Latest / Alternative Exit / Alternative Exit #64 | 400+ Transitions Later: What Actually Makes EO Work

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Alternative Exit #64 | 400+ Transitions Later: What Actually Makes EO Work · Alternative Exit

• Andy Farquharson: Hello everybody and welcome back to the alternative exit. So our next guest is over two decades of experience working in employee ownership across hundreds of employee owned organizations. Hall is the director of the Baxendale Partnership, affectionately known as Baxies over in the UK and they're one of the UK's most experienced advisors on employee ownership. He specializes in ownership transitions, governance, financing structures, particularly around the employee ownership trust. is prevalent over in the UK. So Ewan really sits at the intersection of ownership and finance and long-term business sustainability, which look a combination of subjects which we all love here at the Alternative Exit. So very, very excited to have Ewan here for the chat. So Ewan, welcome to the Alternative Exit. Ewan Hall: Very happy to be here Andy, happy to be here. Although I work within Baxendale Employee Ownership, which Baxi Partnership founded us, but we're sort of our own organisation over here. Baxi Partnership is a very important part of our history. Employee ownership has back over 40 years, but we're in our own little box over here. Andy Farquharson: Okay. Good. Okay, very good. Well, thank you for correcting me. And we'll have the appropriate links that we've got there in the podcast. But I notice that you did not correct me over the fact that you've been employee ownership for two decades. that's a long history in the space and working with lots and lots of different organizations. What initially drew you to this space? Ewan Hall: So, well, I mean, my first project I worked on was probably 2001. And that was as a junior corporate lawyer doing some board minutes for a business called Lock Fine Oysters moving to employee ownership. that was a fish farming business that had oysters, mussels, fish, et cetera. And... Andy Farquharson: Yeah. ⁓ Ewan Hall: There was a colleague I worked with who was very passionate about employee ownership and family businesses. And over time, he kind of went over here and kind of left this big space over here. And I sort of thought, hmm, this looks very interesting. And back in the day, we did maybe two transitions a year. And you find that a lot of advisors in this space, particularly on the legal side, and my background is legal, they either come from a tax background where they may be involved in the tax rules around share schemes, things like that, or they come from a sort of corporate governance background. My background is really around the corporate governance ⁓ side. these different dynamics, these different stakeholder groups, how they interact with each other and employee ownership is about that. People wear a lot of hats. You know, I'm an employee. I might be a director. I might be a founder. I might be a trustee or a trustee director. And I've got these different hats and how these different elements interact is fascinating stuff. And there's a lot of emotion and passion that sits behind a lot of this. and also a very strong independent spirit. that while we've seen a lot, we've worked with probably over 400 clients on their journeys in employee ownership. People like to do things differently. I want to do the way things I want to do it, not the way they do it over there. so understanding that, working with those people and getting those ideas out, and often these are multi-stakeholder organizations. Also, you're trying to get the ideas for lots of different groups. That is a really fascinating approach. It's rarely plain vanilla. It's a case of... you what do you want? And that you should know, you interact with our sector, but that word independence comes up again and again. Why did you do it? There might be a bunch of reasons, but independence usually comes up in that short list very quickly. And that sort of independent spirit infects an awful lot of what we do and what our clients want to do. And we are employing ourselves. We're on the journey ourselves. We don't just advise on it. We wrestle with the challenges and the opportunities that come with it. Andy Farquharson: Well, that's got to help in those conversations with potential clients as they're sort of looking to sit there trying to find someone to help them through their transition. So, hey, look, we do it too. Ewan Hall: Well, it works when we're interacting with an organization like the Employee Ownership Association, for example, which is the sort of trade body in the UK. You know, we go there wearing our hat of what we advise in this space. We know we've seen it from all different angles, but also we're on this journey too. We've got experiences to share about how we dealt with this, but also, you know, we want ideas from other people as the best way for them to, you know, give us all these issues because it is a different approach to leadership. collaboration, all these elements that feed into if you want to get the most out of an employer ownership model, you don't just stick shares in a trust and call it a day, you have to sort of change the way you think, the way you behave in a lot of ways that, know, to say that we're still wrestling and we are an organization in some shape or form has been employed on for over 40 years and we're always revisiting how this could be done and how it could be done better. Andy Farquharson: mean, how different do you find that is to other companies? mean, look, company that's been around for 40 years, they've got multiple phases. They're continuing needed to reinvent so that they can survive and thrive. I mean, do you see that as being very different in an employee-earned org? Ewan Hall: think there's a different slant, but the challenges are similar though. Every business that wants to be multi-generational will need to wrestle with different phases and generations of their life commercially, but also leadership wise. And if you don't get it right and you make the wrong decisions, whatever your ownership structure is, know, your business can fail. But there's an extra slant, a prism through which you look at those challenges with employership that are slightly different. It's often less command and control as for one or two people to decide. If I own this business, I can kind of do what I want with it. I might choose to be nice, I might choose not to be nice, but I ultimately get the final say. But actually, if I'm in a business where we've got a bunch of co-owners who each have a voice in what happens, you can't do command and control in that way, but you still need to think about leadership, skill succession, things that mean that we're future-approved or can cope with the next phase. That is a perpetual challenge for all businesses. And if we're honest, lot of certain exits, you might say, some alternative exits are, too hard, I can't deal with this next phase. mean, why not make it someone else's problem? And that's where exits like say a trade sale might become more attractive because it's someone else's problem then. And that may sound disparaging and it feels like a failure sometimes, but sometimes it is the best choice. Because if I can't fix... succession here for the next people who can take this business to the next level, what are my options when they start shrinking? ⁓ Andy Farquharson: Yeah, well, I think this is the one thing that I guess I've noticed about in the way that the EOT is predominantly rolled out. Okay, like with a lot of the heavy, heavy focus on seller finance, which means that there's a huge amount of onus on the owner to set the right foundations up before they leave, to really sort of protect their further investment or like their payout, which may come. That takes a lot of energy. Do you find that as, is that a barrier for some people when they're thinking about this exit? Ewan Hall: So it can be, but what you're usually doing is you're sort of teasing out streams. So there's ownership, there's governance, which leadership and accountability sort of wrapped up in that. And they often operate on different time tables. So if I'm an owner manager and I'm selling my business to an employers trust, the most common structure in our. Andy Farquharson: Yep. Ewan Hall: or jurisdiction obviously. Most trades, sorry, most transitions like that are done at market values, which means that to pay them out, usually if the business sort of goes steady as it goes, it's probably going to take five to eight years. Now, when I sell my shares, I don't have to leave. And indeed it might be profoundly unhelpful if I leave on day one, because I've actually got an investment in this and actually... Andy Farquharson: Yep. Ewan Hall: when I told the employees what was happening, one of their first questions might have been, where are you going? And actually the answer often is, I'm not going anywhere. And indeed we've actually, we're actually doing more and more work with younger founders who genuinely aren't going anywhere because I just want a fairer ownership model. But for ones whose plan is still to step away, I run separate timelines. I put my shares into a trust in April, 2026, but I'm going to gradually hand over over the next five to eight years. And maybe I'll be out in three, maybe about in four, maybe a... I want to be out in eight. It can vary in terms of what they want. The only thing is you can't control leadership succession and sort of future-proofing that aspect of the business as easily as setting up a trust and signing a stock transfer form and moving the shares in. That is something which sometimes needs more than one go-round. And if a business has been used to maybe a founder, owner-managed approach to leadership where one person decides everything, you're probably going into a different phase. Andy Farquharson: Yeah. Ewan Hall: and the business can sometimes go through that transition they find easy, sometimes they find it hard, it can be a little bit bumpy. and anyone who's worked in a sort of a leadership succession space knows that you do sometimes need to have two or sometimes three go-rounds to make sure you get it right because if you can't do it internally, the external hire is there, but it's, they've both got pluses and minuses attached to them. Andy Farquharson: Yeah. Ewan Hall: And for people who want to know, definitely got to manage the succession position in place. They're going to find it harder to make that leap on day one, but most of our sellers are looking at a gradual step away where actually I still want to be around. We've had some quirky structures where that founder can have that office and that desk for as long as he wants. He can come in 20 years down the road, that's still his space. You maybe can't tell us what to do anymore, but he's still... Andy Farquharson: Mm-hmm. Thank Ewan Hall: He's got a safe harbor here if he wants a break and wants to send out a few emails. Andy Farquharson: It's always good to have that space. like that. But yeah, think it's a transition employees isn't flicking a switch. And sometimes obviously with that comes the ability to protect your legacy and make sure that your team gets the right outcome and the business sort of your customers and suppliers all get treated in the way that you'd ultimately like, which is some of that control that you lose on say a trade sale. mean, what are some of the reasons why the owners that you speak to are choosing employee ownership over the other exit paths. Ewan Hall: So it is very important upfront to be clear what people's priorities are. And it is a sliding scale. ⁓ We get ⁓ some of the very benevolent side of things where I love this business, I love the people, and often they built it with me. I might own the shares, but actually it's been a collective endeavor to get here. I want to share that. We get others who, perhaps the other end of benevolence, who go, I need an exit. I need money for my shares. And for whatever reason, I can't do a trade sale now, you know, because there's no buyer, no one will end in any money or there's, you know, there's some other crisis coming up. And it's quite curious that ⁓ when ⁓ &A activity dries up, there's a certain gravitational pull of employership was I can still do an exit over there at least. ⁓ And then you get everything in between. for in a lot of these cases, whether it's legacy, money, Andy Farquharson: Yeah. Ewan Hall: my role and what I get to do and when. It's on a spectrum. It's about, and it's a lot of it's about having a discussion of what's enough. How much of a legacy do you want? How much is it that you're print on it? How much is it for the next generation to evolve? On money, is it, I want the most I can get, or is it, need this amount? And is actually about amount? Is it also about years? Because you want to have a point where within five years that we can go our separate ways in a healthy way. Andy Farquharson: You Ewan Hall: And all these things, I usually find that once people get past that concept of enough, then they unclench a bit, because they go, that's enough, therefore I'm relaxed about this stuff over here. ⁓ And sometimes that conversation about enough is a five minute conversation. Sometimes it's a five year conversation, because the things don't quite add up quite right. ⁓ Andy Farquharson: Yes. imagine that that's really tricky for a lot of people. I the guys at sort of the exit planning Institute talk about what's the magic number. I mean, surely that just takes a lot of education for many people to figure out what that is. Ewan Hall: I said we've got some younger founders, you they might have, you know, a young family, a lot of your traditional founder, they've, their kids have fled the nest and they're just looking at, know, they're both their concepts of how much to say enough might be different. And enough might not just be about purchase price, it also might be about ongoing role, responsibility, reward incentives as well. So it's a nuanced one. mean, if you... If you meet an 85 year old founder who's just taken on a new mortgage, you kind of go, I think a trade sale is your solution, my friends. I do not think that is the answer for you. for a lot of people, they go, well, I've gotten a mortgage. It's fascinating how many sellers end up buying a new house during this phase of the journey because there's usually a lot of money coming out on day one that enables them to invest in the future in a way that because it's... Andy Farquharson: Yeah. Ewan Hall: There's cash coming out along the repayment schedule. There's usually also a reasonable slug that comes out on day one because if there isn't, you're usually poking with a stick saying, this business actually profitable? Because if it's not, where's the cash? So it's, everyone's got a different answer on how much is enough. And you can have two people from outside looking in, look identical, but they'll have a completely different approach to that. We've done some employee ownership where it's genuinely been a gift. Although it's often a gift with strings, which is says, it's a gift, but you can't do this with it. or I don't want you to do that with it. But most of our transitions we work on, the sellers are getting what we call fair market value, a multiple of EBITDA with an adjustment for debt and surplus assets, and that's the fair price. And I make it pay it. And maybe someone somewhere might have paid them more. know, if the right buyer and a trade sale will usually pay more because they're gonna think they can make more profit out of the entity than you are. When you start peeling back, Andy Farquharson: Yeah, yeah. Mm-hmm. Ewan Hall: how they plan to make that extra profit and what they're going to do to the business to do it, often a lot of sellers go, maybe not, maybe I live around the corner. I want to be able to drive past this workplace and feel all right about it. I'm gonna meet these people down in local shops and I want to feel that's all right. And that comes down to this question of hooking up. If you can secure this and you get this, does that add up to something that you're comfortable with? And that is a totally subjective conversation. And we are not in the business of overselling employee ownership. We don't think everyone should be employee owned. It's going in with your eyes open, expectations managed from a founder perspective, from an employee perspective, from a senior leadership team perspective, going with your expectations managed so you know what you're getting into, what it is and what it isn't. the biggest driver in a lot of this, people say, have you seen it go really well? Or have you seen it go rocky? The underlying business performance will be massively impactful in that. If the business's profits double over that 48-year repayment schedule, it'll be a very different journey than one where you have a couple of bumpy years where the bottom drops out your profit. Andy Farquharson: . I mean, just winding back just a little bit, when you talked about sort of the obviously aligning on those expectations of the seller. So, and what is the number that they need to achieve? And we talked a lot about sort of from their needs, right? This is what I need to live a comfortable life. But on the other side, which you sort of alluded to there, is the valuation piece as well. Like this is much much, I've spent my last 30, 40 years on this, this is my baby, I think it's worth this much. How do you, how is that conversation sort of aligned? mean, if people are wanting that sort of much higher valuation, it's just employee ownership is not going to be for you. ⁓ Or it's not fair for you to put this kind of obligation onto your employees. What are the elements that you bring into those types of conversations to help sort of create awareness around what it would be? Ewan Hall: So valuation is a critical topic. And again, it's one of these five minute or five year conversations. But there are three key numbers really. And people can get a bit distracted by the valuation. There's valuation, there's how much money they can take out of the business in Wayne, and therefore how many years will it take to pay this off. And they're clearly interrelated because a business is more profitable, should have been kicking out more money. But if you focus on the valuation and don't think about the rubber hits the road repayment schedule, it's... you're potentially not signing up for what you think you're signing up for. Now, you can't have more than it's worth for tax reasons as much as anything. And indeed, the tax rules were tightened up in the UK a couple of years ago where basically there's a requirement that the trustee directors of the trust have taken all reasonable steps to secure they're not paying more than a fair market value for the shares. And if you don't meet that, you don't get the capital gains tax relief that we have in this country. And therefore, there's a sort of incentive not to push it too far because if the revenue you say that's too much, you can lose your entire tax relief from the entire purchase price. But it's about a trade sale. Will you get a higher multiple? Because the problem we sometimes have is that somebody once upon a time heard about somebody who maybe would have offered somebody else a number like this and it's stuck in their head and it's sort of like, realistically, how many people out there would do that? Would you? Andy Farquharson: Yeah, okay. Ewan Hall: pay that for this? And the answer is often well, no. And that's where the sort of four to six times multiples are what most of our SMA clients are looking at for multiples of their business. You get some that are a bit higher, get some that a bit lower, but a four to six times multiple usually translates into a five to eight year repayment schedule, because the multiple is usually a pre-tax profit, but you have to pay your corporation tax before you can fund the payment schedule. So in the UK, corporation tax. Andy Farquharson: you Ewan Hall: averages usually about 25%. So you can take your multiple and add 25%. That's how many years it will take to fund a 100 % disposal if profits stay flat. And that can bring it into stark reality. Now obviously businesses might go up, so our profits might go up, but when you're extracting this amount of cash from a business, it's often running a bit leaner and its ability to invest in growth, things like that, that might drive growth in revenue and profitability is often a bit limited. Andy Farquharson: Yeah. Ewan Hall: during the repayment schedule. Having said that, know, anything can happen. We've been through COVID in recent past and that did all sorts of things to EBITDAs. But it's just about being practical about looking at these three numbers. What is the kind of valuation? When are you actually gonna get paid it? Because it's not the sticker price. You don't get it on day one. And how many years will it take? And it just makes, it just brings it into translating it into the real world. And for some people they go tick, tick, tick, that's no bother. Others go. Andy Farquharson: Thank Ewan Hall: and they suck their teeth and they have to go away and think about it for quite a long time. Or maybe I need to get the profits of my company up. It's not in the right, this business as it stands isn't actually worth what I need it to be for whatever reason that might be. Andy Farquharson: Yeah, yeah. So I think that's a really valid point. once people understand where they need it to be, they can then make that decision and sort of how they need to make those changes ⁓ to drive that. Ewan Hall: And everyone's different. We've had clients with no kids. It's all hers or all his, and if we're not around, we don't care anymore. their approach to that will be very different to someone who's got dependents who have real needs that they need me for the rest of their lives. And my aspect of how much they know is going to be different. I'm going to have a different spreadsheet set behind that. But it is also about other things that you put a value on, which is free time, the ability to do other things with my life that aren't just, and if we're honest, that's often the trigger for these conversations. It's not, I want to sell my money for it, sorry, my business for eggs. I want to change my life, my working life in particular. I want to be doing something different, money to Friday. I might have taken, be on, down to see maybe four days a week, but I actually need to find a way of taking this weight off my shoulders. And then that leads to the next conversation about exit. Which is why so much of our work, to be is referred to as bad accountants because it's often the accountant they have that conversation with once a year for preparing the accounts and the says, how's it going? He goes, know, getting a bit tired over here, you know, and they go, well, you know, what are you going to do? And here are your options. And there's only so many options in play usually. Andy Farquharson: Yeah. Yeah, well it's great that there's that group of accountants that are aware of employee ownership in the UK. think sort of having a having sort of big awareness has obviously been a big part of getting getting a lot of growth that we've had in the EOT. Ewan Hall: Well, that was the point of the tax relief that was introduced in 2014. Its main focus was to force mainstream advisors to mention employee ownership when people talked about ownership succession. Because our main problem during the 2000s was that no one even heard of it. I don't even know what that is. When I'm given a list of options, no one mentions employee ownership. actually trade sale, manage a buyout, private equity, for big enough, maybe a listing of some kind. Nobody mentioned employee ownership. But by making it... a tax incentive, it forced the advisor, if you're going to be a good advisor, say, and there's this option over here that you will save some tax on. And we have achieved that mainstreaming. Now, there's some recalibration going on in our sector at the moment because they changed the tax rules. We've still got a tax incentive, but it's not as generous as it was before, where I think there's some rewiring going on about when is the situation where, ah, this is when I'll bring the EOT forward to my client. And I think this is going to be a Andy Farquharson: Just to calibrate there, I mean, you do mention there has been recalibration and rewiring. correct me if I'm wrong, but in October last year, it went from 100 % discount on capital gains, now it's at a 50 % discount on capital gains. So from my understanding, it's still one of the most generous programs globally, and still incredibly helpful. What type of impact are you seeing that that recalibration has had on the transfer market? Ewan Hall: am. So I'd say we're still in a period of static because we've got the change. was at the end of November. We then hit Christmas. Non-EOT capital gains tax rates went up in April this year, which meant that for non-EOT sellers, particularly for SMEs, there was a lot of focus on getting those transactions done by the 6th of April this year, which meant that... Andy Farquharson: Yeah, yeah. Ewan Hall: We've not had a normal test period to really compare it to. And so people understand that tax relief is very attractive and from the 6th of April it became more attractive again because I can say capital gains tax rates for non-EOT disposals have gone up again. And if we're honest, that's what happened with the EOT. The EOT tax relief when it was 100%, when it was first launched, was attractive, it wasn't as attractive, but as other CGT rates, capital gains tax rates went up. Andy Farquharson: Yeah. you Ewan Hall: this became too good. Because it was like, I used to be able to save 10 % for most sellers, but now it'd 24 % if it'd been left like that. So it's usually about 12 % tax a seller is saving if they go down the EOT route. And it's still a very attractive, you cannot sell your business for a 12 % tax rate, which is in essence what it is, in the UK in any other way. But it does introduce another wrinkle for when, there's almost a fourth number in this as well now, there's the valuation, there's what can I take out and when, and how many years, and when do I have to pay my tax? Because most of my consideration is often deferred, and I'm gonna have to probably pay my tax on all the price. And we used to be really busy running the ramp to the 6th of April to get transactions done. Now we've got a lot of people going, I'll just wait until after the 5th of April actually, because that'll give me another year to pay my tax, because when I'm working out how much I will get, I need to put in the fact that I need to pay some tax in that as well. Andy Farquharson: Okay. Ewan Hall: And it's just another wrinkle. And most trade sales and other exits usually involves some deferred consideration as well, but just not usually five to eight years worth. It's usually you're looking for a three year exit plan or something like that. So it's definitely thrown a wrinkle into this. There's still a market out there. It is currently the end of April. I think we've done about 10 transitions this calendar year. So there's work going on, but... Andy Farquharson: you Yeah. Ewan Hall: It's going to be not as busy this year. We just don't know quite where it's going to settle because we're in a very different place. mean, the run up to November when no one thought that actually was actually going to change. But whenever there's a budget event, there's a little flurry of it might. You know, we did 20 transitions in four weeks, which is not how we like doing it, I have to say. But we have a bunch of very grateful clients at the other end. Andy Farquharson: Hahaha! Ewan Hall: You know, the transition is very important, but it's a very key milestone, but it's only one milestone in the journey, which is employee ownership, because the journey never ends. We work with clients who are looking at transition, but also clients that are further down the road reviewing, evolving the structure. one of the main benefits of the EOT is I don't have to think about that sort of transaction funding again. I mean, don't get me wrong, employee ownership business can be sold. not usually plan A, but if you're doing like a management buyout, there's got to be another management buyout, and then another management buyout. It never stops. Every set of owners needs an exit. This is usually the last exit on the journey for this business, and now I just have to focus on building the business, benefiting its beneficial owners, and being a successful commercial business being run for the benefit of the employees. I don't have to worry about funding another exit down the road. Andy Farquharson: Yep. Now, I want to get there and talking about running and sort of setting up a business to really thrive under employee ownership. But before we go there, let's think about the transaction. what do you You've talked in the past about sort of finance being a sticky point for these transactions, being like with the large majority of them being solid finance. I mean, what do you see are the solutions or what would you like to see as some of those solutions to help solve this problem or this sort of stickiness in these transactions? Ewan Hall: I I suppose I don't necessarily see it as stickiness. I think that there's potentially a missed opportunity within the employership sector about an aversion to debt finance that might actually help them in certain circumstances. But to certain extent, often that's around boring money to invest to grow your business. Taking on debt to refinance some other debt doesn't usually benefit the business per se. And that is one of the problems with that is that If I'm taking on a debt to grow my business, I've got a return that I can quantify, that if this pays off, paying off that loan will be no bother, because I've doubled my profits, whatever. This is money coming in to then leave my business again, and I'm paying a premium for that. I'm paying an interest rate, arrangement fees, all that. And I'm compromising my independence with somebody who is probably not that bothered by employee ownership. The founder debt, we can get a spectrum of friendliness from... from sellers, but they also know that I could pull the plug, but if I pull the plug, I'm not gonna get my money, whereas the bank is gonna take a slightly sharper edged approach if things get a bit tight. So what we actually like, and we get debt financed, and the mainstream banks are, almost all of them now have done some EOT transactions, so they are much more familiar with it now than they were 10 years ago. But we often think what's more interesting is often refinancing the backend of the founder debt. So I talked about that. You're separating ownership succession from leadership succession. And usually the former owners are still involved in the business, but that is a diminishing involvement. And there comes a point, and it's often before the end of the repayment schedule where it's it's time to go our separate ways as leaders, sort of controlling mind in the business. But if there's money still owed, it can be to everyone's benefit to maybe take out a five-year term loan to buy out the last two years of debt. means the founder can walk away with all their money a bit earlier than they thought. But the business has often reduced the amount of cash it has got to pay out every year. I might be paying interest for that, but I've actually, on an annual basis, I've reduced the amount of paying out. And I can actually get a little bit faster to the point where I can reinvest my business and start sharing reward with the employee owners. And that can be a sweet spot. But debt finance is hard to plan for. And we've all lived in cycles where, you know, banks will say, sure, here's some money. And other times they've gone, nope. ⁓ the one ⁓ for borrowing that EO businesses sometimes have are that you can't really get personal guarantees from anyone in the business because they're not, if I don't own it, like, ⁓ most of it, I'm not gonna have a personal guarantee. So if you haven't got a decent asset base or a very strong ⁓ record of profits, then it can be harder for you to borrow money. ⁓ we are probably gonna do a couple of debt finance transitions a year. Andy Farquharson: Yeah. Ewan Hall: But it's usually high street banks putting money in. And we get other clients. We've got clients who are very comfortable borrowing money for whatever, for investing in the business, to buy out shares. And they just do as much. of course, our sector does skew away from it. And it's about that independence because they feel, if I take on this debt, the bank comes in its own term sheet of, you've got to give me this every month or every quarter, and you're not allowed to do any of these things. And I say so. And that's the chief. Andy Farquharson: Mm-hmm. Ewan Hall: And so it often, the kind of businesses that want to look at employership are often ones that will shy away from those kind of constraints. But there is a potential missed opportunity for them all the same. If it's like, look, if someone would give you X, what could you do with that to grow your business over the next five years? So it's always ⁓ a complex topic. And if we're honest, if the debt's coming in on day one, it's usually because of that founder and just sending out the money on day one. Andy Farquharson: Yeah. Ewan Hall: It might be a mortgage. I've got to this mortgage. bought this new house last year and I'm not going to sell my company unless I know more mortgage is getting cleared. Andy Farquharson: No, but I love that framing of leveraging, utilizing that leverage for, for really sort of maximizing that business and looking for that growth opportunities, which has been an under, an underutilized tool within employee own dogs. Okay. And this is something in speaking to some of your counterparts over in the U S like they're also seeing this sort of growing use of leverage to support sort of ESOPs to being more acquisitive. or these trusts or finding these different avenues for growth. So yeah, it's great to see you leading that conversation in the UK too. So, to that post transaction that you were alluding to earlier. What are the key elements that you see that are required to turn this transaction into a really fantastic employee owned business? Ewan Hall: So even at the planning stage, before anyone's any shares are going to the trust, we always see sort of four key elements to any sort of transition. The first one is the deal. There is a deal to be done. Someone's going to be transferring some shares in exchange for some money and maybe some of the controls that they want. And that's important because if we can't get one of those agreed, the rest of it is pie and sky. Then there's a piece around ownership. So what are we looking at here? A 100 % trust-owned business? Are we looking at Andy Farquharson: It doesn't happen. Ewan Hall: A hybrid ownership structure where the founders of the family keep some shares. Are we going to allow employees to acquire shares? If so, why? What are our goals and objectives of that? Then there's a piece around governance. Where does power sit? Who has access to information? Who's accountable to who? And what does that look like today and what should that look like going forwards? And then there's a piece around, I'm probably throwing too many things into one bucket here, but it's sort of. Andy Farquharson: Yeah. Ewan Hall: culture, engagement, communication, and how all these elements interact with each other because sometimes while they're owed money, the sellers might want to say on certain governance decisions and they might want access to certain information themselves. ⁓ these three things, sorry, four things, you want to get them aligned and what we try and do is at the beginning of the journey, we try and help clients think about all this stuff. It's not just about the transaction. Andy Farquharson: Yeah. Ewan Hall: We should think about these other things now, try and future-proof them a bit, but also open up one of the questions sitting over those last three, the ownership, governance, cultural, who has the power to change those going forwards? Because most people allow you to change them and review them as and when you feel is appropriate. we find we're sometimes brought in on projects where we maybe haven't been involved in the original design of them, where it's all been transaction focused. and no one's really thought about these other elements and it creates some problems through misguided expectation management or thinking about what's a healthy way of managing the exit of the founder or founders from this business. it's, what we often like to do though is revisit these questions, ignoring the transaction bit, revisit these questions at different stages of the organization's journey. A very common one is when you're about to clear the debt to the former owners, because then often they're Andy Farquharson: Mm-hmm. Ewan Hall: It's not just the debt that falls away, it's other aspects of any controls they might have fall away as well. You've got a freer hand in what you want to do next. And there's a question hangover, what are we going to do with money? We're going to have some more money kicking around now. Who decides what we do with it? And we've got a very crude tool of a spreadsheet, which we call our informed consult consent spreadsheet. Who's informed about this sort of decision? Who's consulted on this sort of decision? And who gets the consent right? And we have different stakeholders like employees, the trust, the board. all the money, maybe the sellers. And we basically use it to have a conversation about, know, who has the power to decide what? And the default position is a company's board decides most things. There's a handful of things that you must get shareholder consent for if you want to do under UK company law. But beyond that, it's sort of blank. And then it's about having a conversation. Who has the power to sell this company? Who has the power to hire these people? Who sets director's salary and reward? And these are, some of these questions are nice and simple. Some have got, you know, some interesting elements and dynamics to them. And that dynamic can be different at the day when the founder's still in control to what it is when they're paid the last pound and actually we need a healthier structure that is, our managers are not our owners anymore. We're collectively the owners and therefore how should that look? Andy Farquharson: Yeah, I love the simplicity of informed, consul, consent. So much easier than a lot of racing documents. We see people sort of coming with very sort of complex forms of ownership, we have had some people sort of on the pod they've talked about, they've gone through and created that list. Sometimes it's been a long laundry list, sort of over 30, 40, 50 different types of decisions that they've documented to help people inform that. What do you think is a good level, like in terms of detail for people to be able to walk through? Ewan Hall: There's a practical bit should sit around everything about this model in terms of how is this going to operate in the real world? I personally don't think there's necessarily a limit, but how much you formalize as a rule, particularly around consent, because some of this stuff will be a function of your culture and how you implement stuff. So a lot of the inform elements, some of it might be codified, a lot of it is just good practice, because if you want a high performing employee owned business, What you generally want to do is to get people understanding how their business works, how it succeeds, how it fails. So you want to proactively usually be sharing information and education as to how to interpret that information so that people can input into the success of the organization at all these different levels. So what information should not be shared? Our sector skews more transparently than a lot of other organizations. Non-EO businesses have got high levels of transparency, but we point on average skew more transparency. So that sort of concept to inform is often, well, let's get the information out. Now we probably need to give context and training so people know what to do with it. But in that consultation piece, the voice I want to hear from these different stakeholders, certainly from looking at my workforce, well, actually, I still need the right people making the right final decisions in the right places in my organization, but I generally want to encourage, know, well-informed, engaged people. giving me feedback as to how we succeed. So, how long the list of things that you want to share and get input on can be quite long. And it doesn't need to be limited, it will depend on the circumstances we look at. We have some clients who operate a model of almost like implied consent. Just go out and do it, but some people can raise their hand and really in if they think you're perhaps, and that's that balance of. Collective structure and giving individual autonomy and empowerment to individuals to go off and succeed individually but within the context of a collectively owned business and every business will have a different approach to that and What is helpful is to have a healthy conversation involving all the relevant stakeholders? What sometimes gets problematic is when the board and the trust aren't communicating properly with each other as to their various hopes and expectations if you a board that feels Andy Farquharson: Yeah. Ewan Hall: they're trying to backseat drive what we're trying to do over here when we've got all the legal responsibility for running this business, but you keep putting your foot on the brake pedal when we want to go on the accelerator. Similarly, you get some trusts who sit there going, I don't really know what's going on over there. They don't really give me good information. they give me is they say they're very busy and you want a healthy balance of the conversation. And that usually starts with an agreement on how do we measure success and what are our high level objectives? Andy Farquharson: Yep. Ewan Hall: We like to think about these objectives from three different scenarios in terms of the circumstances you're thinking about looking at these structures. What does it look like in a day in the life of this business? Money to Friday, day-to-day trading, how does that work? What is it like in a year in the life of this business? Over a year, are the kind check-ins, checks and balances we should probably see operating in a healthy organization? And then extremists in an emergency. where does power ultimately reside? So usually on a day-to-day basis, the trend is I want to give a lot of autonomy to my leadership team to go on and succeed, and I don't want them reporting to a trust every couple of weeks. want to get, but over the year, there need to be check-in points where the trust actually know, are we doing well, are we not, why? And often that's where the check-in meetings happen, and there might be some high level. Andy Farquharson: Yeah. Ewan Hall: strategic business planning things that might need to be ratified by other stakeholders in organization. And in extremists, know, some people have described this as the mad bastard test. What happens if we get one of those? Who's holding the check? And usually it's the trust. And if the trust is going to have that responsibility, is that trust robust and strong enough to be able to do that? And if it is, are we clear why? If it's not, how do we fix that? Andy Farquharson: Yeah. No, no, I love it. look, to be honest, there's so much here that we could dive into. And, but I do want to be mindful of your time. Like you've given us so much, so much today, but ⁓ as we sort of sort of come to the end, like I do want to sort of finish up the podcast with the things that we normally do. So I like to ask people a fast round of three questions and you offer a quick response. How does that sound? Ewan Hall: I've covered quite a lot of things here Andy, I'm moving around. Andy Farquharson: Okay, awesome. So first one, it'll be a tricky one for you with all your years in the EO space, but who is the leader that you most admire in employee ownership? Ewan Hall: See, my quick response is David Erdahl, even though he probably wouldn't have described himself as a leader. ⁓ But he was the guy who inspired me on what employership, I thought I knew this and he showed me that actually it was all about this. And he was the guy who always said, why can't we do that? Why can't we do that? And there were people that inspired him before him, but he was my, he's my David Erdahl. He'll always be my David Erdahl. And he was the guy who really inspired me into employership in early 2000s, an amazing man. Andy Farquharson: Okay. Ewan Hall: Still with us, ⁓ but less active in the EOS space now. Andy Farquharson: Okay, very cool. Awesome. That's a new one. What is your favorite resource on employee ownership? Ewan Hall: I mean, ultimately, the ultimate resource I feel we have in the UK is the network we have of a thriving sector that we've got a sharing, a group of people who are happy to share their experiences collectively and openly in a way that a lot of sectors don't get that. And the Employee Ownership Association is obviously a big conjurer for that, but lots of networking groups set up around that. The sector and how it shares information is very positive and welcoming. It's one of those... things we always encourage people to join our sector, they can plug into that because it is incredibly powerful. Andy Farquharson: Yep, fantastic. And what would you say to a business owner who's sitting on the fence regarding a transition to an employee? Ewan Hall: You want to have conversations with other people who've done it. You want to hear it. You want to hear the warts and all. And we're actually pretty good at sharing the warts and all perspectives and all this. So you want to hear it when it good, you want to hear it when it went less good, and then you want to compare it with your own experience. But often, he wants to talk to, it's often a he, but it's often a she as well. But who are they going to talk to? But often they might have their leadership team and they want to talk to leadership team people and their peers in other organizations as well. Andy Farquharson: you Ewan Hall: That's what I would suggest is the best approach to getting to feel what it's like in reality. Andy Farquharson: Okay, that's awesome. So thank you so much as like I'm sure listeners will realize we've barely scratched the surface of sort of all your hard earned knowledge around to these EO transitions and what's going to make them successful. But thank you so much for giving us a window into those hard earned learnings. And where can people go if they want to follow more of your story and learn a little Ewan Hall: Well, we're Baxendale Employee Ownership. ⁓ We've got a lot of resource on our website. We're a small consulting business, but there's nine of us and nine people who just do employee ownership. That's probably one of the larger teams in the UK. And we're active across the whole UK. We've even done some non-UK work as well because we don't go in and the technical stuff overseas, but maybe our culture and engagement, we do some of that work as well. But we're always happy to talk about employee ownership because... We're spreading the word as part of the responsibility of people who work in this sector as well. But yes, you can find us online, can find us on LinkedIn, find us all over the place, but we're an active bunch and we are collective. Like I'm one of a group. This is not my business. This is my colleague's business. Andy Farquharson: Very cool. So I'll have links to the LinkedIn and the website in the show notes. But Ewan, thank you so much for your time. Thank you for your leadership and thanks for joining us on the Alternative Exit. Ewan Hall: you Absolute pleasure, thanks Andy.