Bankers nearly always asked me “What is your get out plan?” at annual reviews, and over the 35 years I’ve had of running a business I gave them a variety of answers, including “I’ll never retire”, “I’ll pass it on to my children”, “I’ll sell it to a venture capitalist (VC) or investment firm”. I only seriously started considering an EOT after meeting someone at a networking meeting who had done it a few years before, back in 2019. I was seriously worried that VCs were only really interested in their financial return, despite their assurances to the contrary.
I had a couple of aborted attempts at selling but buyers couldn’t convince me that they would really continue with my sustainability ethos, protect all my people, (850 at last count), and support nursery settings in deprived areas. Plus the contracts they offered me to stay on were awful such as asking me to clock in and out – ridiculous for a self-confessed workaholic! And step-in rights that meant I could be out on my ear if there was a national or local disaster, like Covid perhaps?!
I did my due diligence for myself, reading widely, having lunch with the founder and chair of a fantastically successful EOT group of nurseries in the Midlands; another lunch with a founder/still CEO in Taunton. I went to an EOT conference; spoke to financial advisors, accountants and legal specialists about the pros and cons. to make sure I knew what I could be getting into. I discussed options with my directors, including management buy outs, protected bonuses and/or shares for directors, and how we could structure ourselves as it seemed to us that directors could be the losers in the plan if we weren’t careful.
My conclusion was that an EOT was far more likely to protect my business legacy, and staff and settings compared to selling to a VC. I learnt that an EOT can be brilliant for recruitment and retention, innovation and engagement PROVIDED the communication is done well. The tax free chunk of money on completion was a welcome de-risk for me, but I would have got a lot more cash up front from a VC. The tax free income until the EOT pays off the value of the business is a great pension, provided the company continues to be profitable, so keeping an eye on the management accounts and being able to veto board decisions if necessary, is a control worth keeping until its paid off completely.
The figures have to stack up for the founder, the EOT and HMRC. The business needs to be in reasonable shape to provide an appropriate value for all the years of risk, work and investment from the Founder, (valued as an EBITDA multiplier) but must also be affordable for the EOT to give the staff a fair opportunity to do well and achieve tax free bonuses from profit in the not too distance future. I decided to delay sale until we had recovered from Covid and I felt confident about the future for them.
I did move the freehold properties and their mortgages into a different limited company and excluded those from the sale to make the transaction affordable for the business, and give them a debt free balance sheet, which also gives me some leverage to engage in some new business ideas, if I want to in the future. I also paid a first bonus (tax free under an EOT) to all staff on completion, technically earned whilst still in my ownership but through their hard work, which gave staff a taste of what was to come and I hope will inspire them to further success.
Competent succession is of course vital if you are actually going to be able to step back successfully, and this also took me several years to put in place. (beyond the scope of this article!)
A slightly worrying discovery was finding that if the EOT still owes me money when I die, my estate would have to pay IHT on funds they haven’t received yet, so I had to put a life insurance policy in place. Fortunately, my blood pressure went down post EOT, making life insurance more affordable and imminent death less likely, maybe!