Image Creation EOT Sale, Corporate Refurbishment (2017)
"How RVE advised on the corporate refurbishment EOT sale of Image Creation completed in 2017, with the corporate finance, tax, legal and trustee work delivered as one engagement."
Deal Facts
“After many years of hard work building up my business, in 2016 I had an approach from a trade buyer who was interested in buying the company. I was still in my mid-40s and didn’t want to retire, and after a few meetings with the buyer realised that the company would not thrive under changed ownership. However, I was keen to realise a fair value for my shares if this could be combined with a continuing role in the business. The employee buy-out fitted my objectives perfectly – me and Dorn sold 80% of our shares to the EOT (tax free) and retained 20% for future sale, and I will continue to work actively in the business until my planned retirement in a few years’ time. Gerry Young at RVE did a great job advising me on the transaction and I would be happy to recommend him to other business owners in a similar situation”.
The story of the deal
Image Creation Limited was formed in 1998 by Andy Kipping and his wife Dorn. The Company is based near Beaconsfield, Bucks and carries out corporate refurbishment projects for clients including O2, Mars, Uxbridge College and West Thames College. It also provides facilities management services for clients and design and manufacture of corporate signage. The company has 14 employees.
In April 2017 Gerry was appointed by the company to evaluate the advantages and disadvantages of an employee buy-out compared to a trade sale of the business. After considering his advice, the Founder Shareholders concluded that their preferred option was to transition to employee ownership through sale of 80% of the Founder shareholdings to an Employee Ownership Trust (“EOT”), with a 20% stake being retained by the Founders. A financial model was constructed to value the Company, which involved valuing the business on a multiple of its sustainable profits, then adding the surplus cash in the business (the cash that was not needed to provide working capital to the ongoing business).
The valuation was needed to set an independent price for the business, at which the EOT purchased the 80% shareholding in the Company from the Founder Shareholders. After valuing the Company, an appropriate earn-out profile was structured. The Founder Shareholders were issued Loan Notes repayable over a 7-year period, funded by the projected profits of the Company, plus 10-year interest bearing Loan Notes repayable at Year 10. After preparing the valuation, structuring the earn-out and drafting Heads of Terms (which set out the key legal terms of the transaction), RVE submitted the Transaction for HMRC clearance. Clearance was received from HMRC within three weeks. Gerry also advised on the appointment of Trustees to the EOT and was subsequently invited and agreed to act as Chairman of the EOT. The transaction completed in September 2017. The deal value has not been publicly disclosed.
Since the deal was completed, the business has performed ahead of its business plan, and has recruited new staff to service its increased workload. The Earn Out is being paid down ahead of schedule and employees have benefitted from tax free bonuses (up to a maximum of £3,600 per employee) paid by the Company in both December 2017 and December 2018.
Related case studies
Case Study - common questions.
Yes. Most founders / controlling shareholders stay on as director (and often as chair or CEO) for between 1-5 years post-completion, then transition to a part-time non-executive or consultancy role. You agree your role and time commitment with the trustee board; there is no requirement to exit operationally. Many founders find the post-EOT phase the most rewarding part of their career, with a clear financial exit having been arranged and a plan for management succession in place.
EOA research consistently shows employee-owned businesses outperform privately-held peers on productivity, profitability and employee engagement. RVE founders consistently report that their businesses perform ahead of plan post-completion, with vendor loans paid down ahead of schedule. The cultural alignment and engagement boost typically delivers measurable productivity gains within the first 12 to 24 months of EO. Growth depends on the business; the EOT structure does not constrain it.
The deferred consideration due to the vendors is repayable from future company profits, typically over a 5-8 year period. So if the business genuinely struggles, the term of the loan note may need to be extended by 2-3 years. In extreme circumstances, some of the vendor loan may need to be written off (eg if the business were to become insolvent).
The vendors do therefore retain business risk relating to the ultimate payment of the sale consideration under the EOT model.
If the business outperforms the original projections however, the vendor loan can be accelerated, and some vendors have been paid out in full within 4 years.
We are happy to talk over Teams or meet to discuss your exit planning.
We can normally assess whether an EOT transaction will be viable and the likely valuation range at our first meeting.
For accountants, lawyers, and wealth managers
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