Normally in a succession or exit, the founder will have a buyer, someone who has demonstrated that they have both the wherewithal (cash) and (hopefully) alignment with the founder (a desire to maintain the values and grow the business). A buyer will wish to ensure that they are acquiring a company that demonstrates similar values to their own and that will add to the growth of their company at the right price. The intrinsic balance created by the interests of the competing parties tends to lead to a deal being done at a price that is agreeable to both parties.
In an employee ownership (EO) transition employees can often be the last to know.
Do you know how your employees will react to employee ownership?
Founders need to be aware that there is a real risk of derailing the transition, if the employees are informed of a transition as a done deal, without acknowledging that employees need reassurance that EO is not simply being implemented because it is a potentially simpler and more tax efficient exit for a founder.
A successful EO transition will address and recognise that the employees must be treated with openness, clarity and given sufficient time and support to ensure that they understand the process. So what challenges should a founder expect when dealing with employees and how should they tackle them – a few are outlined below:
When should employees be informed?
Ideally the founder should have already determined that EO is their preferred exit strategy, rather than one of several ideas, because informing all employees that this is the plan can backfire quite badly if it doesn’t go ahead. The founder might have tested the concept of EO on one or two senior (and discreet) members of the business, to get an initial sense of what appetite there may be for such a transition. If the initial responses are positive, then the process may begin earnest, but still allow as much time as possible, because reactions to the following may require time to be settled. Timescales of 6-12 months are common for an EO transition, not because the legal process is any more complicated than a trade sale, but just to allow the concept to become comfortable for all involved.
Settle any concerns about price
As a founder of a company, it is usual to be accustomed to large numbers, be that turnover, profit, tax, payroll etc, but many employees may have no experience of figures with many more digits than their salary and can be alarmed at the headline purchase price payable to the founder and the company’s commitment to support the repayment of that over a number of years. It can be helpful to spend some time in the early days of the transition to get employees comfortable with the financial performance of the company. There will still come a time when they (or at least representatives of the employees) will need to know how much is being paid to the founder, but hopefully by then they will have come to understand why the share value, representing the worth of the company, is at the level that has been proposed.
Reassure employees on their responsibility
Alongside the concerns about the overall price, employees can become worried about the burden of paying the price falling upon the company – will it be able to sustain future repayments? Will liability somehow fall on them? This is particularly sensitive for those employees that might consider the opportunity to become trustees of the EOT. Reassurance is necessary to show that the figures can easily be met by the company and that save for a collapse of the company (which can happen in any event) which may lead to the loss of their employment, they have no personal responsibility for the payments to the Founders.
Build confidence in management
In contrast to a founder, who may well have had many a sleepless night worrying about the financial stability of the company, many employees may not have given too much thought to business matters. On learning that they are to take over the company as owners, a wave of concern can arise that in the absence of the founder there will be no strong leader capable of safely steering the company. As in a preparation for a trade sale, investing in up skilling senior managers so that there is a team already operating the company, may allay these worries. Bringing in external support and advisors can also give additional confidence.
Thinking about the future
Employees sometimes need to be reminded that things do change and that the founders, much as some might like, cannot run the company forever. At some point, as founders age and turn their minds to the gap year that they didn’t fulfil many years before, a business succession will become inevitable. With that in mind, employees might reflect on what is preferable to them. Do they wish to see the company sold to a competitor who could implement some synergies (often involving redundancies)? Or a management buyout – with the management team taking on uncomfortable amounts of personal debt (and no stake for the employees)? Or even a winding up of the company to sell off the assets (definitely no employment opportunities there).
Will all employees be positive?
Not all. Founders need to be mindful of the fact that for some employees, how the company that they work for is owned, is simply not of concern to them. As long as they have a job and they are paid, a transition to EO may not be something that has any meaningful impact for them. A more serious consequence is the effect on managers and team leaders – the majority may be completely inspired by taking the company into employee ownership, but for some the perceived lost opportunity of personally owning the company or making partnership will cause them to reflect on whether they will stay with the company or depart for more traditional ownership.
Transitioning to Employee Ownership can be an incredibly appealing succession opportunity or growth strategy and many of the benefits are now well known. But for every willing founder, remember there may be a nervous set of employees. However, with some recognition of these concerns, good technical (legal, accountancy and business support) can ensure that a great result can be delivered for the founder, the employees and the company.
Becoming Employee Owned ought to be perceived with real excitement, EO companies are no longer curiosities, but an important and growing part of the corporate world and are thriving for the benefit of the employees, even as they pay down the purchase price to the founder.