Employee Ownership Trust (EOT) as Exit Strategy - Interview with Jesper Sandberg
In May 2023 Sandberg Translation Partners became an employee-owned trust (EOT). We interviewed Jesper Sandberg, founder and Executive Chairman of the company, to find out what exactly an EOT framework is, why this could be a viable exit strategy for many small-to-medium language service providers, and more.
A career in localization and building Sandberg Translation Partners
I qualified with a five and a half years master's degree as a Danish state authorized translator and interpreter back in 1990. I actually moved to the UK right away after graduating, to start working as a contract freelancer for a Nordic translation agency. And I did that for about five years.
In May 1995 I set up my business and called it Sandberg Translation Partners. That's when I started hiring my first few in-house translators, initially only Danes, and then a few years later Swedes, and so on.
I became a member of several associations for translators and translation agencies. Demand for our services grew steadily as more and more LSPs found us in the membership directories of those various associations. So by 2000, we were eight people in the office. And as the owner, I obviously wore many different hats. I still spent most of my time translating, revising, and mentoring other translators.
Fast forward to 2002, I acquired a portion of another LSP that was closing down, which is when our now CEO, Anu Carnegie Brown, joined the business. We saw steady growth throughout the 2000s. A decade later, in 2012, we acquired two companies with a very similar business model to ours, which took us to around 50 fulltime employees.
This was also around the time when I decided to get out of the office a bit more. I started attending conferences organized by various LSP associations, and not least GALA's own annual conference.
For the last 10 years or so, we've been consolidating our market position and have achieved a fairly high degree of organizational maturity.
In the last three or four years, I have gradually been reducing my own working hours and thinking more about leadership succession and my eventual retirement.
What is an Employee Ownership Trust Framework?
The employee ownership trust framework came to our attention in 2018. It is an indirect form of employee ownership, whereby a trust acquires all or most of the shares. (It has to be a majority of at least 51%.) The trust holds those shares for the benefit of the employees. In the UK, the scheme is promoted and incentivized by the government in the form of favorable taxation, both for the existing shareholders and for the employees.
The main financial benefit for the employees is that they get a stake in the business without having to invest at all. They enjoy the benefits of indirect ownership while they remain employees of the company. If they leave the company, they also leave behind the benefits. So to be clear, the employees do not have to buy shares when they join the company or sell shares when leaving. And that, of course, makes it a lot simpler. The previous owners, the exiting shareholders, have to be paid for their shares of course. And that is done out of future year's profits from the trading company. But once the owners have been fully paid, then all or most of the annual profits can be distributed to all employees in the form of annual bonuses.
In the UK, this is where the financial benefit to the employees comes in because the employee bonuses are free of income tax up to a point. Another significant, non-financial aspect of an employee ownership trust is that it allows for the employees to have direct representation. They can be trustee directors on the board. And in our case, we're starting with two employee trustee directors who joined me and Anu on the board of trustees. And in this way, we ensure that the company's employees have a say in the destiny of the company and have the opportunity to hold the board of directors and the management team of the trading company accountable to the way they run the business.
It seems not to be a particularly well known form of company ownership, at least not in our sector. We have learned from our advisors through this process that it is actually fairly common and widespread in the UK. And there are associations that represent or look after the interests of the employee owned companies and help owners, managers and employee representatives to learn how to get the most out of these companies. So, it is growing, and it does seem to be popular in the UK.
We've heard from industry peers from other countries that similar schemes do exist elsewhere, including in the Netherlands and the USA, but they are probably less well known there. And of course they will have their type of corporate structure.
Why did you want to "share the partnership" with your employees?
We became aware of this scheme at an ATC conference in London in 2018. There was a keynote speaker who mentioned it among other more well-known forms of shareholder exits. We learned that employee ownership companies have existed in the UK for many years, but in 2014, the government decided to try and get more small to medium companies to go this way and started offering financial incentives.
Now, while I have certainly not been in any rush to exit the business, because I still enjoy the stimulation I get from being a part of our exciting industry, however, as I get older, I've had to think about what succession options would be available to us considering our business model.
We’ve always focused on working for other LSPs and we've seen ourselves as a translation production company focusing on five languages. And all of this has meant that few potential buyers would want to or even be able to keep the company running as it is. So although we've actually had several offers and plenty of interest, both from LSPs and private equity over the years, we have also considered this EOT option over the last five years.
We're ultimately drawn to the solution because of the control it gives us. It enables us to secure a future where we retain independence and control over what happens to us, independence in terms of the decisions such as who do we work for and what kind of people do we employ? How much profit do we have to make? We target year on year growth, et cetera.
And as a company, I don't think we would have retained much control over these matters if we have sold to another language service provider or a private equity fund. You might argue that it could be seen as a path of least resistance to a gradual transition.
Why did you decide it was time for an exit strategy?
We actually embarked on the process three years ago, but called a halt to it after a couple of months because we realized that the timing wasn't right for us for a couple of reasons, including financial considerations and leadership succession. In particular, we've had to contend with Brexit and obviously, like everyone else, the fallout from the COVID pandemic in the last two or three years, 2021 wasn't a great year, but 2022 was a very good year.
We knew that our evaluation, which is an independent open market valuation of the company, would take into account the last three years financials. That was part of the reason why we thought the time was right now.
What is your new role going to be from now on?
That's a good question because we became aware after a few days of publicity around it that we didn't seem to have communicated that well enough. Nothing changes, really, absolutely nothing changes for us, in our day to day lives and roles.
The company continues exactly as if there had been no change in formal ownership. Anu continues as Managing Director, and I continue as Executive Chairman, and everyone else continues in the job the way they know it already.
What were the reactions, first of all from Sandberg's employees, and from the industry at large?
If I start with our staff, you know, it's generally been well received. Some people have been more vocal or expressive in asking questions and expressing either reservations or appreciation of it. But on the whole, it's been very well received as, as we would have expected. Communication and expectation management is important. Of course, we have made a significant effort to try and really inform our staff about the bigger thinking about it and the details about how this will all play out over a period of several years.
From the general industry at large, we have had a lot of interest. People appreciate it from like a sense of community. They see it as an interesting contrast to a purely financially motivated sale to a bigger LSP or a private equity investor, which of course are the common forms of share transactions. And a lot of the owners of small to medium companies, of whom Anu and I know many around the world, have actually reached out to us.
Just an hour ago, I had a half hour meeting with a CEO in the UK of a company, a little smaller than us perhaps, but they're very interested. So, if we can spread the word so that people become aware of this opportunity and they can take their time to investigate whether it's the right thing for them, then we're certainly very happy to help.
Do you think that this kind of exit strategy can be easily replicated by other LSPs? Is there any groundwork that you should do that you would recommend?
Obviously any owner considering something like this should spend some time reading the official guidance from the government, because the scheme is the government regulated one. Then you can read advice from professional consultants, so accounting firms and law firms that will advise on the financial and the legal implications involved in the transition.
What I told the person I spoke to separately about an hour ago was that considering what I know of M&A (by having spoken with other industry colleagues who have been involved in either buying or selling translation companies and going through integrations, etc.), it's clear to me that this is by a long way a far easier transition to go through on every level, both the speed with which it can be done from a legal and financial transaction perspective. And, about the amount of thinking and effort that goes into the preparation: if you look at it beyond the share sale, beyond the transaction date, there is no integration, there is no further effort.
You just carry on running the company to the best of your ability, trying to ensure that the company remains relevant in its market space, competitive, profitable. And that’s it, it really is business as usual.
So I would consider it by far the easiest form of exit for owners of small to medium business. I suppose in principle, it could happen to any size of company in our sector and in many other sectors.