Business as a force for good
10 Misconceptions
About EO Trusts
by James Shand of vfdnet.
Selling your Business to your Employees
Many business owners are appalled at the prospect of their business and legacy being ruined by new owners. Years of work (often a lifetime of effort), can easily be risked in order for the business owner to realise his or her value. Does it have to be this way? What if you could realise a good valuation for your business while protecting the legacy you have so carefully built? Can you really ‘have your cake and eat it’? The so called ‘John Lewis’ model presents a great option to business owners wanting to hand on their legacy, but it needs to be carefully evaluated, planned and implemented.
10 common misconceptions about Employee Ownership:
1. “I will have to give away my business to the employees”
No, as normally your business will be sold to the employees.
2. “My employees don’t have the cash.”
Most business sales to employee ownership will be funded through cash in the business, vendor, loans and bank funds
3. “The Banks would not want to fund the new team.”
Banks are prepared to lend if you know how to unlock funding and who to go to.
4. “All the cash needs to be paid upfront.”
Most deals since 2008 have involved a significant proportion of valuation paid over several years.
5. “If I sell to Employee Ownership everything will be fine!”
Changing the ownership is no guarantee of business success – there is no substitute for good leadership.
6. “I will suffer from a tax viewpoint as the taxman disapproves of these deals.”
The tax rules changed in 2015; in fact, Capital Gains Tax is exempt, as long as the transaction is handled correctly. That said, the tax tail should never wag the commercial dog.
7. “Transfers to Employee Ownership are more risky, due to the possibility of unsuccessful negotiations leading to the loss of key employees.”
The stakes are high and need careful management, but with experienced help, these risks can be minimized.
8. “Changing the ownership structure will mean that employees will become more engaged and motivated.”
Unless employees are already fully engaged, they are unlikely to change their attitude and behaviour due to the change in ownership alone.
9. “Selling my business to our employees must involve Private Equity.”
Not necessarily true, as many can be funded through other sources. Specialised funders prefer to invest in employee-owned companies with a good strategy.
10. “My position as former owner can’t be protected.”
Of course, trust is always fundamental, however, legal protections can be built into the agreement.