The Sale Of Ovation To Employee Ownership

 

I’ve an announcement to make. I’ve sold my business, Ovation Finance Ltd.

Now, I realise that this won’t be of much interest to anyone other than me, my wife, the employees of Ovation, some of our clients, our solicitors, and my mum. However, the way in which the business has been sold will, I reckon, be of interest to lots of people; owners and employees alike.

The Usual Suspects

You see, a majority shareholding in Ovation is being bought by an Employee Ownership Trust (think John Lewis, if you’re familiar with their ownership structure). We have a succession plan which, we believe, is going to be a win-win-win; for me, the employees, and our clients.

Let me explain. As a business owner, the question that so often gets asked is “What are you doing to add value to your business?”. When it came to me, I would always answer “Nothing. Because I don’t want to sell my business.” I’m proud of Ovation, of what I have built up.

I didn’t want to sell Ovation to a consolidator. I want the business to continue doing its work in helping clients use their money to find happiness. I like our clients and I’m proud of our employees.

I did, however, want to release some capital from the business I’d built up. When I looked at the usual routes for succession, I realised that they didn’t give me what I wanted.

The other typical option would be to sell shares to the employees. Not all could afford to buy them, however, which would create a ‘have and have not’ culture. Besides, this wouldn’t solve the problem, it would just be handing it on. They’d have the same problem of selling their shares one day.

Making Myself The Least Important Person In My Business

The business is called Ovation Finance Ltd, not Chris Budd Ltd. I always had the idea that it was going to outlive me. I have therefore been embarking upon a plan over the last 10 years or so to make myself the least important person in the business. This has involved making changes in four main areas, including having a clear vision for the business; employee engagement; and getting employees involved with decision making.

Employee Ownership

The final step in this process was to find an ownership structure that would allow me an exit but would not place a burden, in the form of debt, on others.

I found that structure the day I attended a regional meeting of the Employee Ownership Association (EOA). Finally, I found myself amongst like minded people. Owners not obsessed with a future sale, but with the longevity of their business. Employees wanting to get involved with the businesses they worked for. All excitedly sharing with each other their experiences and joys of being part of this new type of ownership model.

That day I decided to sell control of Ovation to an Employee Ownership Trust (EOT).

The Technical Bit

Here’s the technical section on how to transition to an EOT. Ovation Finance Ltd established the Ovation Finance EOT. Shares in the company are sold to the EOT. Newly established, the EOT doesn’t have any money, so a deferred consideration is created. The profit that the company makes now belongs to the EOT. It uses this profit to pay off the deferred consideration over an agreed period of time.

Once the deferred consideration has been completed, the future profit will be available for the employees.

A couple of other things. As long as the percentage is a majority – as long as the EOT is given control – the payments received by the owner are free of capital gains tax. Additionally, the employees receive up to £3,600 of their payments free of income tax. Neat, huh?

Now that the employees control the company (remember, they are beneficiaries of the trust – they don’t actually own shares, so don’t have to stump up any cash – a major advantage of the EOT), they are truly motivated and inspired to make the company work. Furthermore, the focus of the company is no longer on value or an eventual sale, but on long term sustainable profit – happy staff, happy clients.

The Fly

There is, however, a fly in the ointment. Payments to the (now ex) owner are paid from future profit generated by a business that they no longer control (which is actually no different to the reality of almost all methods of business sales).

This means that the business needs to be structured in such a way that it will continue to be profitable, at least for the period of the earn out, and preferably forever.

Partly for this reason, employee owned businesses are not like other businesses. For example, decision making within an employee owned business – where all employees are also owners – is not like decision making in an ordinary business.

Everyone wins. The owner gets a way out, the employees get a way in, and the clients not only continue being serviced by the company, but by a company whose focus is not on maximising its short term value value but on long term sustainable profit.

The Eternal Business Consultancy

And me? Well, I’m retaining a minority shareholding and will be continuing as Chairman of Ovation. I’m also continuing with the Financial Wellbeing podcasts. However, I’m so inspired by the concept of employee ownership that I am dedicating the next phase of my career to it.

I have written a book about employee ownership which will be out in the autumn. The book is called The Eternal Business and provides a model and pathway to transition a business to one that allows the owner to exit and employees to take over.

(Incidentally, if you’re wondering why you’ve never heard of this before, the EOT, with its tax breaks, was introduced in 2014. Of the c280,000 businesses in the UK with between 10-250 employees, only some 320 of them are EOT businesses. The sector is about to explode, and I’m planning on being part of the catalyst.)

As well as the book, therefore, I am establishing The Eternal Business Consultancy to offer my experience in financial planning and business coaching to help other owners and employees in transitioning to employee ownership.

It’s a very exciting time, both for Ovation Finance Ltd and for me!

Here are a couple of recent articles about EOTs.

If you want to know more about how employee ownership might work for your business, contact Chris on [email protected]

Chris’s new book on how to transition to employee ownership, The Eternal Business, is available for pre order on Amazon. If you would like to get in touch, be it for more info, details of Chris’s consultancy, or the online course he is developing, visit his web site.   

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