In the third and final webinar of the 2021 Employee Ownership Explained Webinar series, Andy Scott, Senior Relationship Manager, Commercial Banking, RBS was the guest speaker. RBS can count many Employee Ownership Trust (EOT) owned businesses amongst its customer base and Andy himself has responsibility for several firms owned by their employees.

The topic for discussion was the Role of the Bank in the EOT transaction. You can view his presentation here:

Andy emphasised the importance of involving your bank’s relationship manager at an early stage in the process; the banks have to comply with processes that can mean quite in-depth information gathering exercises. This can take some time to complete and no one wants to hold up the transaction unnecessarily.

Andy then talked through the risk factors that the bank would consider when supporting a customer through an EOT transaction. The bank want a view on the commitments of the company, and what’s happening in its sector. Leadership is important. Ideally, the former owners will remain with the business for a handover period, but if not, is the leadership team of sufficient calibre to ensure that the company will continue to be successful?  The bank is also looking for a robust transaction process, with the necessary HMRC approval given and a clear governance structure that defines the roles and responsibilities of the trading company board and the Trust. The bank is interested in understanding the drivers behind the move to employee ownership; is it an exit strategy first and foremost or is it about long term value creation for the benefit of employees?

Cash considerations are key.  Recognising that most EOT transactions are funded by the vendor, the bank want to be reassured that there is adequate liquidity in the business to allow the company to continue to trade comfortably and meet its obligations. External funding is becoming more of a feature in EOT transactions and Andy explored the different methods the bank might deploy to support this:

  • Invoice Financing used to be viewed as a last resort source of funding but is now viewed as a useful way to release cash against the company’s debtor book.
  • A loan secured against the assets of the trading company.
  • A loan to the EOT.  This would require inter company cross guarantees and security would be required.
  •  Unsecured loan. The bank would insist this was ranked above any vendor loan in place and may restrict conditions of the vendor loan.

A useful discussion followed the presentation. It was generally agreed that more education on EOTs had to be done to raise awareness amongst relationship managers across all banks. It was noted that some banks did appoint “EOT champions” or had specialist departments who looked after EOTs and it was believed this was a positive step.

Questions and Answers

Q. Andy stressed the importance of notifying the bank about the plans to move to an EOT structure. When is the best time to do this?
A. As soon as possible.  The relationship manager will want to support the process as much as they can and the earlier they’re aware of the transaction, the better placed they will be to assist.

Q. With the Trust model: should the EOT payments to former shareholders be made via a completely different account to the accounts held by businesses?
A. Ideally, the Trust should have its own bank account.  I am aware that this isn’t always straightforward to set up.  Your relationship manager should be able to guide you and if you are an RBS customer, I’m always happy to help navigate our processes.

Q. What level of personal guarantee would the bank be looking for from the future directors of an employee-owned business?
A. This can be a thorny one when personal guarantees are required for credit purposes.  There isn’t one answer to this and it’s entirely dependent on the specific circumstances.

Q. We had issues with our bank when we moved to the EOT structure. Even our relationship manager struggled.
A. This is potentially a training issue with the individual staff involved. We do have products suitable for employee-owned businesses (EOBs), and have EOBs as customers. It will vary between commercial and personal banking but the products are there. There is a turnover limit that will determine which banking channel you’re looking at – but this doesn’t hugely change what is available for EOT transactions. I would suggest working closely with the relationship managers.

Q. Is there a role for umbrella bodies to work with the main banks to streamline their services?
A. That’s a good idea although will depend on banks looking to adapt processes for what is still a small piece of the marketplace.

Q. Are RBS, or anyone within RBS, talking to the Scottish Government about changing policy with regards to EOBs?
A. Not aware of anything.

Q. Do the Scottish National Investment Bank have a position/product for supporting EOTs?
A. Not aware of anything.

Q. Are you aware of RBS or any banks discussing with the Scottish Government a guarantee scheme for EOT deals (similar to other guarantee schemes)? This could be a great way to unlock finance to EOTs.
A. Lending policy is UK wide but within that it can be regionalised, for example how pharmacies are funded differs between Scotland and the rest of the UK. It comes down to numbers really – there are not enough EOBs currently to make it worthwhile to change policy.

Q. How involved should a relationship manager be in the transaction team?
A. It’s crucial that they be involved at all stages, not necessary in every single meeting (for example with solicitors or accountants) but they should be kept up to date with any developments, particularly ones that will impact timescales.

Q. Are there any specific changes that the bank needs to be aware of post-transaction?
A. Banks should be kept in-the-loop of any board changes because it the risk level may change. The bank may be more comfortable with the owners/sellers remain in the company for a longer period because of the continuity.

Q. You acknowledged reduced warranties and indemnities in EOT deals. Are RBS happy to accept this position in EOT deals or have you on occasion asked for more detailed warranties in the legals?
A. We certainly do ask for more detail when it’s necessary, and it happens from time to time that we’ll have a look at something and decide that actually we can’t continue without further information and that’s when we might as for additional detail.