When exiting a business, the owners should carefully consider which options best suit their situation. Alternatives to employee ownership could involve selling to an outside investor or private equity, a management buy-out or winding up. All of which have significant disadvantages. On average only one in five small to medium businesses actually sell on the open market and MBO’s are equally rare as managers struggle with funding. Winding up comes with the inevitable cost in redundancies and invariably achieves only a net book value.
Employee ownership by contrast, preserves confidentiality and comes with a readymade buyer, less intense due diligence and a timeline that suits the owners securing future employment. Vendors are able to tailor the terms of the transaction and the sale price qualifies for full capital gains tax relief – what’s not to like?
Businesses that are suited to employee ownership are generally mature with profit levels able to service the debt and employee incentives within a reasonable payback period. Ideal candidates will have a good management team in place or a promising management team. An influencing factor in the decision-making process will be a strong ethical affinity between the owners and employees.
Our financialhealthcheck™, includes a comprehensive valuation including comparable recent transactions and is a great starting point. The financialhealthcheck™ enables owners to compare offers likely to be achieved on the open market with different employee ownership repayment models informing the decision-making process.
When selling businesses on the open market, most company owners don’t always choose the highest offer, but the offer with the best deal structure. Most shareholders tend to prefer offers with most of the consideration upfront and shorter less onerous earn outs.
Some owners try selling on the open market and if deal structures, debt and tax implications prove unattractive decide to sell to their employees instead. Recent offers from outside acquirers can also be used to reinforce a fair market valuation when seeking approval from HMRC.
Some owners prefer selling to their employees from the outset because it means less disruption, no competitor involvement, the terms of the transaction can be tailored, and they don’t need most of the consideration upfront.
There are different types of employee ownership to consider, Direct share ownership transfers shares directly to some or all employees, indirect share ownership places shares into a trust benefiting employees only while they remain with the company. Some companies opt for a hybrid of these models. Retention of shares can also cater for direct ownership of shares by senior management where it is felt useful to have a direct capital stake in the company to help deliver strategic results.
The majority of employee owned businesses, adopt the simple arrangement whereby employees are the beneficiaries of a trust which holds shares on their behalf. Companies such as John Lewis, Riverford Organics, Aardman Animations and Richer Sounds are well-known examples where shares are held in trust.
Mandating transition to employee ownership may not achieve your objectives if current financial performance will not support an EOT or if a fair market value does not match your aspirations. The financialhealthcheck™ will help you decide if employee ownership is suitable for you, and if so, which structure is best suited to your situation.