Tag Archives: employee buyout

Funding the employee buyout – Part Two

CDS Employee Owner Managers Event 21Last week, we looked at the issues raised by John Alexander of consultancy firm Baxendale on funding an employee buyout during his presentation at a recent Expert Breakfast Briefing session.

Carole Leslie, a specialist adviser with CDS, continues her look at the points raised.

Alexander, who has been responsible for structuring more employee buyouts than anyone else in the UK, was clear in his view. There is a significant opportunity for the financial sector to fill a funding gap for potential employee-owned businesses.

The gap is for patient capital, which accepts that investment in employee ownership can provide good reliable returns – albeit over longer periods.

Among the other issues identified were:

Longevity and steady performance are two proven benefits of employee ownership.

The model doesn’t fit with the ‘scrag it and sell it’ short term model.  Many funds prefer a 3-5 year sale of businesses that can demonstrate a “hockey stick” profit forecast, selling at the point optimal value is achieved. While a valid model for investment, it relies on undermining ownership.

Employee Benefit Trusts are an important, but often misunderstood, element in the employee-owned structure. 

Securing the majority of shares in the Trust reduces the requirement to finance the internal share market. The absence of external shareholders for trust-held shares means cash that would have gone out in dividend can be distributed to employees.

Whilst Capital Gains Tax relief may not convince owners to sell to employees, it will ensure the option is on the agenda.

The tax relief is not insignificant, but unlikely to swing the deal, according to Alexander.  What the relief does do is put the onus on advisers to inform business owners that the option exists.

There are too many misconceptions surrounding employee ownership.

Too often employee-owned businesses are presumed to be less than commercial, when in reality they are anything but.  These are good businesses which happen to be owned by their employees.  Indeed, employee-owned firms report higher productivity and more innovation than conventionally structured firms.

The latest Co-operative Development Scotland employee ownership event is taking place at Page\Park’s HQ in Glasgow on July 4 – Employee Ownership Day. To find out more, click here.

Time to learn from the experts…

CDS Employee Owner Managers Event 21Last week we hosted the first of our expert adviser breakfast briefings, with Baxendale’s  legal director Ewan Hall delving into the world of employee ownership.

Here, CDS specialist advisor Carole Leslie reflects on the key learnings from the session.

At CDS, we have been working with professional advisers on building knowledge of employee ownership (EO) over the past 18 months.  We uncovered a real appetite amongst lawyers, bankers and accountants to learn more so we organised a series of expert breakfast briefing sessions, each one led by a respected specialist in their sector, covering an aspect of employee ownership.

Our first event took place last Tuesday (4 February), with Baxendale’s Ewan Hall – one of the foremost legal advisers in the field of EO in the UK. He has managed more than 20 EO transitions directly and been involved in many more.

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Ewan Hall, Legal Director, Baxendale

 The company itself is a major player in the EO field across the UK, with an impressive 50% of their projects in Scotland. They offer specialist advice and investment to help support the creation of sustainable and growing businesses.

During the session – which was covered exclusively by BusinessScotland.com – Ewan spoke about the key decisions and elements involved in an EO transition and talked the audience through the process of an employee buyout (EBO).

 Breaking the subject matter down, Ewan touched on many important points during the 90 minute presentation – here’s a snapshot of the key learnings:

  • An EBO deserves every bit as much consideration as a trade sale or management buyout. The vendor can expect to get open market value for their business, which can be hugely attractive to them.
  • Having a stake in the business doesn’t just motivate people as the new owners of the business; the stability of the EO model safeguards the future of the firm, sustaining local jobs.
  • The vendor also retains considerable control and influence over both the process and the outcome, and can help to put the post transfer structure in place.

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  • Vendor financing is a major feature of today’s EBOs and is often the favoured source of funding – many businesses are conservative about taking on external debt.
  • The sector is incredibly supportive, with CDS providing adviser support in the initial stages. CDS will introduce potential EO companies with established EO firms, so they can share their experience  of the process.
  • Scotland is seeing more EO transactions than the rest of the UK – this is possibly due to the amount of support available.
  • EO doesn’t end with the completion of the legal transaction. It is a constant process, with engagement and communication key to driving the benefits of the model.
  • The EO model gives a long term solution to the issue of succession, but it doesn’t mean the owner has to leave the business – they can still be involved post transfer, often in a non-executive capacity.
  • The key to success for the EO model is flexibility, as it can be adapted to suit the vendor and industry.
  • EO is growing and there is a high level of interest. Upcoming changes to tax legislation are likely to make a major impact on encouraging new EO businesses and rewarding employees of existing ones. The changes will enable businesses to pay out bonuses free of income tax.

If you were interested in attending one of our breakfast briefings, we have four more throughout 2014 – for more information, click here.

And for those of you who couldn’t make it, you can watch Ewan’s full presentation on our website or watch a short teaser below:

Co-operative Development Scotland is the arm of Scottish Enterprise working in partnership with Highlands & Islands Enterprise  that supports company growth through collaborative and employee ownership business models.