Selling to employees – a solution for owner exit?

Harper Macleod's Chris Kerr

Chris Kerr

Chris Kerr is a partner in Harper Macleod’s Corporate team and specialises in advising family-owned, owner-managed and employee-owned businesses in Scotland. He has been involved in some of the country’s highest profile employee buy outs and restructurings.

Here he looks at the growth of employee buy outs, some recent success stories, and considers when the legal sector should present employee ownership options to their clients.

The volume of business sales has slowed significantly in recent times due to the recession. Access to finance has been difficult, even for healthy businesses, and many business owners have postponed plans to move on.

However, the drivers for exit remain strong and at some point these owners will be looking at their succession options. Selling to employees is becoming an increasingly acknowledged route for succession. The exit can be managed, minimising distraction to the company’s operation, and some form of vendor financing can facilitate the funding of the sale. One attraction of this option is that, to an extent, the “legacy” of the company can be preserved.

There have been several high-profile employee buy-outs in Scotland in recent years, all concluded with apparently positive results. Business performance has improved, employee engagement levels have been raised and vendors report they made the right decision.

So is this an option that should be presented to all clients? The Westminster Government commissioned Graeme Nuttall, of London law firm Field Fisher Waterhouse, to report on how employee ownership could become more of a mainstream business model.

The Nuttall Report was published in July 2012, making 28 recommendations, all of which have been accepted by the Government. The Scottish Government has also expressed support for the model. Is the legal profession ready for this increased interest?

Harper Macleod is seen as one of the leaders in this field. In recent years the firm advised successful engineering company Clansman Dynamics Ltd on their employee buy-out. Clansman designs and manufactures manipulators, with 95% of their production going to export.

Clansman Dyncamics' Dick Philbrick

Clansman Dynamics’ Dick Philbrick

The owner, Dick Philbrick, had received several approaches for the business, mainly from overseas buyers. Dick was adamant that the business and skills should remain in Scotland and sought an exit solution that would secure the business in the local area.

The business has a turnover of £11m and a workforce of 38 employees so an overseas sale would hit the local economy. The management-led employee buy-out seemed a good answer. This meant that Dick could manage his own exit from the firm, and also shape the future of the business. Importantly, for employees, customers and suppliers, there was continuity.

Rather than the business being negatively impacted by the transfer of ownership, as so often happens, the firm has gone from strength to strength. In fact the company has experienced a 65% increase in turnover in the past three years.

Another client of Harper Macleod is award-winning Highland Home Carers. The founder, Nick Boyle, could not stomach the thought of selling the company to one of the national agencies as he was not convinced they would deliver the same high standards of care for which the firm is renowned.

Highland Home Carers member of staff with customer

Highland Home Carers is another successful Scottish employee buyout story

Since the employee buy-out, the company has more than doubled in size, made significant acquisitions and expanded its geographic reach. Having a stake in the business has significantly improved employee retention, vital in an industry where consistency of service is key. The business recently restructured its financing and now anticipates a successful future.

Harper Macleod also advises Woollard & Henry Ltd. The Dyce based manufacturer is one of the most successful employee buy-outs of recent years. A brave diversification strategy has resulted in six consecutive years of 30%+ growth in profit.

Scottish Enterprise is dedicating resource to promoting a model which leads to a rise in productivity and profitability. Employee owned businesses tend to stay rooted in their local area and are unlikely to relocate overseas, which also supports the overall economic growth strategy.

Co-operative Development Scotland (CDS) provides a free signposting service to businesses and advisers who may be looking to find out more. CDS is working with the Law Society of Scotland to raise awareness of employee buy-outs amongst the profession. CDS is offering speakers to faculty groups and networking meetings and depending on location, it is possible meetings could be hosted by employee owned businesses, giving direct insight into the model.

Co-operative Development Scotland is a Scottish Enterprise subsidiary, established to help companies grow by setting up consortium, employee-owned and community businesses. It works in partnership with Highlands and Islands Enterprise.

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