Scaling Service x Kirsty Leighton: How to sell your agency to your employees
Forget fire sales and hostile takeovers. Here's how to sell your agency without saying goodbye.
Employee Ownership Trusts (EOTs) have seen a significant surge in popularity in the UK in recent years. Between 2020 and 2022, the total number of employee-owned businesses doubled. As of June 2023, there were 1,418 employee-owned businesses in the UK.
These are still, in the context of the wider UK economy, relatively small numbers.
But it feels like there’s an article every other week in the PR trades about a founder selling their business to their team. W Communications, Brazen, Aspect, and Babel PR have all adopted the Employee Ownership Trust (EOT) model over the last few months.
But why is the PR industry seeing such a surge?
"I wanted to build an agency where everyone’s voice could be heard because I've learned so much from others throughout my career," Leighton said, on why she made Milk & Honey PR majority employee-owned. "It’s important to hear different perspectives, not just from seasoned professionals or specialists, but from everyone."
Initially, Leighton considered an LLP model but quickly discovered it wasn’t the route for her. "I then explored other models and, in 2019, came across the EOT (Employee Ownership Trust) model," she says. "The EOT model appealed to me because it’s flexible, with shares held in trust for employees, eliminating the need for them to buy in or be bought out."
Demonstrating her commitment to the model, Leighton opted to start early and rely on future profits for the buyout. "So, if you’re doing this for moral reasons rather than purely commercial ones, you might start earlier and rely on future profits," but she wanted to go early. "It shows the team my commitment to making it work for all of us, not just for me."
The big advantage of selling to employees? Tax. And these incentives cut both ways, with both the founder and the employees benefiting. "The employees must be majority shareholders, so I sold 55% of the shares," Leighton explains. "The sale is capital gains tax-free, and the payout is staggered over several years to avoid financial strain on the business. Employees also benefit from profit sharing, receiving up to £3,600 tax-free, per year in the UK."
But ownership isn't just about the finances. Employees at Milk & Honey PR now have a significant say in the company's direction. "We present our five-year plan to the EOT council, made up of employees, and seek their input," Leighton says. "Major decisions require their approval. If there’s concern, we discuss it. It’s similar to having a government mandate."
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Profit distribution is based on a range of factors, including seniority and length of service. "It’s based on tenure, days worked per week, and salary percentage," Leighton clarifies. "After 12 months of continuous service, employees are gifted shares, unrelated to individual performance."
When it came to valuation, Leighton worked with advisors Moore Kingston Smith. "We chose a 4.5 times EBITDA multiple. Since we were only two years old at the time, the valuation was lower, but I wanted to establish the infrastructure early."
While the transition to an EOT was complex and costly, Leighton believes it was worth it, but she says there are plenty of lessons to learn. "Don’t cut corners on legal or tax advice," she warns. "Also, this isn’t a silver bullet for retention. It requires ongoing commercial training and involvement from everyone."
Selling your business to your employees can be a deeply rewarding way to give back to the people who have helped build it. Beyond the altruistic benefits, it's also a shrewd business decision. The tax advantages offered by EOTs make it an increasingly attractive exit strategy for entrepreneurs seeking a smooth transition while ensuring their company's legacy lives on.
Would you like to be featured in Scaling Service?
If you’re a founder or senior decision-maker at an agency and can talk about any of the topics below, ping me an email on paul@hardnumbers.co.uk.
This isn’t an exhaustive list; it’s just the topics I’d like to cover over the next 12 months. If there’s anything commercially focused that founders can learn from, hit me up.
Senior Communications Consultant at Hard Numbers 📈
6moCracking piece Paul. Such an interesting model and exit strategy.
Looks like another great issue Paul and Kirsty has such an interesting take on this.