How to Reconcile All Stakeholders’ Interests in an EOT Sale
In an Employee Ownership Trust deal the focus can often be on getting the best deal for the business owner. Everyone’s keen once a decision has been made to complete a sale to employees that they lose sight of the importance of ensuring all stakeholders’ interests are included in the EOT agreement.
Our Virtual FDs have seen an EOT fall foul post-transaction and picked up the pieces to keep the business alive and thriving past the point the owner walks away. James Shand, vfdnet founder, created a step in the process of an Employee Ownership Trust, called the Grand Bargain.
What is the Grand Bargain?
When vfdnet part-time FDs are part of the EOT deal team with corporate financers and lawyers, they combine all stakeholders’ views into the ‘Grand Bargain’. This is a methodology that follows the valuation of the business undertaken by the vfdnet part-time FD for the business. You can see the steps of an Employee Ownership Trust sale.
Each stakeholder involved with an EOT has different interests. A fair allocation of money from company profits is needed to strike a ‘fair’ deal. The Grand Bargain is a methodology to consider the different stakeholders’ needs.
The key stakeholders are:
- Former owner.
- Business investment.
- Management team.
- Direct shareholders’ dividend.
- Interest on loans.
- Profit share for employees.
The business itself needs cash reserves for investment in its people and equipment so the staff inherits a positive going concern with a bright future.
The Grand Bargain for a member of staff will consider the profile of the most difficult employee and imagine they are sat in the room with you. What would they deem fair?
The new senior management of the business will be seeking a reward for the extra work they’ve contributed to support the EOT process. They also need to be invested in taking the business forward, fulfilling the forecasted plan for profit and keeping the team motivated and happy. Money needs to be kept aside for this investment – in people and potentially for the purchase of new equipment or technology to keep the business competitive.
The former owners typically get an immediate pay-out on the deal, but the majority of the consideration is typically paid out over the 5-6 years following the transaction. That will be planned into the financials to give a realistic forecast for everyone. The profit share for employees can often be an afterthought, being paid out of whatever remains after all other priorities are met, whereas the Grand Bargain methodology ensures this is considered at the outset.
Why the Grand Bargain?
As you can see there are many stakeholders in an EOT deal. Keeping everyone happy, communication clear and a thriving business following the EOT transaction is made possible with the Grand Bargain.
The Grand Bargain methodology will avoid an excessively large pay out to the former owner:
- placing the company in unsustainable debt
- restricting investment
- lack of dividend payments
- no bonus to the top management level
Miss this step and you could find there is no business to hand over or staff leave along with valuable knowledge and experience. The business’s future cash flow could well be affected so that the former owner’s payouts could be delayed or not materialise at all. vfdnet experienced Virtual FDs use the Grand Bargain methodology to take every stakeholder interest into account, leading a process to also consider ‘what if’ scenarios, generating a golden opportunity for the business to thrive for all stakeholders.
Do you want your EOT to be successful?
Following the EOT, a time you would associate with a celebration, a time of joy and when staff motivation is high, however without the Grand Bargain methodology being followed, it can be a negative time and frustrating for stakeholders. Staff don’t want to wait to receive their profit share. The business is in danger of losing its best assets – its people. An Employee Ownership Trust is nothing without the employees!
Arrange a call with James Shand to discuss vfdnet’s role in Employee Ownership Trust deals and the part the Grand Bargain plays in its success.
Don’t execute the EOT before you’ve completed the Grand Bargain!
