional limitations where at least 4 members of staff are needed for each previous owner or anyone connected with them. This means that a business with an owner, their partner and 2 children who wish to stay on, the business will need to have at least 16 other employees to be eligible for the tax relief.
Quick Sale
Trusts can take time to set up, which means for business owners who need a quick sale, this is not a viable option.
A business sale can take as little as 6 weeks if the business is correctly prepared and all parties are ready to expedite the sale, however, this is rare and usually only available for the simplest and usually smallest of businesses. The majority of business sales will take between 6 and 12 months to complete. A sale via an Employee Owned Trust will take approximately the same time, but cannot be expedited as there is both legal work to do plus the staff consultation period needed to get the staff onboard with the changes.
Delayed Payments
The majority of business sales have some kind of deferred payment, this can be in the form of simple delayed payments, money left in escrow, or a payment structure requiring the owner to earn out their exit. However, the expectation of the seller is to receive all of the money upfront.
The majority of business sales to Employee owned trusts result in most of the money being deferred for up to 10 years, enabling the staff to acquire the business without over leveraging the business and forcing it to service unmanageable levels of debt.
Our model is to use the sale to raise as much funding as possible via normal channels to allow the owner to receive a larger amount upfront but the shortfall will still need to be covered by a deferred loan from the owner.
Sales value
The valuation of any business is a complex matter, see article, when it comes to valuing standard businesses though the price someone is willing to pay dictates the majority of sales, with risk factors being a major consideration for acquirers which can reduce the amount paid, or in the case of a strategic buyer, which is usually a competitor or someone specifically looking to acquire your business for one of it’s assets the price could be much higher than other valuations.
Under the rules of the Employee Owned Trust acquisition it is not possible to pay more than the “Market Value” for the business and over payments can result in the sale losing the tax free status. This can result in the employee owned trust not paying as much as offers that are on the table from other parties.
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