Tag Archives: John Alexander

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.

Funding the employee buyout – Part One

At a recent Expert Breakfast Briefing session, John Alexander of consultancy firm Baxendale tackled the issues around funding an employee buyout.

Here, CDS specialist adviser Carole Leslie looks at some of the key points raised in the session.

Employee ownership is a model fast gaining pace – the number of employee-owned firms in Scotland has doubled in four years, and if more of the right kind of finance could be made available, this number would increase significantly.

Alexander said: “It’s chicken and egg. Raising awareness is important, but for an exponential increase in employee ownership there has to be access to the right kind of money. The money comes first.”

  • The equity gap must be addressed

Alexander proposed the solution as being the establishment of high-profile funding sources staffed with visionary fund managers. The Baxendale experience proves that employee ownership presents a reliable, if different, investment. Patient capital is required to nurture the model and that will take a change in behaviour from funders.

  • Vendor financing plays an important role

Properly structured vendor financing can benefit the seller and the business. The outgoing owner will usually be a benevolent and well-informed lender who will take a flexible approach to repayment, ensuring the employees are not overly burdened with debt. An earn-out deal can mean that the vendor benefits from productivity gains driven by the new employee-owned structure.

  • The importance of the employee stake must not be underestimated.

Alexander counselled that employees do not become the main funders of the transaction. This could create funding issues for a future internal share market. However, employee investment is the result of a decision by the employee that their company is worth investing in. Financial buy-in results in an emotional buy-in that reflects in performance.

Next week, we’ll be looking at some of the other issues around financing an employee buyout.