In the second webinar of the 2021 Employee Ownership Explained Webinar series, financial planning firm, Brewin Dolphin were the guest speakers.

Tom O’Brien and Zoe Gillespie of Brewin Dolphin delivered a refreshingly honest, informative and jargon free presentation about the role of financial planning in the EOT transaction. Tom observed that the number of these transactions, and the size, are increasing and this makes proper financial planning to be more appropriate than ever. View the full presentation below.

Tom boiled it all down to one simple question: What do you want for your life? The response to that enables the financial adviser to “reverse engineer” and build a plan that fits with the individual’s situation and aspirations.  Timing is critical – an individual at a later stage in their career looking forward to retirement will have different needs from someone who is selling their first business in their early 30s. The plan has to adapt to changing circumstances; as Tom pointed out, it’s been a rollercoaster of a year.   Tom also advocated consideration of the emotional aspects of the EOT transaction; more than standard commercial transactions the move to employee ownership is likely to bring a mix of feelings and concerns that may impact on the decision-making process.

Many owners are advised to maximise the sale price, but this should be viewed in the context of what the individual wants to do with their life. No two businesses are alike, and no two business owners are the same. The common thread is that people want to do what they want, when they want and not have to worry about financing. 

Tom stressed the importance of regularly reviewing the plan to adapt to changing circumstances. He talked through a helpful example that clearly demonstrated how inflation and interest rates can affect a cash balance, and tax changes can impact on anyone’s financial plans.  Carefully considered investments can be a safer haven for finances when the proper advice is sought.

Zoe talked about how to manage risk in investments, and the importance of establishing the individual’s appetite for risk. Low risk with high returns is everyone’s ideal, but rarely realistic! However, a low-risk strategy might be appropriate for some individuals and even medium risk investments can increase despite market volatility. There has to be a balance and Zoe emphasised how inflation can eat into real value.  She stressed the importance of diversification to maintain a healthy portfolio.  There’s a lot of truth in the saying “Don’t keep all your eggs in one basket.”

The Brewin Dolphin team left us with three takeaways for thought:

  • Prepare a plan: it is never too early to start the process. The earlier you start; the more options are open to you. Similarly, it’s never too late and gains can always be made.
  • Timing is key – a long earnout plan and how payments are structured will shape the financial strategy. Many companies who follow the EOT route find they are in a position to accelerate payments as performance increases, and this should be well managed.
  • Work with advisers to talk through scenarios. What happens if there is a need to fund care, or education?

Attendees agreed it was an excellent, invaluable event.  The third in the series will look at the Role of the Bank in the EOT Transaction. The speaker will be Andrew Scott of RBS and will take place at 10am on 27 November via Teams.

Question and Answers

Q. When do you advise business owners start the planning process?
A. At the earliest possible opportunity. The earlier a financial planner is engaged, the earlier a plan can be put into place and the greater the potential for maximizing all the planning opportunities as well as potential tax efficient returns.

Q. Do you think there is a mindset difference between owners selling to an EOT and sellers selling in a traditional sale?
A. The main difference is the mindset of the owner. With a traditional sale, the owner tends to have a “figure” in their head that they want for the business. With a sale to an EOT the seller is often looking for other factors. The number of companies opting for an EOT is accelerating and the scale of the company is growing. This reinforces the need to seek appropriate advice at an early stage.

Q. Do you have any knowledge/idea of the thirst of the current government to maintain EOTs?
A. It’s tough to speculate but looking at the trajectory I genuinely think it’s here to stay. At the end of the day the government want owned businesses, and the positives of an EOT – increased productivity, jobs staying local, more people in employment etc. – are positives for the government. The challenge is offsetting the tax benefits, but I think the benefits are here to stay – at least short term.
Glen Dott of Scottish Enterprise agrees and thinks that the increasing awareness of the importance of retaining wealth in local economies– both in Scotland and in the UK provides a strong case for EOT owned companies because it keeps jobs local.

Q. Many owners already have a SIPP – how does this work for ongoing planning?
A. A pension (in whatever form) is just one of many building blocks for financial planning, and it’s something we look at maximizing when we speak to people.

Q. We are finding that the average age of business owners considering selling to an EOT is getting younger. Does the age of a seller impact financial planning?
A. Definitely. There has been a cultural shift in people’s priorities, and we are seeing people selling businesses in their 20s and 30s. It’s usually the younger people who are keener to engage with planners, and there’s a lot more to plan. Interestingly, the younger generation are more likely to insist on ESG factors when it comes to investing.

Q. Do you find that business owners are already aware of the EOT as an option?
A. It’s a growing trend but knowledge levels are low on what an EOT actually is. It’s gone up exponentially from a few years ago but usually people have read an article or seen it somewhere – they know something but not an awful lot.

Q. Is EOT something you actively promote to clients?
A. Yes, we do. The suitability depends on their priorities and their reasons for selling. It comes back to understanding the client.

Q. We used to spend a year doing a transaction and now they’re taking 3-6 months. How can we ensure financial planning is brought into the transaction?
A. Introduce them to a financial planner! We offer a free 1:1 session. Many business owners will already have an existing relationship with a planner, but they need to ask them if their financial planner really understand EOTs. We all have a duty to make sure a person is looked after. It’s never too late to have that conversation with someone – “do you have a planner? Can I introduce you to one?”.

Q. What should employees take into account? Is there any role for financial advice given to other individuals within the company, not just the seller?
A. Absolutely – lots of companies (including Brewin Dolphin) will go into a company and speak to all employees, and this can be tailored to income levels because people at the lower end will have very different financial goals and priorities to someone in upper management. This can be done without cost as well.

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Our Employee Ownership Explained series continues online and you can sign up to future events here.