Employee owned trusts; what's all the fuss about?

How do law firm owners pass on their business? Their culture and legacy? At a time when private equity investment is increasingly popular and offers a potentially lucrative route to exit, firms are also exploring the opportunities presented by alternatives; including Employee owned Trusts (EoTs). 

As Mark Slade former CEO and current CTO of Fidler and Pepper explains in this latest Today's Conveyancer Podcast, his firm has recently opted to become an EoT.

He candidly discusses how the directors began to explore their succession planning; initially a trade sale was an option. He says they explored private equity too. But the more he and co‑owner (and brother) Matt explored these routes, the more uneasy they became. Redundancies. Loss of identity. Earn‑outs. Reporting to new bosses. The risk of being “kicked into touch” after decades of service. None of it aligned with the firm they had built.

The success of another firm prompted Slade to look into EoT and he discovered what it offered was what he and Matt were looking for.  A future shaped by the people who built the business; protection for long‑serving staff; flexibility for his co-directors, a structure that rewarded loyalty and performance; and importantly, a legacy bigger than any partner.

It's not a "quick-win"... the payout is long‑term. The business must continue to perform. Succession still matters. But the reaction from staff, who were aware of plans to look at what the future of the business looked like, was immediate and emotional. 

Slade concludes an EOT deserves a serious look for firms looking at their succession planning.

The Today's Conveyancer podcast can be found on your preferred podcast provider and also at www.todaysconveyancer.co.uk. Subscribe and listen in for all the latest conveyancing industry news and views. 

Thank you to our podcast sponsors LEAP Legal Software and InfoTrack

Transcript

SPEAKER_00 0:17

You can also find a link to the code.

SPEAKER_01 0:22

Hello, welcome along to the late container podcast. Today we'll like it to be joined by Mark Lady Mark is familiar to many lessons. And the topic of conversation today is something that I've been quite keen to explore over the past couple of years, but never quite got round to it. It is employee ownership trust because you've recently announced Mark that fiddler and pepper has become an employee ownership trust, which is obviously really interesting and exciting for you guys. Um I'm kind of intrigued to hear about that journey, how it started, and uh why in particular you sort of felt that route was the right thing for you rather than sale or private equity, something along those lines. So thanks so much for joining the podcast. Hopefully a number of our listeners will know who you are, but I guess many won't. So, in the first instance, tell us a little bit about yourself, please, Mark, and your background.

SPEAKER_02 1:25

No problem. I was I'm a solicitor, I was CEO of Fiddler and Pepper for 20 years, currently I'm CTO. Fiddler and Pepper, we've we've always used IT quite extensively, and that's been my sort of baby as well. So we've been at the forefront of a lot of technological advances. We were the first firm to do online convention quotes in the 90s, first to do Wheels Online in the 90s, first to do SMS text updates to your phone in the I think in the year 2000 that was. So that's been something that's been really important to us. And then alongside that, we've always tried to be a nice place to work. We've called it trying to make it a magical place to work, and that's been at the core of our values for the last sort of 30 years, really. And that neatly feeds into the whole EOT thing, really.

SPEAKER_01 2:19

Well you're not Mr. Fiddler or Mr. Pepper.

SPEAKER_02 2:22

I am a solicitor.

SPEAKER_01 2:24

Um you said that at the start.

SPEAKER_02 2:26

But actually, I spend most of my time now coding. I learned about coding self-taught in the early 90s, and now that's that's that's most of what I do, uh, and that's what I really enjoy doing.

SPEAKER_01 2:39

So if that's an introduction for the uninitiated into yourself, Mark. Let's move on to what is an employee ownership trust? I think a a lot of people will have heard of the term, they might well have heard the acronym EOT as well. But perhaps for those of us that aren't particularly familiar with the concept, what is an EOT?

SPEAKER_02 3:00

An employee-owned trust. It's often known as the uh John Lewis model because they've been operating under something similar to this for I think getting on for a century now, I'm not sure in exact details, but there are a load of other businesses operating in this way. And what happens is that the shares of the company are transferred to a trust, and the trust then holds the shares on trust for the benefit of the staff. Now, generally speaking, the trust doesn't take a role in m managing the company or running the company, but they take more of an executive role. So if there's major things like buying a new office or bringing in a new CEO, they will be consulted and they can put a stop to that or or need to know why that's happening because they need to know that what's happening is in the best interest of all the staff. But they they they do not run the business and they don't take any part in the day-to-day running of it. Yeah, I think that's that's the main thing. And what's what's been found is that EOT companies generally are outperforming their competitors by sort of 10 to 15% in terms of improved profitability. It should be, and we're hoping that will be, an added attraction for recruiting talent and for keeping people, because people feel that they are part of the future of the business and the business is being run with them in mind.

SPEAKER_01 4:24

And and who's on the trust? I mean, is it members of the senior leadership team, and then are there some external advisors?

SPEAKER_02 4:31

No, we I mean you've you've got options there, you can have external people on there, uh, but there's no reason why you need to. We actually deliberately chose three members of staff that aren't on any management teams at all. And these are people that we felt the staff could work with, they've got a good relationship with with all of the staff, and we felt that they were people that we could work with. The outgoing owners can also be part of the uh trust company, but have to be in a minority. So it's it's a limited company, Fiddler and Pepper UT Limited, that owns the shares of Fiddler and Pepper. And these we've called them trustees, but they're not trustees, they're directors of that trust company. So it's it's three women that we work with and have done for many, many years, and me and Matt are the directors of that trustee company.

SPEAKER_01 5:25

Okay. So I guess you know, the million-dollar question here is why was this the right route to explore for you guys rather than the sale in private equity investment, an alternative way in which you might, for want of a better phrase, dispose of the business?

SPEAKER_02 5:48

So we we've been building this business for many, many years and made it quite successful and very happy with how it's gone, but we are look we were looking for sort of not necessarily an exit strategy, but a way to get value from that because you've built something that's worth a considerable amount of money, and it's been nice to actually have some of that to retire them. Um in traditional partnership law firms, quite often the retiring partners, their aim is just to leave it in a bit of a better state than what they found it in, and that's that. But we feel what we've got here is something quite different to that. It is a systems-led business, it runs on high-volume contracts, it's all about quality of service, and whilst we do volume work, uh we've got a 4.8 out of 5 rating on trust pilot, which we're very proud of, and we don't want to lose that. That's important to us. So we're looking at options, and we were approached by two or three businesses who are interested in buying us out, and we had a number of talks with with various ones, and it's you know it seemed all right. They're all talking about this due diligence process that you go through, which can be quite painful. But we also knew that as part of that, there are usually redundancies that go around a buyout, because quite often they'll get rid of the admin teams and centralise that with their own admin, and then quite often it it forms a pattern that the existing owners are locked in for a certain period of time, be it a year, 18 months, two years, and that's called the earnout. So you have to stay there and and help with that, but then quite often at the end of the earnout, you're generally sort of kicked into touch. So that's that's a sort of setup. That's not my idea, that's what I've seen happening in in practice with a lot of events. I didn't like a lot of that, I didn't like the fact that people that we've worked with for 20-30 years would just be made redundant. I didn't like that the fact that the business was likely to lose its identity, become part of a bigger organisation. And for my involvement, I can only speak myself. Uh I and well, firstly, I wouldn't want to report to another boss. That that's uh you know, I've been bosses that that might be difficult for me, but I could swallow my pride. But the the other thing is how they're going to run it. I don't know how they'd run it, and them being kicked into touch after a couple of years. Well, that that doesn't I don't fancy that. I don't know. It didn't ring true.

SPEAKER_01 8:33

There's only so much golf you can play.

SPEAKER_02 8:36

Yeah, yeah. I mean, if you on looking on that's on the buttons, the dark side, if you look on the bright side, you might get on with these people, you might work really well with them, everything might be golden, and you might go well in their new bigger company, and that's fine. And I know people that's happened too as well. So I was just looking at one side of it, but there are other sides that you know it it could have gone very well. But from my perspective, I'm 63 now, so you know, whilst I think of myself as incredibly young, others might not view me in the same way. So I think there's probably a greater likelihood I'd be kicked into touch, and that's not something I'm I'm ready to do just yet. So, anyway, we we'd had these chats with various people, and we went to meet a couple on the way down to an awards ceremony in London, and we came away from that meeting, and both Matt and I were making excuses about how they weren't really that bad after all. But you know, being frank, the one seemed very cutthroat, and the other one didn't I wasn't impressed that he knew what he was talking about. I can say these because you don't know who they are, uh and we've been approached by a number of people, so they don't necessarily know who they are either.

SPEAKER_01 9:46

You've never you've never been one to mince your words anyway, Mark.

SPEAKER_02 9:49

So well no, but I mean we were we were making excuses. But if that was the only way out, then that was how it would have to be, whether it was them or with somebody else. Then we went to this award ceremony in London, and I think it's Talberts in the West Midlands, they won an award and they they'd been publishing the fact that they they are an EOT. So I thought, what's that all about? So I read up on their website while they're at the awards ceremony, because they they won an award, they'd done well, and they were making a big deal of it. So then I started looking into a bit more, and then a bit more, and then the next day on the train back, I was just reading up all about it. I ordered a book on it, and I read more and more about it, and I just thought, this just matches us down to the ground, you know. It really just suits who we are. We've got so many people in the business have been with us for 10, 20, 13, even 40 years, and a lot of them are like family, and some of those are in the admin departments that would go in a normal sellout. So there's that side of it, but also from my perspective, there's flexibility there. So I can stay working with the business as long as it suits the business and as long as it suits me. If if I want to and they they don't, then I'm out, you know. That's the end of it. And if they want me, but I've had enough, I that they're out. But it's a proper two-way dialogue. I went down to four days a week a couple of years ago. That's fine, I don't want to go down any more than that, but I might do in about another three years' time. And the EOT gives you a bit more flexibility on that. So I look, I'd looked into it all and I thought, yeah, this this is what we want to do. So I I called Matt about it, and and he he looked into it as well, and Matt talked it through with our dad, Matt's my brother, and Matt wasn't sure about it initially. And so my dad said, Well, you know, you need to look into it, Google it, look up for bad stories, and look for things where it's gone wrong. And we've both done that. We've we've looked for examples of where an EOT has gone badly wrong. And the only one we can find is for someone that that sold out to his staff and he thought everyone loved him and secretly they couldn't stand him. And as soon as he had completed it, they kicked him out. So that's the only one where it's sort of blown up in their face. And you know, that's not necessarily bad for the company, and not necessarily he should still get paid out, and that's probably the best thing for the company in the long run. So it it just seemed the right idea. We took it to the other directors, they were delighted because we shared with them the possibility that we might sell out, and obviously they were very nervous about that, and you know, it's a scary prospect, and you might do well under the new rules, but you might not. So they were they were over the moon about it, and it felt felt right, felt like we're leaving a legacy. And for me personally, I took over as CEO about 23 years ago, something like that. And I remember just at that time I was doing it, I was on a mountain biking weekend and I was on a long climb, and I got to thinking about what I wanted out of the business. And the key thing for me was I wanted I wanted to create something that was bigger than the partners, because then it was all about a partnership. I wanted to create something that was more than that, that had its own momentum. Because if it's all on partners, then it lives or dies on the partners' personalities and abilities. So you can get a real dick in the in charge and the whole thing goes pear-shaped. Whereas I'd like to create something, I wanted to create something that was more than that. And then when this the ERT thing sort of came up, I thought, well, this is this is that, this is the answer to that. This is creating a legacy that's much bigger than us and stronger than us, and and and and is great. So the sweetener of all of this, as well, of course, is the tax advantages. Now, at the time I was looking into it, any payment you received under the EOT is completely tax-free, which was amazing. So that's nice. Unfortunately, Rachel Reeves had other ideas about that at the I was about to say so there is a way in which you can realise some value for yourselves through this process. Yeah. So essentially, you're selling your shares in the company. So you'll be selling them for a price, so you get an independent valuation on that, and that's based on your performance over the last few years, and then then you agree on that, and you agree a multiplier, and then you sort of work out a period over which you'll be paid. And our period is anywhere from probably six to ten years, and on the face of it, that is longer than if you went to a trade sale. But having said that, I know one trade sale that completed in 2019, and I know that they had half the payment straight away, but I know there's another half that they still haven't had because a lot of these private equity deals will depend on them being able to sell on themselves. And I think, you know, in that particular one, then the second half of the payment will come when they sell on, which is perfectly fine, and that's fair. So, but but the myth of uh a trade buyer coming in, handing you a check, and you're waltzing off into the sunset, it it is a myth. That that doesn't happen. That's why they lock you in, and that's why they want you uh incentivized so that you need to benefit from them selling on themselves.

SPEAKER_01 15:28

So But the longer the period here, the higher the risk, presumably. I mean, you talk about six to ten years, you've built a very solid and you know very good business, but that doesn't mean to say that your EOT is going to continue to operate it in a solid and successful way, does it?

SPEAKER_03 15:46

Yeah, absolutely. That's a risk.

SPEAKER_02 15:49

We're involved in I mean from the the EOT completed on the 8th of April, um and we're involved, we've not changed, the management has not changed. It's the same directors running it, there's been no change whatsoever. We've got about 170 staff, and in amongst those are people that we are looking to bring on, and we've been looking to bring them on for quite a while, and they've come in and got more involved with directors' meetings and and so on, but now they can see an end game here as well. So I think that it's turbocharging some people's involvement with the business and making them realise that there's there's a massive potential going forward. We had a um a big presentation meeting to all the staff towards the end of March, and we told them all about it, and um and that was brilliant. It went down really well, everyone was very happy. And what we hadn't realised before we started this process is how many people were already aware of us selling out as a possibility. You know, we didn't think people were thinking about this, but they weren't just thinking about it, they were openly discussing it, especially when I went down to four days. They were saying, Well, he's he's not long for this world. Uh you know, it it's something's going to happen soon. So they were they were talking about it, and then also a surprising number of people have worked for other companies that have sold out, and they've gone along that script that that I just mentioned, you know, all the admin function being made redundant, losing your identity, and then a them and us strategy. I know one uh lady spoke to me about that and said on the firm that she was in that was taken over, it was very much them and us, and they did not like each other, and it just went downhill from there. So there was a few people said, you know, if you had sold out, we were going to leave straight away. So we hadn't realised any of this was going on, and but it was yeah, it was great sort of comfort to the people there. We had a lot of really nice comments uh on the back of it. So yeah, it's really, really exciting. It feels like the right thing to do. There is the risk of it not panning out and us not getting paid off, but we're going to get paid off gradually. So the longer it goes on, the less of an issue that is to us. And if we hadn't taken any steps, the risk of it all going pear-shaped will be there anyway. You know, if we weren't selling out or or doing an EOT and it all went down the toilet in five years' time, well, if we hadn't done this, we'd we'd still have lost everything. So yeah.

SPEAKER_01 18:31

You mentioned that there are obviously tax benefits to the process, and they've changed, haven't they? So it was you know very favourable. It's now 50%, isn't it? No, not 12%.

SPEAKER_02 18:45

No, it's it's 12%. You typed at 12%.

SPEAKER_01 18:50

50% on capital gains.

SPEAKER_02 18:55

So yeah, that that's that's it. When it happened, I was splitting feathers, but I couldn't find anyone that was remotely sympathetic.

SPEAKER_01 19:05

And then what about the sort of the practical impact on the staff? I mean, that my understanding is something it gives us an opportunity to reward the staff to bring them into the ownership of the business, feel as though they've got a bit more uh of a financial interest in it. How have you kind of managed that process?

SPEAKER_02 19:24

Yeah, well we're in the in the process of that. We've got the ability there, so you know, we can offer share options and shares to people, and that's something that we're looking at and considering. We can't say any more than that at the moment. Uh, but that that's something that can happen in the future or soon or whatever. But but it yeah, it gives you uh other options there for how you want to sort of balance the the load really and let more people benefit from your success in the future. There's also the ability with uh an EIT company to pay tax-free bonuses of up to £3,600 a year to each member of staff. We're looking into that as well. At the moment, we've got a very complex bonus scheme that we put in place that works with our profits, works with people's roles. It's it's taken a lot of effort to get in there, and we're pleased with the scheme, and we're still tweaking that. We haven't got enough floating around to pay that and the tax-free bonus as well. And there are rules about paying the tax-free bonus, it needs to be paid in a fair way to effectively all people. You can exclude certain people, like ones who've not been here for a year, you can scale it on how long you've been here, you get a bit more. But other than that, you can't link it into profits, fees generated, and those sorts of things. So we're looking at that, and as as time goes on, we hope to be able to bring that in and run that in alongside the existing bonus scheme.

SPEAKER_01 20:57

We are sort of moving towards the end of the time we have for the discussion, but I I guess and you've been incredibly candid, Mark, it's it's been really interesting, and hopefully, listeners have you know sort of taken away a huge amount from this. Uh I guess just to sort of finish off, tell us about the legal experience that you've you've gone through. Because of course, this has put you on the other side of the coin that uh you kind of play you know in in a in your daily in your daily role. You've obviously engaged uh another firm to support you with this. What's that process been like?

SPEAKER_02 21:32

That's actually been really good. We've we've we've sort of had watched various webinars on it and so on. We watched one by a company called Doyle Clayton, uh, and they're who we chose to advise us. They've been been very good. There've been a variety of advisors within the business. Uh, we had a range of quotes earlier, a massive range, and these were about in the middle, so that that helped as well. It's it's a good process, actually, because my understanding. With a trade sale, is that it will get very adversarial in the due diligence stage, and they will be trying to knock you down and so on. And obviously, that's not happening here. So we only started the process off I think last August, I think it was, we first started, and it completed in uh on the 8th of April, as I said. You need to get the consent of your regulator. So I think the SRA have done a few of these, they can take several months to uh agree on it. We're CRC regulated, we're the first CRC firm to do this. The CRC were great about it. They yeah, they were just they knew what they wanted to find out, but we're happy to have discussions on what we can and can't do, and it was it was good, it was a good process with them, and then so you know the early stage is that you get evaluation done, and then you just you take it on from there. But it's it it it wasn't a painful process, but there's quite a bit of legal stuff involved because the structure is not a simple structure, really.

SPEAKER_01 23:09

This is probably a very naive question, and I ask it with my tongue in my cheek, but you this is in effect Turkey's voting for Christmas, isn't it?

SPEAKER_02 23:16

You can make up your own valuation of the business because uh yeah, you'd think so, yeah. Yeah, we sold for a hundred million. Um no, uh it it it has to be an independent valuation, and there's a company they use for that, and we you know we've produced our accounts to them, we produced a summary of the business, we explained who we are, what we're good at, what we do, what the opportunities are going forward, and some of that they've taken on board, and some of that they say, Well, that's we can't take that into account, that's not entirely relevant, and then on the basis of that, with the valuation was reached.

SPEAKER_01 23:56

To finish off with, then, Mark, and I've not met anybody who isn't uh keen to share the virtues of EOTs. Uh, you know, uh this is a route that, as you say, a number of firms have gone down. I think it's it's much more prevalent in other business areas, isn't it? But it's obviously reasonably new to law. You're obviously an advocate for it. But what advice might you give firms who are thinking about this at the moment and some of the key kind of triggers that you went through that took you down this route rather than you know an alternative?

SPEAKER_02 24:28

I'd say, you know, it sends a great message to your staff, but it doesn't take away the issues around succession. You know, you you've still got to have succession planning there. Now succession planning is is is to be coming from within, and we're we're uh we're on that that road, and and that's great. But it's it's a vote for your staff, it's a vote for your local community because you know you're investing in the local community, you're you're showing your commitment to it. If you're already looking at a trade set or thinking along those lines, then I think definitely give it a look, give it some consideration because there's lots of advantages to this. So, yeah, you've got the flexibility of your involvement, you've got the tax breaks, and you've got the message it sends to your staff. You've got also the the improved performance in the company when everyone's pulling the same way. Hopefully, people are policing each other instead of turning a blind eye when someone's trying to get away with something. So that there's lots of stuff there. So if you're looking at a trade sale, I'd say this is uh genuinely an excellent alternative. For us, I mean it was a no-brainer. This is this is like ten times more valuable to us personally that over a trade sale. It it just means so much more to us. Fits who we are, fits how we work our firm. If you're not looking at a trade sale at all and you're just thinking of retiring, then I'd say it's something that you could still consider. But you know, it like I say, it doesn't take away the succession issues. So if you are a four-partner firm and you're all over the age of 55 and there's no one coming through, EOT is not going to help you. You know, you you've you've still got to have people coming through who are going to take this business off you, and they've you know, it's got to seem like it's worth taking on for you.

SPEAKER_01 26:15

I think as you say, you you know, if you're not preparing for the future, then regardless of whether it's EOT, say LPE, it's it's kind of irrelevant, isn't it? You know, you have to be thinking about uh what uh what the future of the business looks like. But it's been this dinner years ago.

SPEAKER_03 26:34

There was a guy there, seemed a nice guy, he was about 55, I think I was about 45 at the time.

SPEAKER_02 26:40

As the meeting went on, and we got onto succession and so on, and then it became clear he'd got five partners, and they were all over the age of 55, and they got no one coming through. And as the evening went on, he became more and more aggressive. And I think he he was just it it was just dawning on him what what a shit state he was in, and and you you can't have that, you've got to be bringing people through, whatever that looks like.

SPEAKER_01 27:07

100%, and that's that's I mean, true of legal businesses, true of any businesses. You know, I often share the story of uh my dad, GP professional services, became a senior partner by virtue of the fact that he's been there the longest. You know, that's that's not succession planning, is it? That's just how good is your pulse.

SPEAKER_02 27:26

It's um yeah, it's not to say, but I think yeah, if you if you're looking at a trade sale, then I think this is genuinely a good alternative.

SPEAKER_01 27:37

Thank you so much for sharing your insight. And uh as I say, it's a topic that I've been really keen to explore through the podcast for a little while. So really appreciate you joining, Mark. The Today's Conveyancer podcast is available on your preferred podcast provider. It's also available on today'sconveyancer.co.uk. My thanks to Mark. Thank you as ever for listening, and we'll see you again soon.