Success with Employee Ownership Trust (EOT): Chris Maslin Reveals All

Welcome to the podcast that’s dedicated to helping business owners prepare for exit so you can maximise value and exit like a boss. This is the Exit Insights podcast, presented by Succession plus. I’m Darryl Bates-Brownsword, and today I’m joined by Chris Maslin. And Chris has already exited his business to an EOT employee ownership trust, and he’s going to share some thoughts and insights, having gone down that route. And yeah, just share his experiences with that. Welcome, Chris, and thanks for joining us today.

Hi, Darryl, thanks for having me, and thanks for the introduction. Yeah, all sounds spot on.

Brilliant. So, Chris, your background in the business we’re talking about from memory is an accounting practice.

Have I got that bit right? You have, yeah. I’ve been an accountant in tax for almost 20 years now, the last 15 of which were building up a practice, which a couple of years ago I stepped away from yet.

So what led you down the route initially of going, hey, look, I’m ready to exit my business, or I’m ready to partially exit. Can you give us some background as to what led up to your thinking and your process around changing ownership or changing control of the business and then down the EOT route?

So the business has been growing slowly but steadily over multiple years, and it got to the stage where the senior staff were to a large extent running the business anyway, in terms of the day to day operations. And I think perhaps partly because of that and partly because of just my nature, it wasn’t as interesting for me as it used to be. I think I quite like building something from scratch. Once it’s established, it’s less exciting. So, yes, I think perhaps combination of I got a little bit bored. I was very grateful to the staff that were largely running the business anyway. My other exit options would have generally included like a trade sale where I think some of the senior staff’s jobs would have been at risk, which didn’t really appeal. So, yeah, the EOT seemed to fit nicely.

Okay, and can you give us some magnitude of the size of the business in just terms and number of employees?

So the time of sale, there were twelve people turnover round about a million pounds.

Okay. So right at that, I guess the lower end of the EOT size, that can qualify for an EOT exit.

To some extent. I mean, since doing that, we have helped some smaller businesses than that, I think, yeah, you probably need to have an absolute minimum of five employees, we’d say, and when you are at that stage, probably the founder is going to have to stay on. I would have thought the bigger you get. The reality is, the less relevant the founder is in terms of the day to day running. So it’s a bit of a sliding scale. But yes, we’re certainly at the smaller end compared to a lot of the other businesses that transition.

Okay, so you’d taken the business to a stage where you’d build it up, you started it from scratch, I think, correct?

Yeah.

Started from scratch, got it on a healthy growth path. It was growing steadily. You’d effectively succeeded yourself out of the business. So you weren’t in as much a day to day role because all the staff were running it and building it themselves, and you got bored and ready for a new challenge yourself, recognising that businesses can keep going and running with the owners there. But I don’t know about your experience, but my experience is absent owners businesses tend to. Can dial back because the employees start going, why are we doing all of the work for the owner to take all the earnings out of the business? 

You’ve decided, you’ve come to the point where you think EOT is the solution for your business. Did you arrive at that decision on your own or did you involve the management team in the conversations? How did you arrive at the EOT conversation?

Well, so I think I came to the decision on my own, but did involve the senior managers relatively early on. So, as you suggested earlier, yes, in theory, I could have retained the shares forever, disappear off into the sunset. The staff run the business and I still take the profits. I think partly ethically, that wouldn’t sit very well with me. But also, I think, even ignoring that from a practical perspective, like you say, would the staff be happy with that?

I think when the owner is coming in and the owner’s leading the business, a lot of the times the staff are happy with that. They are just employees, but they are following this leader. But if I was openly disappearing off, I think the mindset might have changed. So that’s why the EOT appealed. And in terms of involving them, I was very aware of the fact that if they didn’t like the idea and they didn’t want to run with it, then it would have been a non starter for us.

But in terms of other options, management buyout wouldn’t realistically have been an option. I think it’s something that a few decades ago was perfectly normal and perfectly achievable. But because wages have kind of done this, whilst house prices have done this, your average up and coming 30 year old simply isn’t in a position to be able to raise the capital to buy out their previous owner. So the EOT enabled them to take control gradually from myself without having to put their hands in their pockets.

Okay, so that’s a nice summary. And when you first raised it with them, and you said, here’s my thinking, and you involved them in the conversations, were they aware of employee ownership or an EOT specifically at that stage when you first raised it?

Not at all. Obviously, they all know it fairly well now, but we’re talking four years ago, maybe the idea was first broached and given it was, I think so, 2014, that the legislation came in to make EOTs possible. The awareness of them has been increasing, I would say quite slowly.

So the reality is, four years ago, they were relatively unheard of things. I think they’re still a bit niche, but the awareness is growing. So at the time, the staff had no idea what employee ownership trust was. Neither did I, particularly. I just read about it and read some of the headlines and quite like the idea.

Yeah. So you did your research effectively together, and when they started to realize that, I’ll say it, they were going to end up with a free business effectively, and I say that loosely, and that you were going to phase out and the future profits, the business, you’d be paid out with future revenues and they would end up with a controlling stake and ownership of the business. What was their response when you sort of said you’re going to acknowledge their contribution in this way?

I guess I think everything you’ve said is true. I suppose it paints a very positive spin on it from the employees, and I think it is good for the employees but the slightly dark side is that they will typically be having to work for the business for multiple years after the sale, with a lot of the profits still coming to me rather than going to them. So they’re sort of paying for the business with their blood, sweat and tears rather than with their cash. And certainly one of them in particular raised the point that, hold on. Doesn’t this mean that EOTs are great for people who join the business five or ten years afterwards, but not so great for the people that the long term loyal ones that are there at the point of the transfer, because they’re going to have to do all that early work without being able to benefit from much of the profits? So, yeah, it’s an interesting dynamic trying to kind of square that circle.

Yeah, absolutely. So how did you handle that question? Because it’s a good question.

Well, so things that were sort of specific to our situation, which others could potentially do, but there’s no need to just revolved around trying to make it that there was a less significant cut off. So your stereotypical situation is up to eat sale.

The founder owes it all. Everything’s quite straightforward. Then the sale happens and the founder will be owed a big chunk of profits for, let’s say, five years. The timeline can vary, but let’s say five years and then, bang, five years, that suddenly stops. All of a sudden it’s like the staff have got all the money in the world from that point onwards.

It’s sort of like clearing your mortgage. You suddenly got all this disposable income. But the downside is that for those first five years, there’s potentially not a huge amount in it for them. So what we did, I didn’t sell 100%. So I retained a fairly significant stake, which meant that the amount that they were paying was reduced because they’re not buying 100%.

I also agreed to waive my right to dividends for the period whilst I was being paid out, which certainly isn’t compulsory. It does seem to be fairly normal. The reason being, if you don’t do that, you work out what the profits are. You then say, right, this chunk’s mine because I own this much share still. This chunk’s for the EOT, but of that, this chunk of it’s still mine because you owe it to me.

So it was just a nice way that we could make it so that whilst I was getting the deferred consideration payments, there was still a decent profit share for the staff. And if anything, the flip side is that once those deferred consideration payments are cleared, I’m making no guarantees that I’m going to continue to waive my dividends. So it shouldn’t change that much in terms of what’s available to the staff.

Okay, so if I understand what you’re saying there, you made it more attractive and perhaps put words in your mouth fair. So that once EOT started, yes, you would be getting your payback from the equity, but also you didn’t take all of the profit because you made some available so that they would get some immediate benefit via some sort of incentive or bonus payment as part of the EOT. So they could see from day one that there was some advantage and some change correlating to the transition to EOT.

Very much so. I mean, I’ve heard it said that the only person on the other side of the negotiation table when you’re doing an EOT sale is your conscience as the founder. And it maybe sounds a bit glib, but I really do think it’s true.

One of the big problems we see with helping other people do it is they like the idea of you can almost choose your own valuation. Yes, you need someone else to independently sign it off. But ask 100 people, you’ll get someone to sign off a crazily high valuation and you might think, well, I’ll also stay MD and I’ll pay myself a huge salary. This is amazing. I can make this the best deal ever for me.

But every little thing you do that skews the deal in your favor is directly skewing it against the employees. So not only have you got your conscience there, but you’ve also got the fact that if you’re too greedy about it, the staff may well end up saying, this deal is rubbish for us, we’re just going to walk away. And if they do that, you might quickly find the business dies of death.

And whatever deal you do agree to with yourself, the business still has to be able to afford it.

Yes, of course. And so it’s the staff’s efforts that’s helping to make it be able to afford it. So if it can only just afford to pay you out and there’s nothing in it for the staff, why would they bother? And I guess it’s worth sort of jumping at this point of going. One of the things that build a business is the people and the culture of the organization, and also the commercial activity and the commercial success of the organization. So if you just construct an EOT purely on commercial arrangements, it’s ignoring the whole point that hang on a sec. EOT is a form, a specific form of employee ownership. And the whole philosophy of employee ownership needs to be factored into the decision making criteria. Where I see employee ownership is that it’s acknowledging and recognizing the contribution of people who helped you build the business to where it is. But it’s also a massive commercial incentive, because now everyone is aligned and incentivized and has exactly the same incentives and outcomes and bonus motivation as the owners do, as in any bonuses that come to them come via increased equity and increased business success, which is subtly different to increased or performing your job in isolation to anything else or anyone else.

So it’s that whole philosophical, I guess, approach that is a big important part of going down the EOT route.

Well, I think, yes, certainly that’s one of the selling points of it, is that the business retains its independence. You don’t suddenly have some other big corporate coming in and saying, right, you’re going to have to start doing things how we do them now. So, yes, the culture may drift a little bit over time as the previous owner heads off and new leaders step up. But, yeah, in principle, it can stay.

Yeah. One of the other bonuses that are often talked about is that you’ve got friendly buyers. Arguably, hopefully.

Well, definitely. I mean, one of the weird realities is that often you, as the founder, are acting and literally signing off, both as the seller and as the buyer, because more often than not, you’ll be one of the trustees who is the buyer.

Yeah. Okay. So, Chris, you mentioned that you didn’t sell the whole business to be just for listeners to be EOT compliant. You have to sell a controlling stake, which is 51% or more than 50%. How much did you sell? Out of curiosity, or. The more important question is, what do you plan to do with the remaining equity?

So, at the time, we sold 60%. You know what? With hindsight, would I do things differently? Possibly. Possibly not. The logic at the time was that we had and still have a relatively young team. I’m not that old, but I was one of the older people there. So perhaps there could be a lack of stability there or a perceived lack of stability.

Young people want to go off and do exciting things, et cetera, et cetera. And I felt like, by me retaining a significant stake, if the business were to fall apart, because a couple of the key staff would disappear, then I would have the financial incentive to step back in and kind of steady the ship, or however you want to phrase it. I don’t know whether or not that was a good idea, but one of the things it has done is given me flexibility in terms of what I can do with those shares now. So, for example, within about 18 months of the transition, we put three people on what I would call the leadership team at the time of transition. So the people to really run the business going forwards, within 18 months of that, two of them had moved on.

Wow.

Just different factors. One of them took a shiny job in London, had always been lured by the big lights, and it was just too good an opportunity to miss the other one, I think, sort of struggled with some of the leadership side of things. Leading can sound good in theory, but in practice, not so much. And there was probably also some clashing with me to the extent that was I really stepping down in the way I should have been.

But what it has meant, me retaining the 40%, was that we’ve now been able to, at a fairly favorable rate, sell 10% to the remaining person, because I do think you said a few minutes ago, that all of the incentives are aligned. There’s some truth in that. But I think there is a danger that some of those leadership team, they’ve got a lot to gain if things go amazingly well, but they’ve not really got anything to lose if things go badly. So it’s something that I perhaps realized. It’s all very well, me saying, right, I’ve sold, you’re in charge now, so go on, go off and do good things.

But if the business collapses soon after that, I’m the one that loses far more than anybody else because of all that debt that’s owed to me. So it kind of became apparent that for the senior team, as you said, they put no cash in, so there’s no risk for them.

No skin in the game.

No skin in the game. If the business plods along as is, well, that’s good for Chris. He gets his nice, reliable payouts and we might get a bit of profit. But really, maybe what we should do is just let’s make some proper gambles with the business. It’s like you hear about the investment banks, that the downside is if we totally stuff it up, we go, whoops, we walk away. No real loss on us, we’ll get a good job elsewhere. And if it goes amazingly well, well, firstly, we’re the hero, and secondly, we’ve quadrupled the profits, or whatever it may be, and the staff will gain the benefit of that.

So I think one of the things I was keen to do, and perhaps with hindsight, might have done differently, was try and get one or more of those individuals to get some skin in the game early, to make them put some of their own money in. Not necessarily a huge amount, but just so that they actually have something to lose if they take a bit of a gamble and it doesn’t pay off.

Yeah, I think that there’s a human factor there, isn’t there? Whereas we tend to value what we pay for something. So if we pay and it just needs to be enough so that we feel it, and then we’ll consider those risks and treat those risks appropriately.

So, yeah, I think that’s a good learning, and, as you say, there’s no skin in the game. So, yeah, I think you’ve highlighted what I see as some of the concerns and risks. So how have things gone since the business? You mentioned a couple of left. What’s happened to the business since the transition?

Well, yeah, a couple of fairly key people left. We also had two pregnancies around the same time, so one of whom should be coming back any minute. But, yeah, there was a very tricky time about a year ago where, like I say, for entirely different reasons. Four staff all disappeared off at a fairly similar time, which put a lot of pressure on the other ones when there were only about twelve of us at the time. But fortunately, two people in particular really, really stepped up to the mark.

And the rest of the team all pulled together, so there’s 15 of them now. The team’s growing. I think we certainly got over the worst of the struggles when we were short staffed. We’re now in a much healthier position. One of the key individuals, like I say, has now got a 10% direct stake ownership. So I think her goals are very much aligned with mine. And in terms of the remaining 30% that I’ve still got, that’s sort of how I foresee things going, is that there will be, the businesses will always have some plotters that do a great job, but it’s just a job to them, and that’s fine. And then it will have the people who are like, no, I want this to be more than this. I want to really build this and grow it. So the plan is that we’ll probably keep it a 60-40 split in terms of EOT and direct ownership, but when appropriate, I will be drip feeding little bits of those direct shareholdings to some of those key staff.

And then my thinking is that can carry on forever in a day, that key staff will at some point leave, but it’s in their incentive to make sure the business is in a really healthy position when they want to, so that other people are quite keen to snap up their shares.

Okay, Chris, so things didn’t go exactly to plan, and you’ve had a few hiccups. What’s your role in the business now?

I’m very happy with where things are now. I think that probably wasn’t the case about a year, 18 months ago.

A large part of that, except, will be my fault. So the senior team did ask me on more than one occasion, right, Chris, you’ve done the EOT sale. What is your role now? And at the time, my attitude was like a typical founder. Like, it was still my business.

Just, well, you guys do whatever you want to do whenever you’re good at, and I’ll fill in any gaps that need filling in. And in my head at the time, that was me being super helpful. I think, in reality, that was just really frustrating for them in terms of. Right, so you’re just going to kind of be hanging around, kind of sticking your nose into everything. So yes, that’s something that I would do differently if I was to do it again.

I think probably we should have got someone external in to sit almost like a group counseling for us to nail down. Right. What are the things that I’m going to do? They’re going to do, what are each good at? What do we each enjoy, et cetera, et cetera.

But less through detailed, careful planning, more just through fumbling our way. I think we’re in a good situation now. Myself and the current MD, we’ve got quite complementary skill set. So we’re good at different things, we enjoy different things, which means we don’t clash.

Yeah, I think we discussed it once on another podcast where we talked about the normal process for exiting a business is to go through a succession plan. Bring the management team up, develop the leadership team over time, remove yourself gradually by training, mentoring, whatever process you do of bringing the new talent up through the organization, and then potentially you exit with an EOT. What tends to be happening is we’re exiting the business first from an equity decision, and then we go through a succession strategy. And all the cultural, the energy, the personality issues remain the same. We’ve got to go through that learning and letting go and handing over the reins process. It just seems to be a little different order than normal.

That certainly can be the case, but there’s no reason why you can’t do all that succession planning side in advance.

For sure.

Maybe there’s an element that, again, I’m perhaps like most business owners in that, a bit gung ho. Well, let’s just go in and do it and we’ll worry about figuring things out afterwards. But yes, there’s certainly a lot to be said for working things out in advance before you sign on the dotted line. I suppose the only fear I had with that was I didn’t want to be that owner that’s like dangling that carrot that’s always just out of reach. And, oh, next year, once you’ve taken over doing all the efforts and I’m not doing anything, then we’ll sell to an EOT and that there might be the fear that, oh, I quite like this. I’m just getting all the profits without doing any of the work now maybe I’ll find an excuse to delay another year. So I felt like it’s good to have that commitment where you can just see, look, I am doing this here. I’ve signed the paperwork for it to happen. Now let’s do the management side.

Yeah, the process we’ve used to overcome that is we’ve gone hey look, let’s develop that succession plan and let’s do what we call a ladder to equity. So gradually evolve the incentive scheme so that people are getting the bonuses and financial recognition and reward and financial benefit from gradually making that transition. And then before you switch to the equity transition as well. So as you say there’s more than one way of doing things and you’ve learned as you were going what are you doing now Chris?

So in terms of that business, not a great deal. I’m still there. I think I’m a bit of a comfort blanket for the MD. That 99% of things she knows exactly what she’s doing but she can bounce ideas off me if she’s a bit unsure. But what I’m spending most of my time doing these days is effectively helping other businesses at the smaller end do the same thing. So helping them with the accounts, tax and legal side of selling their business to an EOT.

And I’m guessing there everything that you learned along the way is they benefit from your experience.

Yeah. Yes. Warts and all. So I suppose that is one area that maybe differentiates us a bit from some of the competitors is that I have been there and done it and got the t-shirt and got a few scars along the. I think you know the main difference perhaps is on the emotional know I’m sure Darryl I know you work with people exiting businesses. There is that real emotional side of it’s your baby and you’re handing it over. And I think stereotypical professional advisors view you don’t get that. You don’t really understand that. It’s just hey you’re getting a load of money and you’ve got to sign some paperwork. What’s the big deal?

Yeah look and that’s why I talk about the cultural and commercial aspects of owning a business. Whenever you run a business there are two sides to it. There’s just the commercials, there’s the systems and there’s just doing the stuff, the process and then there’s the heart and soul of the organization, the personality of the organization because you’ve got people involved. And people have emotions and feelings and whether they be business owners or employees they all contribute to that. So when doing any succession or exit strategy we think you need to address both sides and ease the organization through that transition period. And if you get it right every now and then when you do it gets perfect and you get a fantastic result. But because humans are involved there’s a few bumps along the way in most cases, which I guess, let’s say, keeps it interesting.

Indeed.

So, Chris, you’re working with the smaller side of businesses, helping them to make those transitions. What suggestions do you provide with others and go, hey, look, if you were to do things differently, or what’s the key tip that you provide, or that is top of mind, don’t do it this way, don’t do what we did, do this instead.

I think that it can be very easy as a founder to understand how the deal is going to work for you. And as you’re pretty much in control of it, it can be very tempting to push up the sales price a bit, boost the deal in various ways for yourself.

But what I would suggest is probably the most critical people are, whoever the one, two or three key people in the business who are going to be running it once you’ve sold. And you need to make sure that it works for them, because if there’s nothing in it for them, you run a very real risk that they’ll leave and then you might have a business with a bunch of employees that are sitting there thinking, well, I don’t want to lead this business. They’ve gone, I’m going to go, too. So it needs to work for those senior team, those people that are crucial to the business. We had problems where, like I say, two out of three people in our senior team disappeared.

Thankfully, the one that remained really made a go of it and someone else who wasn’t in that initial three really stepped up to the mark. But it could have been an awful lot worse had they not stuck around either. So, yeah, that would be the main thing is just, it needs to work for those people first. If it works for them, then it will work for you and it will work for the rest of the employees, but it needs to work for those key staff.

Yeah. So as any business strategy, you need a strong leadership team who know their purpose and where they’re headed and their vision and have a plan for the. Future

And that they’re financially motivated to make sure it happens

FOR sure. Hey, Chris, look, the question I ask everyone when we’re wrapping things up is what’s the key message that you would love listeners to take away from our conversation today and effectively from your learnings of going through and transitioning to an EOT and having, I guess, a bit of a bumpy ride? That was unexpected. What’s the key message that you want people to learn?

So I think EOTs can be a wonderful thing. I see it as the guilt free way to step away from your business. I would just hammer founders to really think about those key staff and what’s in it for them, not what’s in it for you. I think it can be very easy to get bogged down in creating the best possible deal for you and then it’s going to burn you. So please take care of that

Brilliant. Chris Maslin, thanks for sharing your exit insights with us today.

Thank you very much, Darryl. Cheers.