We’re Now Owned by an Employee Ownership Trust: What Management Needs to Know

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That’s exciting news! The owner of your company has sold the business to an Employee Ownership Trust (EOT), making you a new employee-owner. 

But now what? Employee ownership is more than just a financial arrangement. As a senior leader, you’ll need to maintain operations while fostering an employee-ownership culture and governance model. There’s important work ahead, but it’s all worth it!

Your work will now contribute to several new benefits:

• Generating new wealth for you and your employees.
• Creating a greater sense of ownership and purpose among your team.
• Knowing that your efforts support the broader community.
• Maintaining long-term stability for the company.

However, there are also some risks to be aware of, such as:

• Pride of ownership can lead to higher stress for some people.
• Clearly communicating the new rights and responsibilities of employee-owners.
• Addressing tasks or initiatives once handled by the former owner.

Many of these benefits and risks can be addressed by aligning your company values and mission to reflect the new ownership structure.

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Aligning Values and Mission

Start by reviewing your corporate values and mission statements. You don’t necessarily need to change them but consider how employee ownership is reflected within them. For example, below are a few potential values that align with employee ownership:

• We find joy in serving others. Our mantra is “we before me.”
• We prioritize long-term thinking over short-term thinking.
• We recognize that people drive our business.
• We level up the workplace through transparency, diversity, and inclusion.
• We are not shy about profit—profit fuels our mission.
• We believe business has a purpose beyond profits.
• We have fun together.

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Similarly, the mission of the company may not need to change completely, but ensure it aligns with employee ownership. Consider elements like:

• Organizational well-being
• Financial well-being
• Employee well-being

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The New Organizational Structure

Your company will have a new organizational structure. Below is a basic org structure:

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The Role of the Employee Ownership Trust (EOT)

After the sale, the company will be owned by a trust. An Employee Ownership Trust is a legal entity that manages an asset on behalf of Beneficiaries (employee-owners). EOTs are useful for employee-owned companies because they can own company shares indefinitely without tax liabilities, avoiding major tax or succession events. 

Trusts are managed by trustees instead of shareholders or directors. Trustees typically take on an oversight role rather than an operational one, with business leadership delegated to a Board of Directors or management. 

At least 33% of trustees must be company employees. 

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The Trustees’ responsibilities include:

• Ensuring compliance with trust by-laws and mandates
• Voting the company shares when necessary (e.g., electing new Board Directors)
• Authorizing any sale or purchase of shares
• Approving payments to Beneficiaries according to trust guidelines

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Trustee decisions are usually made through resolutions, which the company’s accounting team then executes.

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The Role of Management

Most of the time, management will continue to operate as before the sale. The transition to EOT ownership doesn't require changes in how operational decisions are made. 

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However, increasing communication and transparency with employee owners is good practice, but employees of an EOT-owned company mainly have the right to financial participation rather than decision-making authority. Establishing interaction methods between the company and the EOT can be done in various ways:

• Larger companies might have the EOT appoint or elect a Board of Directors to oversee management, including recruiting a President, aligning strategies, and approving budgets.
• Smaller companies might authorize the President or CEO, or an Advisory Council to oversee management.

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The Board of Directors or Management’s duties include:

• Overseeing operations
• Ensuring organizational health and well-being
• Determining when and how much to pay in dividends to the EOT.

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The Role of the Beneficiary (Employee-Owner)

When an employee joins the company and successfully passes probation, they become a Beneficiary of the Trust. Conversely, when an employee leaves, they usually cease to be a Beneficiary. 

Benefits are generally paid to beneficiaries as ‘eligible dividends,’ which might be referred to as ‘EOT Distributions’ to differentiate from dividends paid to the EOT. Regardless of the term, beneficiaries normally receive tax-preferred payments from the EOT. 

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If the company is sold or wound-up, any surplus in the trust would be distributed to the Beneficiaries. 

Many companies create employee-owner councils that advise management on company culture, programs, and overall morale, fostering enhanced employee-ownership understanding organization-wide.

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The Beneficiary’s role entails:

• Conducting themselves like an employee-owner, focusing on how their work supports the collective good of all employee-owners.
• Participating in annual meetings, employee-owner councils, and other company events.

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Operating an employee-owned company can be incredibly rewarding. While the ownership transition doesn’t necessitate wholesale management changes, it requires careful attention to the various stakeholders within the new ownership model. 

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Be deliberate, get it right, and you’ll unlock the power of employee ownership!