A little over two years ago, Peter Hollis, Founder and Principal at Hollis and Co Chartered Accountants, started thinking about his legacy. While he had no intention of retiring any time soon, he was aware that staff and clients would be wondering what would happen when he did decide to stop working. 

“If you don’t lay out a clear path, people start making up the story themselves. I thought there might be a possibility we could lose clients on the back of this, and a possibility that staff could leave because they don’t actually know what the future holds for them.”

However, Hollis never really wanted to sell the business, as he had never been comfortable with the idea of selling client relationships. He wanted to do something that would give both clients and employees peace of mind that things would mostly carry on as normal. 

He started considering the possibility of a management buy-out, but also had some doubts. In particular, he didn’t want to create two classes of employee in the business. “I didn’t think that was a good recipe for moving forward.”

But there was another option on the table that could work for Hollis and Co. Hollis had worked with a couple of clients that had gone down the Employee Share Ownership Trust (ESOT) route, where a company ends up being owned by trustees for the benefit of all the staff.

With nine employees – five of whom are chartered accountants – Hollis felt that this option was tailored well to the make-up of the practice. “In other practices, a management buy-out might suit better, because you might have an individual who stands out as the successor. While I would say that happens in the majority of situations, it wasn’t the case here.”

At a staff awayday in October 2022, Hollis explained the plan to his employees, where they discussed what an ESOT might look like. Having taken his employees’ comments on board, Hollis was satisfied that it was the right way to go. 

Hollis hoped that the process would be relatively quick, but little did he realise that he was setting something of a precedent for an audit practice. ESOTs are not common in the profession; to proceed, it was necessary to bring in legal advisers to check against regulations. At one point, it was debated whether it would be necessary to split the audit and accountancy practices, which Hollis wanted to avoid. 

He was able to draw on the advice of two prominent legal experts in the field of ESOTs: David Pett, a barrister and author of ‘Employee Ownership Trusts’, and Graham Nuttall, the solicitor who wrote the Nuttall Review on employee ownership in 2013. They helped him navigate the regulation around audit practices and get the ball rolling on transferring ownership to a trust.

“If you’re going to do this, you need to use a lawyer who’s done this before and knows about employee share ownership trusts, because the last thing in the world you want to do is to not comply with the legislation,” says Hollis. “The thing then becomes ineffective, and you lose the capital gains tax benefits on it.” The seller pays no capital gains tax when transferring ownership to an ESOT. Employees can have £3,600 a year tax free, but they still need to pay national insurance on this. 

The Hollis and Co ESOT currently has three trustees, including Hollis, and he has appointed another director to the company. Despite that, things are currently running much as they did before. Hollis is being paid off through deferred consideration, from future earnings of the practice. 

Hollis is in the process of forming an employee council to advise the directors on the operation of the practice. 

“My priority, when I started this, was always the clients and the staff. But as I went through this process, the priority really became looking after the staff. Most have been here a long time, and they’ve been good to me.”

Over time, Hollis wants to get to a point where, gradually, the staff take over his role until he has nothing to do. Then it will be time to step away from the practice. But Hollis is not in a rush. “I want to leave them in a position where things will carry on fine without me. From there, the staff need to be comfortable with taking the reins and steering the direction of the practice.”

He recommends that practices do consider ESOTs as a way forward when it comes to succession planning. “You need staff who are prepared to take responsibility to run the firm. You could go down the route of a management buy-out or private equity, but I quite like the dynamic of people owning the business that they work in.”