How Employee Ownership Trusts in Business show entrepreneurs the exit, with Chris Maslin

Hello and welcome to this episode of The Unnoticed Entrepreneur with me here, Jim James, in Wiltshire. And we're going to Tunbridge 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, you know, 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 wanted to take over the business, release you to move on to the next entrepreneurial journey. Chris, tell us about what business you built and who it was that you got interested to take it over from you.

Hi, Jim. Sure. Um, yeah, it was an accountancy practice effectively. Um, 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. Um, and I think there's an element that I'd 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 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 so viable anymore. So the EOT basically gets around that problem.

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.

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 accountant can be tricky. Um, often lethargy sits in and you think, I'll just stay where I am because it's easier.

Very interesting. So the profile of the company, you know, a lot of clients at a lower value, whereas in my case I had a few high-value clients where the relationships were the key point of difference, really, really defines the nature of the deal. Chris, explain to myself and my fellow unnoticed entrepreneurs What is an EOT? And we know John Lewis is an EOT, but that's a sort of celebrated example. What is it and how does it work?

So, it stands for Employee Ownership Trust. Like you say, John Lewis in the UK is the most famous example by some way. They've been owned that way for approaching a decade now. And yeah, they are the figurehead of that community. Realistically, other than John Lewis, there were very, very few businesses owned this way until about a decade ago. It was something that Nick Clegg, bless him, everyone remembers him as the guy that said he wouldn't hike 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 EOT with certain tax perks attached. So as long as you achieve certain criteria, you've got these benefits. So yeah, it's 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 a trust is nebulous. It doesn't exist. You can't see it. You can't touch it. But effectively, it's 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, there will come a point where I've been paid off completely, and then the staff will enjoy everything.

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 team in Singapore are 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 so on. But why would they not want to then just try and raise the money and buy you out straight away? What benefit does this trust have? For them?

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, it's something that, you know, in the employee-owned world, we'll 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. Whereas with the trust model, it's indirectly owned. So what do I mean by that? You won't find any staff members' 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.

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?

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 worked, 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.

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, I think up to £1 million, isn't there? I mean, you're the accountant, not Not me, but if you sell a business as entrepreneurs' tax relief, how are you impacted if you do an EOT? 'Cause if you're not selling things in the same financial year, but over time to a trust, how does that work?

In short, it's even better. So I think what you are 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%. 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.

Chris, you've 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 It could be structured?

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 3 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, okay, 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 2 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 going to be in the office was a day, it was a nice end of month where we'd lined up for the sale. Because 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.

So, take those first 3. Interesting, it took 3, you know, took 3 people and then you had 18 months. It's 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 3 key team members?

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 want to 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. Um, 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 going to have what role, other people might be.

Interesting. So as an accountant who one might think is a little bit didactic, actually you were really very flexible in your, in your thinking, much more entrepreneurial, uh, in, 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, Mazlins, as the accounting firm. Share with us how you communicated that to make sure you didn't have churn.

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. Um, 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. Um, you know, the main concern I had was things like Companies 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 that 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 sort of relatively large number of individually small clients. So we just did it via newsletter really. We, you know, Mailchimp, other providers are available.

Yeah.

So we did consider the wording very carefully just to think what concerns might people have How can we alleviate those?

And what messages did you have in there, Chris, in that, as you say, uh, newsletter, just using a regular platform like Mailchimp, for example, or AWeber, any of these tools you can use?

What was the message?

Yeah, what were the messages that you thought you needed to share with the clients?

I think really just a message of stability, that, um, look, you know, 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 changing. Yes, one of the guys who you probably used to speak to a bit, but the reality is, towards shortly before the transfer, hardly any of the clients were still getting in touch with me anyway, just as things had 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, you know, that has happened a lot in the industry. And more often than not, it ends very badly for the clients. They end up seeing prices doubled, half the staff get sacked because the buyer wants to make their money back quickly.

You're absolutely right. Now, Chris, what about motivation for those 3? Because you've mentioned the sort of the buyout, and often, yes, there's this kind of, this kind of Wheel of Fortune that gets played. People, you know, buy a business, they build it up, then they sell it to the next lot, and that's their capital gain for being an entrepreneur. How have the people that have taken on the business kind of approached this? Because it, 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?

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.

Chris, you're 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?

Yes, so I mean, it's perhaps worth mentioning of the 3 key people I'd earmarked to run the business, one of them is still with the firm a couple of years on. So 2 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'll 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 it into a language that they'll be happier. Because yeah, we did have a few frustrations. I think a lot of it, as alluded to earlier, revolving around the roles, who's really doing what, and me perhaps being a bit too blasé about it. oh, it doesn't matter, we'll just fumble along.

Well, and maybe underestimating your own role, which is, you know, quite often, uh, an issue I think for entrepreneurs, is to kind of undervalue, devalue the central place that you, that you, you know, 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 EOT system?

So yeah, it's basically trying to help people do exactly what I did. So one of the downsides of EOTs, 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 it, 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 GoApe or any other high-profile cases, but just make an affordable package for businesses. Yeah, we tend to say anywhere from 5 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 gonna get an entirely bespoke service, but you're gonna get everything you need done efficiently and affordably. So just trying to make it as easy as possible for people to do the same thing.

Chris, that sounds a wonderful, wonderful resource for entrepreneurs. 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?

Well, certainly it's an area that I wouldn't say is my strength, 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 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, 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 clients don't expect that.

Okay, Chris, that's wonderful. And I think that one of the conversations I've had with a few people is about having 2 brands. Uh, Rusty Shelton and I talked about this, about the personal brand being the on-ramp for the company brand, and that actually we have to have 2 brands that coexist side by side. And if your own identity is tied up too intrinsically with the company, then it, it really becomes a, you know, a bit of a um, a break to you being able to let go of the business, um, but you need to have both.

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.

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

Uh, yeah, it's a fairly distinctive surname, so you find me quite easily on LinkedIn. Um, that's perhaps the best place, or goeo.uk, the website, for more information about that. Plenty of blog posts and information for people who want to read up on it.

Chris Manzlin, 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, I tracked him down, I saw him on LinkedIn and saw what he was doing. I thought, this is really a new way for an entrepreneur to exit the business, and I 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 this show, do please share it with a fellow unnoticed entrepreneur. Review the show on your player. It all really helps. And until we meet again, just encourage you to keep on communicating. Thank you for listening.