The transition to an Employee Ownership Trust (EOT) is a significant and positive milestone for any business. However, moving beyond the initial celebration requires a clear-eyed view of the challenges that can arise, and the work required to ensure the structure fulfils its potential.
Welcome to the tenth instalment in our Employee Ownership Know-How series, where we pick apart the misconceptions, myths and unhelpful norms that go hand-in-hand with employee ownership. In this episode we cover;
- The Challenge of True Empowerment
- Ensuring Effective Governance and Representation
- Managing Expectations of New and Existing Employees
- The Balancing Act of Leadership
- Balancing Financial Stability and Growth
- Looking Ahead to the Future
The Challenge of True Empowerment
In the early stages of an EOT, there is a strong sense of novelty and shared purpose. Yet, the real test of a successful EOT is whether this feeling translates into genuine empowerment. While employees may have a voice on certain matters, key strategic decisions often remain with the senior leadership team.
The goal: To ensure the EOT does not become a superficial tool for engagement, but a genuine channel for meaningful influence and participation.
Ensuring Effective Governance and Representation
An EOT is founded on the principle of democratic governance, with the EOT Board acting on behalf of the wider team. However, the effectiveness of this model depends on the integrity and independence of its members. The potential for conflicts of interest or a lack of objective challenge can undermine the trust and confidence of the wider employee body.
The goal: To establish clear lines of accountability and ensure that elected trustees feel empowered to represent their colleagues without fear of reprisal.
Managing Expectations of New and Existing Employees
The initial team that championed the transition to EO is often deeply invested in the model. However, newer employees may view the structure differently. They join a company with a pre-existing debt from the buyout, a burden that may not feel like their own.
The goal: Effective communication is essential to ensure that all employees understand the long-term benefits and the role they play in the company’s future success, transforming the vendor loan from a burden into an investment in their own prosperity.
The Balancing Act of Leadership
For the management team, particularly the CEO, the role shifts from a traditional leader to a facilitator. They must navigate the interests of the employee owners, the fiduciary responsibilities of the Trust Board, and the commercial pressures of the business.
The goal: To acquire a new set of skills – not just in strategic management but in building consensus and fostering a culture of collaboration.
Balancing Financial Stability and Growth
A central challenge in the early years of an EOT is the need to service the deferred consideration [DC]. This can create a tension between using profits to pay down the past and investing in the future through capital expenditure, salary increases, or bonuses.
The goal: For governance bodies to work together to find a sustainable balance that allows the company to meet its financial obligations while still enabling innovation and rewarding employees appropriately.
Looking Ahead to the Future
The EO model is designed for longevity. However, this raises the question of how the company would respond to a major external event, such as a substantial buyout offer.
While the EOT is designed to prevent a quick sale, trustees may one day face a very difficult choice between preserving the long-term legacy of the company and delivering an enormous financial windfall to the employees.
The goal: Have a clear, long-term vision that carefully balances purpose with profit.
Who We Are
We’re Paradigm Norton – a financial planning firm that understands both sides of the employee ownership table.
We’ve supported founders navigating the handover. We’ve helped new EO businesses build sustainable cash flow models. And we’ve lived the journey ourselves, since becoming employee-owned in 2019.
That’s why we approach deferred consideration with two priorities: protecting the vendor’s future and empowering the employee-owned business to thrive.