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.