After two and half decades at the helm of ShopBot, Ted Hall was looking toward retirement, but what to do about the company and team he had built from scratch, much like his very first CNC machine? His solution was to create an Employee Owned Trust, which he says has potential strong benefits for the employees, the company, and the community, as well as taking care of the original shareholders.
Although EOTs are relatively new in the United States, they have a long history in the United Kingdom. Much more common here is the Employee Stock Ownership Plan, which is connected primarily to retirement benefits for employees. In contrast, an EOT gives employees an immediate stake in the company including an ongoing share of the profits.
How an EOT works
An Employee Owned Trust is a trust that holds the stock of a company for the benefit of employees as a group, not as individuals. Employees participate in the financial benefit of ownership by regularly receiving a payout of a portion of the company’s operational earnings, much like stockholders receiving dividends. Unlike in an ESOP, the more common form of employee ownership in the United States, employees do not receive their own individual equity in the company, and they don’t have to wait to retirement to see the benefits.
The trust is governed by a board consisting of a mix of employees, management, and outside directors. Charged with setting strategic direction, the board selects the CEO, reviews company financials, and carries out the ongoing earnings-sharing under the Trust formulation. In the case of ShopBot, the Trustee for its EOT will be an outside professional hired to ensure that the terms of the Trust are being fulfilled.
While an EOT is dedicated to keeping the company going, an ESOP is not.
“The point of an EOT is first, it’s a much simpler kind of thing,” said Hall. “Much easier to accomplish, it’s less expensive. It’s highly flexible.”
He says an EOT is oriented “to the moment,” meaning it functions as an ongoing profit-sharing arrangement with nothing to do with employee retirement.
“If you are operating an organization with a lot of entrepreneurism, if you have a group of people who really want to keep pushing the company forward,” said Hall, “it’s a great way to transition the ownership to them.”
In ShopBot’s case, Hall describes the EOT as the best kind of employee ownership. “It means that employee participation is in the moment,” he said. “You know, the world has changed a lot since the 21st century. People don’t expect to work for a company for 30 years.”
Employees can come and go without involvement in stock but benefitting from company profits all the time while they are employed. The trust holds the company for the benefit of the employees. At ShopBot, benefits are paid quarterly, but other companies might pay on a different schedule.
“We figure the more often you can do it and the closer it is related to the performance of the company, the more effective it is as a way to engage employees,” said Hall.
Hall points to the value the trust provides to the community because the trust is intended to perpetuate the company as a productive part of the community.
“It’s a transition strategy that doesn’t involve selling of the company or moving the company away,” he notes. “The jobs stay. The contribution of the company to the community remains.”
Compare that to so many transition strategies that involve liquidation of assets, major reorganization, or physically moving the operation to somewhere else.
Exiting shareholders benefit
Hall says that an EOT can be very flexible in how it compensates exiting shareholders while transferring the company to the trust and employee ownership. A larger company with plenty of assets could conceivably structure a transaction to immediately compensate exiting shareholders. In the case of ShopBot, the shareholders essentially finance the deal over a 10-year period.
They used a valuation strategy based on a multiple of EBITDA (earnings before interest, taxes, depreciation, and amortization), paid out over a 10-year period. “If the company does well, existing owners will do well,” Hall said. If the company doesn’t perform, then there is some risk for exiting shareholders, similar to if they had financed a normal sale of the company.
Hall is not concerned about the risk in the performance-based payout. He believes it helps the company prosper because there is no financial “albatross” to weigh down the company as it moves forward. The shareholders can be bought out early if the company prospers.
“You wouldn’t want to do it if you didn’t have a lot of confidence in the company, the management team, the overall spirit of the thing,” said Hall.
Should you consider an EOT?
Hall freely acknowledges that an EOT might not be for everyone. He confesses he delayed planning his own exit strategy from ShopBot. “I was having too much fun,” he said.
He says some companies might develop to the point of having another larger company or investor buy them out at a premium, but he thinks that kind of strategic exit won’t be available for 95 percent of small companies in which traditional performance-based evaluations are not particularly attractive to investors.
He wanted an exit strategy that allowed the company to continue to thrive and would benefit his hard-working employees. “I believe it will be win-win, because I have some confidence in how the gang is going to do,” he said. “If they do well, the company will do well, and if they do well, the exiting shareholders will benefit, too.”
Hall notes that his company has always operated as an open-books, profit-sharing operation, so the EOT is not a huge change for existing employees. They are recognizing the EOT means more participation as employees in governance of the company, as well as profit sharing.
“They’re pretty excited about all of that,” he said. “But the bottom line is we’re just a small business and everybody is kind of tuned into getting the next tool out the door.”
To hear the full interview with Ted Hall talking about the ShopBot EOT, check out the podcast.
Have something to say? Share your thoughts with us in the comments below.