In today's episode we are joined by our guest, Chris Budd, who tells us about employee ownership trusts and how they work. Make sure to tune in to find out why a business owner might choose to have an employee ownership trust.
Employee-owned businesses are totally or significantly owned by their employees. Our guest this week is Chris Budd, a qualified business coach and Employee Ownership Trusts specialist. Chris runs us through the different options for exiting a business, how employee ownership trusts work, and why a business owner might choose to do this.
Resources Mentioned In This Episode:
>> Ovation: Sound Financial Planning
>> Book - The Eternal Business
>> Employee Ownership Association
>> Financial Wellbeing Podcast
>> Initiative For Financial Wellbeing
>> JOIN THE WEALTHBUILDERS ACADEMY - CLICK HERE TO LEARN MORE
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Unknown Speaker 0:01 The purpose of wealth talk is to educate, inform, and hopefully entertain you on the subject of building your wealth. Wealth builders recommends you should always take independent financial tax or legal advice before making any decisions around your finances.
Christian Rodwell 0:19
Welcome to Episode 103 of wealth talk. My name is Christian Rodwell, the membership director of wealth builders. And I'm joined today by my co host and founder, Mr. Kevin Whelan. Lo. Hi,
Unknown Speaker 0:30
Chris. Good to be with you again.
Christian Rodwell 0:32
Yes, here we are. So we are looking today at something a little bit different, really something which applies to an existing business owner, I guess, because it's all about how to exit your business, and specifically, around the topic of employee ownership trusts.
Unknown Speaker 0:50
It's a complicated word again, Chris, the word trust, not just the use of the word. And I think there's a double meaning here. One is, if you're going to think about passing a business, into the hands of somebody else, you know, there are probably four main ways to do it. I know, our guest, Chris says there are three, but there's probably four. So number one, you can sell it to an acquirer, too, you could technically pass it on to family members, right and a lot of family businesses. Three, you could do an MBO, which is the management team buy it out, so you get your eggs that way. And fourth is this employee ownership trust. But the the key thing with all of these things really, particularly the employee ownership trust, is because it Trust has been created. It's a kind of a legal document, like a pension is a legal document. So we, we use the word trust a lot, then we in wealth building, the use of a word trust is really, really important. So you got to know which kind of trust you're talking about. But the other thing is, if you're going to be relying, as Chris will explain, on your employees to continue to run the business, so you get paid from the cash flow of the business, you've got to trust each other. You know, the feelings got to be right. The cultures got to be right. The preparations have all got to be right. And I'm sure they're all good things that Chris will raise in his story is how he created that solution for himself in his financial services business.
Christian Rodwell 2:27
He did indeed. Yes. So our guest today is Chris bird. And Chris is one of the UK's foremost experts in how to sell your business to your employees. He's the author of the eternal business book. He's also podcast hosts, which are mentioned. And yeah, interesting topics. So why don't we head to the conversation with Chris bird. Chris, welcome to our talk today.
Unknown Speaker 2:47
Thank you very much, Chris.
Christian Rodwell 2:49
Great to have you on. And today we're talking about employee ownership trusts. So before we kind of dive into exactly what our employee ownership trusts, please give our listeners a brief introduction to yourself.
Unknown Speaker 3:00
So I set up a financial planning company in 1998, which became evasion finance. And I sold that to an employee ownership trust. to three years ago, now Crikey. And I was so enamored by all of that, that I set up a consultancy to help other people to do the same. I wrote a book about it very subtle product placement behind me, wrote a book about it. And yeah, so So now that's what I do with my time, I also wrote a book called The financial wellbeing book, we have an institute called the initiative for financial wellbeing all about money and happiness. So that's kind of a hobby, if you like, and then the day job is succession planning and employee ownership trusts.
Christian Rodwell 3:41
Yeah. So let's, you know, first getting really clear on what is an employee ownership trust and who's it for?
Unknown Speaker 3:48
Okay, so there are three exits for a business are three ways to sell a business up until 2014. There were two and then the eo T was introduced in 2014. The traditional to our sale to a third party such as a consolidator, or the sale to your employees, your management team and management buyout. Now, they work for some people, and I'm not knocking them it's horses for courses, but they weren't for me. The reason that they weren't for me, particularly with the consolidator type route was because there is a certain game played by some consolidators and some large corporates called efficient chip deal. I know you've ever heard of the fish and chip deal, Chris.
Christian Rodwell 4:31
I haven't.
Unknown Speaker 4:32
Okay, so this is this is a good thing to show shed a bit of light on a fish and chip deal is where the the larger company will send out a large valuation to reel in the fishing. The owner, the owner then gets very excited maybe tells friends and family and possibly even employees that they're going to sell. And then they chip away at it the purchaser through various different means, such as due diligence. And that's perfectly reason Double, you know, somebody's got a big defined benefit transfer liability, that probably should be reduced in the purchase price. Sometimes it's not so reasonable. And I have come across occasions where somebody is just not paid in breach of contract and the company, the seller didn't have enough money to, to sue. So some companies are great, some companies not so great. The point is, as far as I was concerned, I didn't know which was which. So I was kind of dreading the moment I had to sell my business and get in bed with these people. So then you look at the management buyout. And that works for some where you have a management team who have the money or the resources to be able to do so. And the ability to run the company, because what will happen is, you'll probably get paid out of the future profit of the business, one way or another, you might get a lump upfront, but there'll be warranties if the profit doesn't happen, you will pay it back. So one way or another, you usually end up paying out of the future profit of the business. So you need to make sure you got a management team that will take the business and be safe with it. Some companies will have that some weren't. For me, there was an extra level there, which is if I was really passionate about leaving a legacy of my business, I love my business ovation is a really cool business. I wanted to look after the employees and I wanted to see a carry on. That's why the consultancy is now called the eternal business because I wanted to say gone, Gary on it in theory forever. So for me, therefore, the sell to management team, what they might have done is a few years later sold to a consultant data, so that wouldn't have given me the legacy. So in 2014, this thing called the employee ownership trust was invented. And the shortcut to think of how it works is john lewis. You familiar with how john lewis is owned?
Christian Rodwell 6:37
well aware of the partnership arrangement there?
Unknown Speaker 6:40
Exactly. So all the partners, all the employees of john lewis are called partners. They're not actually partners, they don't own equity. All the equity is owned by a trust fund. That what happened is when the company makes profit, they when, if and when are the most difficult times, when the company makes profit, that profit goes to the trust fund and is distributed to the employees. And the ELT is exactly the same thing. But for the smaller business. So there's an HMRC approved suite of paperwork that you get their approval for. And then you can do this yourself. This is what I do with with the majority of innovation. So the way it works is the actual transaction. What happens is, you set up your own IoT, you sell your shares into the IoT. The IoT, of course, doesn't have any money because it's just been set up, but it does not have the shares and therefore the future profit of the business. And so uses that future profit to pay you out over a period of time. But defer consideration as it's called an agreed repayment schedule is set up by you with the eo t as part of the sale. Now there's a few rules in place. For example, the EOD must have a controlling interest. It doesn't have to be 100%. But it must be more than 51%. The EOD also, a regular question asked is what valuation Do you use, and it's an independent market valuation by a suitably qualified accountant that you need to need to use. So, so yeah, and that's it to then sell, and then you get paid from the future profit of the business. One more thing before I take a breath and allow you to actually ask a question. What there's a really, really important point here, which is your if you've if you go through this process, and you sell and you're getting paid for the future profit of the business, it means that you are now being paid from a business that you no longer control. And it's for that reason that the work I do. And the work that we promote, is to take your time to prepare your business for your own exit, you need to make yourself the least important person in your business, I would suggest before you make the sale to the E ot. Now, everybody has done that and can do that. And we do a lot of work with companies post sale. But ideally, if you can do that work before the sale, so that you can just one day quietly leave and nobody notice and then get you can then trust it, you will then get paid.
Christian Rodwell 9:04
Yeah, no loss of information there. So let me pull out a few points that I picked up on. And well, just there you mentioned, you know, preparing so what sort of time period are we talking about? And, you know, I know you do business coaching as well, Chris, so we talked about having your five year 10 year plans, and, you know, always starting with the end in mind. So what sort of timeframes are we talking about?
Unknown Speaker 9:30
Ideally, a couple of years. The employee owned business does not work like a privately owned business as a lot of changes needed. So you've got the owner themselves, they need to feel able to let go and owners are very much one of the major challenges, let's say, in letting in letting go and allowing others to step up. You've got a leadership team. They may be a new leadership team or maybe they've been waiting to take over for a while. And managing their expectations, helping them to understand that leadership in an employee and business is not the same as leadership in the private business. It's about empowerment engagement, not about, you know, taking over control, because the control has been passed to everybody in some way, shape or form. And then as the employees, helping them to realize that their voice is now going to be heard, but they don't actually get a vote. So we don't get the death by committee situation, you still have a functioning nimble business, but where the employees are contributing all of that, thinking like business owners, all of that takes time for people to adjust to a new way of thinking of working. So two years is ideal. As a minimum 20 have been done quicker than that and have been okay. But when they are done quicker, it's a pretty good idea to then still make sure you do the work afterwards. The cultural change, that's what it's all about a cultural change. There's one really important thing I haven't mentioned deliberately, okay, the proceeds for the owner from the sale to aliotti are free of capital gains tax, not human entrepreneurs relief. Now, the reason for that is because the government loves the concept of employee ownership, it's it's both sides of political spectrum love it, it's very much the kind of data right by your own home type principle, it's also employees benefiting from profits, so both sides of the political political spectrum like it. But what that has led to is it has been promoted by a lot of accountants, corporate finance, etc, as a tax free exit. Now, that can be disastrous. I've got lots of examples I could give you, where if you don't prepare the company properly, then things can go very, very badly wrong. And of course, you might then not get paid out. So there will be plenty of companies at the moment who have gone into this very quickly. And if that's the case, well done. That's really good. I love employee ownership, but you do need to spend some time working on your cultural changes, even if it's after the sale. There is one other tax just to check in, which is the profit when it's shared to the employees 3600 a year for your income tax. There are a couple of tax perks to it as well. But it is really important that people spend their time on the culture, preferably before but if necessary, after,
Christian Rodwell 12:21
yeah, interesting job, see where, you know, always looking for the wealth building lessons here. And I guess the key things that you know, for most of our members, Career Services is financial independence. And we measure that by the level of recurring income that someone is generating from their assets every month. So does it cover the lifestyle that they're they want, but also the freedom of time? So you know, it feels like the the OTS can provide both of those things for an owner? Yeah, absolutely.
Unknown Speaker 12:49
One of the first questions that I always ask people, I've spoken to literally hundreds and hundreds of business owners over the last few years since I wrote the book. And one of the first questions I always ask people is how much do you need to sell the business for? And of course, they say it's worth a million or 2 million or whatever. And I say, that's great. But that wasn't actually the question, how much do you need to sell the business for. And so one of the first things that we get them to do is to go and get proper financial planning with cash flow forecasting, etc, so that they can work out how much they actually need for that business. And if that figure comes out is less than the current value, cracking, you got options, but maybe it comes out as more of that value, in which case, you need to take a bit more time building the business. So that knowledge is very, very important. And of course, that includes a bit of work about what life do you actually want to lead post sale. And a lot of business owners have given no thought to that at all. That's where the financial well being stuff kicks in helping people to work out the sort of life that they want to lead. And that's one of the main that's a major part of the first part of the online course that we run is helping owners to work out, actually, what am I going to do next? The nice thing about that is very often, actually, is that once you get over this and start thinking about that, they say I'm gonna send in five years time, it's always five years time. By the way, whenever you ask a business owner, when do you plan to sell in five years time, then you come back next year. So when you buy, it's always five years, though, once you start actually getting them into this process that five years usually comes a lot shorter quite quickly. Because you've helped the workout live beyond the business, and they start to find that quite appealing. My experiences very often that comes from all like two years.
Christian Rodwell 14:29
Yeah. So obviously, there's the benefits for the for the owner, in terms of benefits for the employees that are getting profit shares, what are some of the other benefits in terms of the culture,
Unknown Speaker 14:40
the main thing is they get to get involved. There's a very good book called drive by Daniel Pink, which talks about how the nature of work these days is very different because it's no longer completing a series of steps, but it's what he calls heuristic working solution driven When you do heuristic working, you don't want reward in a kind of a financial reward or what you want is to get involved with the purpose of a business. So one of the things we do again through the program is we get people to be very clear about what we call the flag in the ground, the purpose of the business assignments and xy kind of stuff. Because if you've got a really clear purpose, when the employees take over, what happens is they start to really care because they get to have a voice in the business, which has a real purpose, which hopefully is aligned with their own personal purpose. So if you go to an employee ownership Association, meeting, which we go to lots of them, where we help sponsor, the annual conference, etc, the energy and excitement of all the employees of lathe workers, people who perhaps a year ago, were just turning up to do a job. Now they get to go to a conference to talk to other employees about employee engagement, and they love it, they absolutely love it. There is a statistic, which era come up with which, for their research, which is that the they call it the wash factor, simply by allowing the employees to get involved. There is an increase of 15% in profit after year one, but I come back to stressing that all takes time to prepare, that takes time to get that culture, right. And there are lots of vo a ELT companies where the owner has carried on just running the businesses before you won't get any of those benefits, or certainly not as much can even go against you. If the employees thought they were going to get a voice and then they don't. So preparing for this sort of thing. And if it only carries on in the business, that's not always possible. But you've got to manage very, very carefully, or maybe I should say, work even harder on getting the employee voice heard. So yeah, they absolutely love it. And ask them live ovation. What they think of it, and hopefully they will tell you the same thing.
Christian Rodwell 16:54
Yeah, and what about any other recent case studies of other companies where you've kind of seen that before and after process and some of the changes that have come?
Unknown Speaker 17:04
Yeah, there's been some big name, sales actually recently. So then here in Bristol, arm animations was in government and all that riverford foods, which is sales. So there been some big, big name sales. Richard releford foods is a really nice example. Because they're very much, they've very much embraced the whole thing, what tends to happen, I can tell you some of the problems as well as the good things. In fact, it's quite easy to just talk about the problems. And I don't want to do that, because that makes it sound like it's quite negative. It's not as really positive. But I've certainly seen occasions where the lack of preparation has meant a management team has become the new leadership team under the new board, and they've treated it like their business. I can think of one example of an engineering company where the directors have refused to share any financial information with the employees in case they sold it to their competitors. That's not really embracing the spirit of employee ownership, to be honest. So there's some there's some things to watch out for. But the positive stuff, you will find that the person who may be, they never really contributed American to one particular company, the lowest paid member of staff. And when they were going through it, people said, Well, you know, that sort of person won't really care about this. She now joins in the team meetings to talk about some business issues. She doesn't say a great deal. But when she does, everybody stops to listen, because she's got great ideas they were never heard before. She enjoys her job so much more than she did before because her voice is being heard. So that's a nice little example. The best phrase I've heard to come up with that is a receptionist at a company who said, I don't work for the company. I am the company. That's a great thing to hear. Isn't that a lovely expression?
Christian Rodwell 18:50
So anyone listening now, Chris, that is it. Considering this? What would be the process? What's the next step for them?
Unknown Speaker 18:57
The next step is to not talk to anybody. Maybe except me, of course, but not to go and talk to your employees for sure. Because they might not hear the message in a way that you would want them to hear the message. It's very easy. And I've seen this a lot. I've done it myself. You go to the employees, great news, I find a way to sell this business. Yay. And they don't hear it as quite, quite as happily as us that you think you said it. So it's about what's in it for them preparing your engagement plan. Don't go and talk to solicitors. You don't need them yet. Why pay expensive fees to solicitors when you don't need them until the end of the process. The phrase that we use is you need to work on the transition, not the transaction or before the transaction. The solicitors will be absolutely crucial when the time comes. But you need to be working on the culture. They're not on the legal aspects. And don't talk to your accountant. I mean, obviously there will be exceptions. If you've got to Canada's a really good friend that's absolutely great. But the accountants again I don't really have much of a role to play in this process. And they, they need to do evaluation. But they're the tax rules are all laid out, I can tell you in five minutes, what we have done what the tax rules are. So the accountants don't have a great deal of a role in all of this. So they're not the important people to be speaking to. What you need to be speaking to is people who have done it before, through the employee ownership Association, people who can help you on the things that you do need to do to begin with, which is the likes of ourselves, who will help you work on the cultural piece, there can be real harm done if you go and talk to some of those other people first, because your focus might go off onto the tax or on to the legal aspect, or your leadership team might get the idea. So we will help you to prepare an engagement plan on how to speak to those various different parties. So it's really important, other owners as well, if you're not sure about it, we can put you in touch with them. Speak to some other owners who have been through the process. And hopefully he will be just as excited about it as I have.
Christian Rodwell 20:56
Yeah, well, thanks so much for sharing all of your experience with us today. And of course, we've mentioned your book, the eternal business, you've got the financial well being podcast as well, Chris, where's the best place for someone to head to online to check those things out.
Unknown Speaker 21:10
So the internal business.com you can loads and loads of videos, blogs, lots and lots of content on there, people can have a look at. And if anybody's interested in financial well being then the if W initiative for financial well being if w.org.uk we've got a conference in May with Ruby Wax as our main speaker, which I'm very excited about. So they can come and get involved with us there. Obviously the financial well being podcast on your usual podcast provider.
Christian Rodwell 21:35
Thanks so much for sharing with us today, Chris,
Unknown Speaker 21:38
thank you very much enjoyed it.
Christian Rodwell 21:40
Okay, so that was interesting, Kevin, and we can dive into some of the things that Chris was talking about there. But before we do that, why not head on over to trustpilot as we like to do and pull out one of our latest reviews, and I am looking at one from Jim who says, I just feel more confident and relaxed with all aspects of money. Since joining the wealth builds community, I've been able to have sensible, well informed conversations with people on the same journey to financial independence, and been introduced to consultants have put in place the safeguards for my family without jargon nor great expense. And he goes on to say the structure, information and support have made the entire experience a stress free and enjoyable one. And it concludes with we've moved from financial instability to stability in 12 months, and in the coming 12 months aim for financial independence by remaining in the wealth builders community, as the name accurately describes, this is wealth building together. Thank you to Kevin Christian and the amazing team and coaches. So thank you, Jim.
Unknown Speaker 22:49
Yes, very nice. Indeed, from Jim, I appreciate those kind words always nice. When you get kind words, Chris, it reinforces the integrity of what we do. And the only measure we have of our success is whether people are making progress to their financial independence. And, you know, we do that through a combination of things, don't we, and we're committed to that. We do lots and lots of free stuff. So make sure you, you know, jump onto our free Facebook group. Chris, I'm sure you could post a link to the new recurring revenue roadmap. And let people see that because we often refer to the roadmap or we certainly will be more so in the podcasts. You know, and we also will frequently mention, you know, some things that we do, where we would invite people to learn a little bit more if they think there's a good fit. So lots of people will tell us, they've been listening to the podcast or following us for quite a while, then after they've got that level of comfort. They hear and feel our integrity, then the timing can be right. So if you're one of those people using the timing could be right. Where would somebody head on over Chris to see if they would care to work with us?
Christian Rodwell 24:01
Well, the first step would definitely be to download a copy of the roadmap. So wealth builders.co.uk, forward slash roadmap, and then you can visually see what our processes that we're talking about every week on the podcast, and there's nine steps there. And I guess, you know, tying into today's conversation, Kevin, if we look at the steps in our roadmap, then step four is all about assets. And really, I guess the employee ownership trust is is a form of JV, would you say?
Unknown Speaker 24:29
Yeah, which would be you know, pillar number seven, wouldn't it Really? So pillar seven. And I think it's really I think it's less about the employees having the asset. I think it's more about an exit strategy for the business. So I think it's probably more stage nine. When somebody is already got the asset, they've already got the results. They're measuring results, but they've got to a place where they want to sell the business for whatever reason people sell the business. You know, they get to Some people get tired. Some people get bored. Some people get ill some people just want to move on and, and flesh, their creative muscles in another business. And certainly in financial services, many people get a little bit in tired of just the regulatory side of things, you know, so all sorts of reasons people want to sell their business. And really what's interesting, you know, from a number of different perspectives, I mean, usually you would expect if you've got a good business that has a high degree of recurring income, you've got a good solid niche in which you're playing your role. And the business can work without you. And you hear Chris saying, you've got to be the most the least most important person in the business. Is that what he said something like that? Yes, the least.
Christian Rodwell 25:45
Yeah. So really just make yourself almost redundant, ready for that transition.
Unknown Speaker 25:50
And that takes time and preparation. And I think he talked about that being a couple of years. And that's probably true, because you can't suddenly kind of move into employee ownership trusts unless you have a, you built a sort of roadmap for that in a different way different roadmap, of course, but lots of preparation. And, you know, wanting to make sure that of course, the employees themselves a rock for the, for the role, because your future income will come from the share of the profit, because the, as you heard him, say, the employee ownership trust is essentially a trust where you sell the shares of the company to the trust, which you know, serves everybody well, potentially, anyway. I mean, the only downside, I suppose is, generally speaking, Chris, if you sell your business to an Enquirer, where the acquirer sees the potential for the ongoing profit, you will normally secure a premium on your business, because the acquirer is getting something they can't just replicate. Now, in this case, when the employees are replicating, you definitely as a business owner, not going to get a premium. Right, there's not a premium selling price. But it's a an exit that allows you to be paid really, from the proceeds of future profits. And as long as both sides can see that, and of course, as the owner, they do qualify for what we pay, we call entrepreneurs relief, but it's really a capital gains tax relief at 10%. So it's as good as selling a business from that viewpoint. So yeah, there's there's definitely some good things in there. Ideally, if you're a business owner, sell it for a premium, and you'll get capital or capital gains relief, entrepreneurs relief. If you do an ELT, you will, if you pass it on to your family, you're definitely not. And the chances are with an MBO, you know, where the management team by you out, you've, you've got a lot more challenge, because you're only dealing with the management team. So whereas with the employees, it kind of feels nice as well. And I like what he said, interestingly, curious, he said, I wanted to create a legacy for the business. And usually when we think of legacy, we think of legacy on death, don't we? I mean, often you think of that. But he wanted to create a legacy on his lifetime, not just for himself to get an ongoing income, but to essentially revere the employees. And I love the name of eternal business, I thought that was very clever, to kind of build that sort of infinite angle to the business. So you know, it's a very interesting, but niche way of getting an exit for your business. And I think it was definitely worth an airing, because it kind of rattles around all of our pillars and the use of trusts and ensuring that you're looking after people and treating people with integrity and all of those good things. So I really enjoyed it.
Christian Rodwell 28:53
Yeah, no, it's something that has definitely cropped up a couple of times amongst our members. And so we're always have our ears open and seek out the best experts that we can find to bring and share some words of wisdom. And we'll continue to do that, Kevin. And of course, if there's anything that you'd like Kevin and myself to address, you know, questions or future guests that we can reach out and bring to the show for you then do drop us a message. You can get ahold of us Hello at wealth builders co.uk. Or just reach out to us directly through our Facebook community, and search wealth builders and you'll find us there. Oh, until next time, Kevin. We'll be back. Same time, same place.
Unknown Speaker 29:33
Look forward to that question. Until then, my friend. I'll see ya.
Unknown Speaker 29:39
We hope you enjoy today's episode. Don't forget that we are constantly updating our resources inside the wealth builders membership site to help you create, build and protect your wealth. Head over to wealth builders.co.uk slash membership right now for free access. That's wealth builders.co.uk slash membership.