Deciding to Move
When Sinx and Mills, our founders, initially spoke to me about exploring an equity transition, I was relieved and excited. The plague of uncertainty that the pandemic brought had been bearing down on all aspects of life for over a year. I was craving some sense of stability like many others. Knowing we would be working through a plan to determine the next phase of ustwo studios ownership - creating some form of future certainty - was exactly what I was looking for. Even more so, I knew Sinx and Mills were already leaning towards an Employee Ownership Trust (EOT), which was going to provide reassurance to all ustwobies about the future of ustwo studios.
Our path to employee ownership was not overnight. There were foundations that needed to be laid, feasibility criteria to be met, affordability models to be tested and shareholder consensus to be built. That being said, the overall process was relatively straightforward and most importantly for us, driven entirely by ustwo. In an effort to inspire other companies to explore and consider employee ownership, we are sharing our story on how we established an EOT.
Getting our House in Order
Our founders wanted to approach an equity transition from a position of financial and cultural strength. Before we explored this, there were some fundamentals that needed to be in place:
- We transitioned from “founder led” to “management led” by creating a team of leaders guided by ustwo studios CEO, Carsten Wierwille.
- We returned to profitability and cash sustainability across all studios.
- We built a high quality, well balanced client portfolio, focusing on high impact work.
- We lived and breathed our values, taking them even further by obtaining our B Corp accreditation in 2020.
By 2021, it was clear that the foundation was stable, allowing us to move onto the next phase of exploring the transition.
Even though Sinx and Mills were already leaning towards the EOT as their preferred equity transition mechanism, we wanted to do a thorough review of various succession strategies to weigh the pros and cons. Ultimately, the pros of an EOT heavily outweighed all the other options and, as described by one ustwobie, “was so ustwo.” For Sinx and Mills the key distinguishers for the EOT were:
- It allowed ustwo studios to remain independent and to own our future.
- It protected our community, values and culture.
- The quality of work would remain intact.
- It was an evergreen model which would not require external investment.
Assessing the Mortgage
The EOT is a mechanism for transferring the majority of the equity from the owners of the business to the employees, current and future. The innovative legal framework was put in place by the U.K.’s Finance Act 2014, and over 700 companies have become EOTs since its inception. An EOT is unique in that it allows the shareholders to sell their equity on day one, but it is paid for gradually by the business through future profits. It acts similar to a mortgage in that the employees get to own the house on the day they move in and then pay down the mortgage as they earn future income. The difference is an EOT happens to be a lot more flexible and shorter on repayment schedules than a standard bank mortgage.
For this reason, a crucial step in our process was a feasibility study to 1) assess the affordability of an EOT - could the business repay the loan without there being a financial burden - and 2) assess our criteria to qualify for an EOT. In order to do this we had to:
- Create a five year growth plan, setting our strategic and financial goals.
- Obtain an independent valuation of ustwo studios.
- Determine the percentage the shareholders wanted to sell to the EOT (this had to be 51% or greater) which drives the value of the loan.
- Model out loan repayment scenarios based on the current forecasts and the five year plan.
Once we were comfortable that the loan could be repaid in a reasonable amount of time (we are planning six years), knew we met the criteria and had shareholder consensus on the EOT, we were ready to move forward with implementation.
The final steps saw us appoint an external Trustee to oversee the EOT and work closely with our legal and tax advisors to execute the transition. On 4th April 2022 we moved into our new house and appointed three employee representatives to join our Board meetings, a move that brings us closer together as partners.
Over the coming months, ustwobies will learn and adapt together as to what it means to now be employee owned. For me, I am most excited about the certainty of knowing the direction we are headed. We get to maintain our independence and protect the house Sinx and Mills built.