Exploring the Potential of EOTs in Business Exits with Chris Maslin

Speaker 1: 0:24

Hello and welcome to this episode of the Unnoticed Entrepreneur with me here, jim James, in Wiltshire. We're going to Tumbridge Wells in Kent, on the east side of the UK, to meet Chris Maslin. Chris, good morning, hi, jim, good to be here. Well, it's good to hear from you because you're going to share with us the success that you've had in what we call an EOT, an employee-owned trust. Now, for those of us that have had a business or have got a business that we want to exit, we often think of either selling it to somebody else or closing or listing it. But you've got a whole different story, which is getting your employees to buy the company Very clever and creates continuity, and I'd love to know how you've done that. So, chris, we're going to talk about EOTs, how you've communicated that so that the existing staff wanting to take over the business released you to move on to the next entrepreneurial journey. Chris, tell us about what business you built and who it was that you got interest to take it over from you.

Speaker 2: 1:22

Hi, jim. Sure, Yeah, it was an accountancy practice effectively. So it was built slowly and steadily over the course of a little over a decade, got to the sort of a million-pound turnover, a dozen employees kind of size. And I think there's an element that I sort of lost interest in it a little bit. I was keen to do different things, but the senior staff in particular were really excited about the business and wanted to push it forward. So possibly one of the options we might have looked at would be an MBO, a management buyout. But I think a key issue with that was whether the senior staff had the money to buy in. I do think there's an element that perhaps with the house prices as they are your average sort of 30 to 40-year-old who maybe 30 years ago could have bought in it's just not survival anymore. So the EOT basically gets around that problem.

Speaker 1: 2:11

Yeah, you know, chris, i tried to sell my PR firm back in the mid-2000s also after a decade of running it in Singapore, and I tried the MBO, and the big bottleneck was people saying we don't have the cash to buy it. The other part, though, was that they said, why would we buy the company? Because if you're not here and we do the work anyway, we might as well just wait for you to leave and we'll kind of inherit the clients by default. So tell us, how did you overcome what, for me, anyway, was a central obstacle? in the end, that deal fell through because of that reason.

Speaker 2: 2:52

I think that latter part, I mean, I don't feel like it was ever a consideration or an issue for us. I suppose perhaps because we have a relatively large number of individually quite small clients there's maybe not that super close relationship between a staff member and individual clients. So a lot of what we do well is more about sort of a streamlined, efficient business. So yes, certainly some of the staff could replicate that relatively easily. They know what software we use, They've seen how it's set up. But I guess starting that from scratch might be easier said than done. And certainly we know from experience persuading someone to change account can be tricky When lethargy sits in anything. I'll just stay where I am because it's easier.

Speaker 1: 3:39

Very interesting. so the the profile of the company know a lot of Clients at a lower value, whereas in my case had a few high value clients where the relationships were were the key point of difference Really really defines the nature of the deal. Chris, explain to myself, my fellow unnoticed entrepreneurs, what is an e o t and we know john louis is a E o t, but that's a sort of celebrated example. what is it and how does it work?

Speaker 2: 4:10

so stands for employee ownership. Trust like, say, john louis in the UK, is the most famous example by some way. They've been on that way for approaching a decade now and, yeah, they are the figurehead of that community. Realistically, other than john louis, there were very, very few businesses owned this way until about a decade ago. It was something that nick clag bless him. Everyone remembers him as the guy that said he wouldn't like tuition fees and student loans and then did. But he was also instrumental in making a sort of more off the shelf offering being the e o t with certain tax perks attached. So as long as you achieve certain criteria, you got these benefits. So, yes, been for about a decade. It started to become a little bit more popular and I think now we're sort of drifting from the innovators and the early adopters doing it into it becoming a little bit more mainstream. So in terms of what it is. So I mean a trust is something I'm aware a lot of people aren't that familiar with. You maybe think of sort of trust funds as like a US thing. What does it really mean? And I can't answer that question that well. so it, a trust, is nebulous. It doesn't exist, you can't see it, you can't touch it, but effectively it's something that's been set up. Its primary purpose is to look after the employees of the company. I've sold most of my shares to this trust, so the trust owes me money. Because the trust now owns most of the shares in the company, it's entitled to the profits from the company. So effectively, in the short term I get paid out for the purchase by the profits of the business. You know there's a set amount that's been agreed. It pays me X pounds per month. Anything over and above that the staff get and obviously, longer term they will come a point where I've been paid off completely and then the staff will enjoy everything.

Speaker 1: 6:01

I see. So there's, there's an entity, the trust that sits now between the company and you and between the employees and you, because traditionally The staff would buy the company from the founder. In fact, i've sold my PR firm in the last year and the the team in Singapore basically buying that out over time. So how do you pitch this, chris, to the employees, who you've already said they wouldn't leave because you know they have to then get that many clients and and so on? But why would they not want to then just try and raise the money and buy you out straight away? what? what benefit does this trust have for them?

Speaker 2: 6:47

I mean, to some extent they get a lot of the perks that they would have from an MBO without having to buy out Not all of the perks. So something that you know in the employee-owned world will differentiate between directly owned shares and indirectly owned shares. So directly owned is what you're familiar with. You know when you're a founder, you directly own those shares. If you do an MBO, you are selling those shares to individuals. They now directly own them Because with the trust model it's indirectly owned. So what do I mean by that? You won't find any staff member's names on any share certificates. It's the trust that owns the shares. But that trust is there to look after the staff. So when it makes profits, those profits go to the staff. So effectively, the staff get a lot of the benefits of ownership without directly owning shares. The key thing that they won't be able to do because they don't own shares they can't sell shares. They don't receive dividends because they don't own shares, but they are entitled to a share of profit for as long as they work there.

Speaker 1: 7:49

Oh, I see. So they get a share of the profits. And how do they allocate the share of profits? Because if you've got, I think, 10, 12 staff, how are you deciding the allocation of those dividends?

Speaker 2: 8:04

So there will be trustees who ultimately will make that decision, But they are restricted in how they can divide things up. So key thing they cannot do is single out individuals either positively or negatively. So what you can do, you can potentially say we're just going to split them evenly, So it doesn't matter if you've been working here for a month and you're on minimum wage or you're the CEO, you're all going to get an equal split. You can do it based on salary, which from what I've seen, is perhaps the most common. So inevitably the people on the highest salaries get the biggest profit shares. There's a few other routes you can do it. Things like length of service hours work to sort of differentiate between full-time and part-time staff. But there are effectively a few set models you can choose between, but then the trustees will pick which one.

Speaker 1: 8:53

Chris, it sounds fascinating and really quite innovative as well. From a tax point of view. I think there's an entrepreneur's relief if you sell a business. You know, think up to a million pounds, isn't that when you're the accountant, not me. But if you sell a business as an entrepreneur's tax relief, how are you impacted if you do an EOT? Because if you're not selling things in the same financial year but over time to a trust, how does that work?

Speaker 2: 9:20

In short, it's even better. So I think what you're talking about is now called business asset disposal relief. That's the one where, putting it simply, if you sell your business, you pay 10% tax rather than 20% or higher like you might otherwise pay When you sell to an EOT. again, there are some criteria you need to meet, but it is totally tax-free. The key thing I know you sort of mentioned you get as if you're selling over a period of time. Key thing is you're not selling over a period of time, you're selling on one day, you're just being paid on a period of time. So it's a little bit like you know, if you buy a house with a mortgage, you own that house from the date of exchange or completion, but the payments go for a long time after that.

Speaker 1: 10:06

Chris, you explained this to me in a wonderfully articulate way. How did you explain this to your team? Because this is a little bit different, as you say, other than the John Lewis example, and if someone's listening to this from Singapore or America, it may be different. But how did you explain to your team that you are no longer interested to run the business and this is how it could be structured?

Speaker 2: 10:31

Not very well is perhaps the short answer. So yeah, i'm not in any way saying I did this brilliantly In terms of the order that we told people. So I think step one needed to be that I was happy that it was the right move. And I think it's important you don't sort of drip the idea to people until you're confident you want to press ahead with it, because otherwise you know you're just going to cause a lot of confusion and potentially disappointment. So once I decided it was the right move for me, i then spoke to the three people that I felt were the most important staff to run the business, who, between them, had the skills I felt were required to really take things forward, to check that they were on board. Inevitably it's a massive deal for them and a lot to think about pros and cons, partly to do with if Chris is disappearing what impact does that make on us? Partly just the more technical. Ok, so what does this EOT thing really mean? What power do I have? What benefits do I get? What responsibilities do I have? So we probably spent about 18 months with the senior team knowing about it, getting their heads around it, what it would mean, what it wouldn't mean how their roles would change. But the rest of the staff we literally told on the day of the transfer, which was partly just a coincidence of timing. This was two years ago, so initial COVID lockdown had passed, but we were still in sort of everyone should kind of work from home a lot of the time if they can. So it was rare that we had everybody together And it was just a bit of a coincidence that the one day where all the staff were gonna be in the office was a day it was a nice end of month where we'd lined up for the sale. Cause I do feel like for the junior staff it's less important that they're on board. To be quite blunt about it, they're not critical in whether the business succeeds or fails, so it's just a nice little extra thing for them.

Speaker 1: 12:20

So take those first three. Interesting. It took three, you know, took three people and then you had 18 months is quite a long sort of run, isn't it? to explain it, what were some of the questions that you faced from these sort of three key team members?

Speaker 2: 12:40

The most common one and the one that I probably answered the worst was in terms of what was my role going to be afterwards. So perhaps, you know, anyone who's a bit of an entrepreneur is happy being flexible. So I was kind of like, well, i'll just do, you know, whatever needs doing, you do what you wanna do and I'll fit around that, which in my mind was a very nice answer, but I think to them that was hugely frustrating. You know they wanted to be told look, your responsibility and your role will be A, b and C. I will continue to do X, y and Z. I will totally extract myself from A, b and C. So I think you know if there's one learning point for me, it was about that that even if I'm not bothered about knowing exactly who's gonna have what role other people might be, Interesting.

Speaker 1: 13:29

So as an accountant who one might think is a little bit didactic, actually you were really very flexible in your thing. You're much more entrepreneurial in your approach, chris. What about for your clients? Because over a decade you'll have been the face of the company. The company has your name Maslin's as the accounting firm. Share with us how you communicated that to make sure you didn't have churn.

Speaker 2: 13:56

Sure, i mean, you know the company name there shows the lack of creativity from accountants. We didn't have any issues with it at all. I was quite keen that we get the message out to the clients before they find out about it some other way. You know, i'm perhaps not a big fan of the word spin, but I am quite aware that the same piece of news can be painted in very different ways. So I felt like I wanted to make sure we told people first hey look, this is a positive message, here's how it will benefit you. You know, the main concern I had was things like company's house. There's some publicly visible changes there in terms of me no longer having control of the company. So, like you say, there's perhaps a risk because if that was the first people saw of it, they might think What's going on? Chris is bailing out? Oh no, the company must be in terrible trouble. We'd better go. So. In terms of how we dealt with it, as we briefly discussed earlier, we've got a relatively large number of individually small clients, so we just did it via newsletter, really Mailchimp other providers are available. So we did consider the wording very carefully just to think what concerns might people have? how can we alleviate those?

Speaker 1: 15:08

What messages did you have in there, chris, in that, as you say, newsletter, just using a regular platform like Mailchimp, for example, or Aweber any of these tools you can use. What was the message? What were the messages that you thought you needed to share with the clients?

Speaker 2: 15:28

I think, really just a message of stability. Look, there is a change going on here, but it will not affect you, the staff that you deal with day in, day out. They're not just changing. Yes, one of the guys who you probably used to speak to a bit. But the reality is, you know, towards shortly before the transfer, hardly any of the clients would still get in touch with me anyway, just as things have evolved. So, yeah, just really reinforcing the fact that nothing really is going to change from the perspective of client service, but putting a positive spin on it. That hopefully, this means, firstly, we should care a little bit more than perhaps our competitors might, because everyone who works at the business benefits from us doing well, but also the stability in terms of we're not going to be sold to private equity or a trade buyer, which I think that has happened a lot in the industry and more often than not it ends very badly for the clients. They end up being prices doubled, half the staff get sacked because the buyer wants to make their money back quickly.

Speaker 1: 16:31

You're absolutely right now, chris. What about motivation for those three? Because you've mentioned the sort of the buyer, and often, yes, there's this kind of wheel of fortune to get to play. People you know buy a business, they build it up, then they sell it to the next one. That's their capital gain for being an entrepreneur. How have the people that have taken on the business kind of approached this? Because, to some degree, although they're getting the profit share, they're kind of locked out of getting a capital gain themselves, aren't they?

Speaker 2: 17:03

Yes, and it's something that I think can be a significant issue. There'll be people who argue well, they never had to buy in, so why should they be able to sell up from something they didn't buy into? But yes, it can be a problem. So you know the senior staff in our situation. They got a fairly hefty pay rise to just try and reflect the fact that on paper, your role isn't really changing that much in terms of what you do day to day. But basically there is more responsibility on your shoulders now that perhaps wasn't there before because it was on Chris's shoulders. But I am still quite aware that, like you say, without that sort of tie in of I own shares in my own name and therefore, if I quit and things fall apart, i've lost a lot of value there. There's nothing that really ties them in. So a few things you can do with that. One is you just accept it and you hope that you can make the job good enough that by the time you factor in the salary, the profit share and any other perks of working there, people wouldn't want to leave. But the other thing you certainly can do, you can have people owning shares directly, so the EOT doesn't have to own 100%. It does have to own at least 51% to get most of the tax perks. But what you can do is have the EOT owning, let's say, 60%, and some of the key staff perhaps have 10%, 20% each. That kind of thing.

Speaker 1: 18:23

Chris, you're a plainly an expert now in EOT. If there's one learning that you've got from this episode, what would that be? from a communications perspective, anything that you could share that maybe didn't go quite according to plan.

Speaker 2: 18:38

Yes. So I mean it's perhaps worth mentioning of the three key people I'd earmarked to run the business, one of them is still with the firm, a couple of years on. So two of them have left at different times and for very different reasons, different circumstances, but, and for what it's worth, you know the business is doing fine. I don't want to belittle the people that have left. They were great, they've gone on to do different things, but I think, in terms of what would I have done differently? I imagine there must be sort of a business version of couples counseling, and I think that would probably be quite wise, because it became increasingly apparent that we might have a conversation and I would say something, but they would hear a different message to the one I was trying to give out, and I'm sure that the reverse was true as well. So I think just someone who's very good with people who sit and listen to both sides and effectively kind of be right I know Chris said this, but what he means is that sort of translating into a language that they'll be happier. And we did have a few Frustrations I think a lot of it is alluded to early revolving around the roles who's really doing what? and me perhaps being a bit too blase about it? Oh, it doesn't matter, we'll just fumble along.

Speaker 1: 19:45

Well, maybe under underestimating your own role which is quite often an issue, i think, for entrepreneurs is to kind of under, undervalue, devalue the central place that you possess in the business. You've got a new business called Go EO. Chris. Just tell us briefly what that is doing and how you're helping entrepreneurs that might want to look at the EO T system.

Speaker 2: 20:11

So yeah, it's basically trying to help people do exactly what I did. So one of the downsides of EO T's they're still relatively new. So it's the kind of thing that you know if you want to do it well, really, you want to get sort of an expert accountant and tax advisor on board, you need to get a law firm on board, you probably want to get Some coaching people on board and before you know you're spending tens of thousands of pounds, if not hundreds of thousands of pounds, in professional fees. So what we're trying to do very much catering to the small end of the market. I'm not looking to help with the next richer sounds or go APR, any other high profile cases, but just make an affordable package for businesses. Yeah, we tend to say anywhere from five to 25 employees Just to help them do it relatively affordably. With a bit of experience from someone who's been there, done that, made a few of the mistakes along the way, with my accounting and tax background, i can help on that side too. But yeah, teamed up with a solicitor who can you know, we've got things templated so that you're not going to get an entirely bespoke service, but you're going to get everything you need done efficiently and affordably, so just try to make it as easy as possible for people to do the same thing, chris that sounds a wonderful, wonderful resource for entrepreneurs.

Speaker 1: 21:20

If there's one thing that you'd like to share about getting noticed that you feel has moved the needle, or that you're working on with the new business or the previous one, what would that be?

Speaker 2: 21:32

Well, certainly it's an area that I wouldn't say is my strength there. Just to be upfront on that, i think one of the things that I've always had a bit of a dilemma with. It seems like it's a lot easier to get noticed as an individual than it is to get noticed as a business, and I've always tried to get noticed as a business, partly because of the things we sort of alluded to earlier. I didn't want it to be that every client who's full sorry who phones up, insists on speaking to me. So try to make it all about the business rather than about me. I know you might think what? why on earth did I name the first business after myself? So what have I learned? really well, just that that's harder. So perhaps what I'm accepting is that I can perhaps be the face of the business and the name of the business and get out there, but no different to with Sainsbury's or Richard Branson at Virgin. That doesn't mean that clients will expect to speak to me every time they phone up or for me to answer their emails. So maybe just accepting that.

Speaker 1: 22:25

Okay, chris, that's wonderful, and I think that one of the conversations I've had with a few people is about having two brands. Rusty Shelton and I talked about this, about the personal brand being the on ramp for the company brand, and then actually we have to have two brands that coexist side by side. If your own identity is tied up to intrinsically with the company, then it really becomes a, you know, a bit of a break to you being able to let go of the business, but you need to have both.

Speaker 2: 22:56

Well, definitely, if you want to sell your business and you're not going to be there anymore, it's quite important that the business does not entirely revolve around you. Quite the opposite.

Speaker 1: 23:04

Brilliant, and you've done that successfully. Chris Masliff, if you want to find out more about you, where can they do?

Speaker 2: 23:10

Yeah, it's a fairly distinctive surname, so you find me quite easily on LinkedIn. That's perhaps the best place. Will go to the website for more information about that. Plenty of blog posts and information for people who want to read up on it.

Speaker 1: 23:23

Chris Maslin, thanks for joining me on this unnoticed entrepreneur show today. Thank you very much, jim cheers. Well, what an interesting and completely new topic today. Thanks to Chris for sharing. I tracked him down a store on LinkedIn and Saudi is doing. I thought this is really a new way for an entrepreneur to exit the business And hope you found it as interesting as I have. Do check out Chris's LinkedIn and I'll put that on the show notes and in the meantime, if you enjoyed the show, do please share it with a fellow Unnoticed entrepreneur review the show on your player at all really helps and until we meet again, just encourage you to keep on communicating. Thank you for this.