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Preparing for your business succession

Employee Ownership Trust

Richer Sounds

In May 2019, Julian Richer, the owner of Richard Sounds transferred a majority stake (60%) in his company to his 500 plus employees via an employee ownership trust. As part of the arrangement each employee will also receive a windfall of £1,000 for every year of service.

Now Julian Richard is 60 years of age and said he “has reached the age when he thinks of posterity”. Because the couple do not have any children to take on the business, they felt it was the best thing for them to do

Most importantly, Julian Richer did not want to sell to a stranger. As a result they might have completely different aims and ambitions for the business. He said: “I’m hoping it will ensure the succession of the business”.

Unsurprisingly Richer, whose mantra has always been “people before profits” went on to say:

“I’ve been running my business for 40 years and the overriding thing I’ve learned is that it’s all about the people. If you treat people right, then they are going to be happier, give a better service [to customers], stay with you and they are not going to steal”.

What will he do now?

He is not retiring from Richer Sounds. There will be a contract of employment and agree his hours of work. The operations will be managed by the chief executive, Julie Abraham. Julian Richer is one of the trustees of the employee ownership trust.

Now all of this generosity may come as a bit of a shock to some business owners. As a result, you will though see from the list below that it is not rare. The concept was pioneered by the John Lewis Partnership in the 1920s, when John Spedan Lewis created a trust settlement for his father’s departmental store. John Lewis is the largest employee owned company in the UK.

Another pioneer is Dame Stephanie Shirley

Dame Stephanie Shirley

In an article in The Sunday Times Business News dated 1st September 2019, Dame Stephanie Shirley, founder of Freelance Programmers in 1962, described her experiences here.

She writes:

“We eventually decided to set up a trust that would hold shares for the staff. I started by giving up 4%, then topped up the holding each year until 17% of the equity was held in trust for the workers.

“However, it made no cultural difference. Only at our silver jubilee in 1987, when I donated a further 7% to take the trust’s holding up to 24% (at no cost to anyone but myself), did the staff seriously consider that they might come to own the company.”

“Which was how the story was set to develop. But trend is not destiny.Circumstances intervened.”

Dame Stephanie goes on to describe the distressed sale of some of the shares and how her dream of 100% staff ownership disappeared overnight. The business recovered and eventually, one in three of the workforce had a significant holding but it still it didn’t make any difference.

Her story continues

“So, clearly we had to think more boldly: we offered 30% of my stock holding in an internal market. And that finally did make a difference. A distinct sense of corporate excitement and electricity in the air followed the relinquishing of my personal control to the workforce. So it as that my co-ownership dream was realised, albeit not in the way I had expected.

“How long did this take? From the original concept to 62% staff control, more than 15 years, during which time I kept my head down and worked as hard as ever”

The progress was slow as she paid the scheme’s legal and administrative costs.

“Yet long-term co-ownership proved to be the right exit route for me. And exit all founders must.

“Given that all the hassle left me with a smaller slice of a larger cake, would I do it again? I do not hesitate: yes, I would”

Who else is doing it?

Looking into the UK’s 50 largest employee owned companies shows a broad range of industries, in all sizes and all regions of the UK.

Engineering: Mott MacDonald Group; Arup; CH2M; BMT; Black & Vealch, Union Industries and PA Consulting.

Logistics: Unipart and Steer Davis & Gleave.

Social Care & Health Care Services: Shaw Health Care; Bristol Community Partnership; Medway Community Healthcare; Locala Co0mmunity Partnerships and Care & Share Association

Travel Guide: Sawdays.

Preserves: Wilkin & Son.

Training: Prospects Education.

Retail: Riverford Organic Farms and Oldrid & Co.

Manufacturing: Gripple and Scott Bader

Leisure: Alfa Leisureplex.

The engineering company Weir Group is giving all 15,000 staff shares this year (2019) and next.

Wallace & Gromit and Shaun the Sheep.

In November 2018, Aardman the Bristol-based step-motion animation studio set up an EOT. They are  behind Wallace & Gromit and Shaun the Sheep provided 75% of its shares to an Employee Ownership Trust.

In a Joint statement, Peter Lord and David Sproxton, who together founded the company in 1972, said: “We’re not quitting yet. But we are preparing for our future. The creation of an employee trust is the best solution we have found for keeping Aardman doing what it does best. We need to keep the teams in place and providing continuity for our highly creative culture. Those that create value in a company will continue to benefit directly from that value.”

Sproxton will continue as managing director (MD) for now. He will be accountable to the EOT but a new MD will be appointed sometime this year, when Sproxton will move into a consultancy role.

Employee ownership requires two things.

There must be a mechanism where the ownership can be shared among all employees. Equally the business has to have a culture and a structure where employee influence and voice can be shared. The two are intrinsically linked. As a result, of these two matters the benefits should be achieved.

The Ownership Dividend   

In July 2018, the business-led Ownership Effect Inquiry published its report  EO Inquiry Final Evidence Report.  The Ownership Dividend. Chaired by Baroness Bowles of Berkhamsted, the Ownership Effect Inquiry is overseen by a number of business organisations.

Most importantly, the report says the employee-owned “sector” accounts for well over £30bn of turnover in the UK. In her forward, Baroness Bowles wrote that the sector is “thriving and fertile”, but noted that the model is not necessarily “ideal”. Above all its impact is not automatically and neither does it work for all.

Besides this the report found that among employee owned business, there were increased levels of productivity and efficiency, improved workforce retention, easier recruitment and employee-driven innovation. Longer-term decision-making seems to lead to greater resilience.

In contrast, owners who decide to transfer the ownership of their business to their employees are still relatively unusual. They take the view that although they have been offered lots of money to sell; they decide not to do this. As a result the owner has a sellable business. Certainly, owners take the view that whoever bought their business could have chopped it all up and sold it on. They feel they could not do that to long-serving employees.

Employee Ownership Association

The Employee Ownership Association (EOA) estimates that no more than 200 UK Companies are owned by employees. Momentum is now gathering behind the idea as a result of several high-profile conversions and potential backing from the shadow John McDonnell.

Furthermore there are down sides to selling to worker can be an involved process for owners. They may have to wait a few years to receive all the cash due to them.

Even so these doubts do not stop founders setting up the arrangements. Employees own shares via a trust and will receive a share of the profits. They will also be able to help make decisions on the future of the business via a workers council.

Julian Richer has a strong streak of idealism and egalitarianism. With that in mind, motivated owners see EOTs as a better way to ensure a company’s future than a trade sale.

Why would an EOT be attractive?

The attractiveness of making the move to employee secures the jobs in the locality. Other attractions are the confidence to customers and suppliers of the business’ longevity. EOTs unleash the added effort of the employees as they become owners of the business in which they work. This leads to increased performance, profitability and success.

It allows the owner to manage their exit on their terms. They may retain some ownership over the longer term.

As a result, the decision to become employee owned is one made to safeguard the long-term future of the business’ ownership. Furthermore it also protects its values and culture – something that most owners are incredibly proud of.

Therefore, these benefits are complementary to the tax benefits. There is an exemption from capital gains tax on the entire proceeds and the opportunity to offer employees tax free bonuses.

Any owner interested in this idea should really be asking the question: Why wouldn’t I consider an EOT as the only alternative?

In the planning for ownership succession there is no need to be concerned about the end of a business’ brand, name, legacy or culture. Consequently, employee ownership is proven to deliver long-term sustainability by transferring ownership to a new generation of owners. Likewise the associated risks of a trade sale are voided. Support and engagement from employees can happen. Management buy-outs do not always achieve this.

The Nuttall Report

Graeme Nuttall, a partner at lawyers Field Fisher Waterhouse LLP, wrote The Nuttall Report on employee ownership for the coalition government which was published in July 2012. It explains the obstacles to promoting employee owned companies and sets out a framework for knocking them down. Recommendations are also made to the government on how to promote employee ownership.

He wrote: “There are baby-boomers owners of successful, independent businesses who do not want to sell their life’s work to a competitor to see it disappears into a conglomerate”

His report led to the establishment of EOTs in 2014.

Here are some of the legals.

Selling to a Trust

Selling to a trust allows founders to avoid paying capital gains tax. It also permits the payment of a tax-free cash bonus to employees of up to £3,600 a year.

The companies set out above are prominent in their respective industries. They are held up as by supporters as proof that such an ownership structure does not mean sacrificing competitiveness. The EOA 2018 Annual Review written in November 2018 by the EOA and advisory firm RM2 claimed the 50 biggest employee owned-firms are responsible for £19.8bn of annual sales and increased productivity by 7.3% in the first quarter of 2018.

This report did include the John Lewis Partnership which had revenues of £10.2bn.

So, given the model is such a good force, why is it not more widespread?

The trusts were set up in 2014 and only 250 forms have converted.

First of all it takes a time for owners to receive their full consideration. They are paid out of annul profits meaning they might have to wait years to realise the full value of the sale. Likewise, there is also a fear among some executives that running a staff-owned business is tough because big decisions have to be made and approved by the employees.

The managing director of Union Industries, Andrew Lane, has rejected this criticism. “We are exceptionally nimble”, he said. “We can make a decision today, and tomorrow it’s out in the field.” He goes on to say the profits at Union Industries had increased every year since the structure was changed.

The lack of knowledge among owners that employee ownership is an option is another reason. It will though require a wholesale shift in how we view business success for there to be a greater uptake.

Your decision

This option is not something that can be rushed into and requires a business that is sustainable without you the owner. In other words it has to be sellable in the first place. Moreover, it will mean the systems and processes are in place and you, the owner, are not working in the business.

If this paper is of interest to you then I would be very happy to chat it through with you and see if it is something that works for you and your company.

I look forward to hearing from you.

 

Andrew Watkin

Andrew is the director of Assynt Corporate Finance Limited and an Accredited Member of the Association of Crowdfunding experts.

Previously a partner and head of corporate finance at Baker Watkin LLP, Andrew has more than 35 years of experience in all forms of corporate finance across many business sectors.

Andrew is also the Chair of Governors at a local school and an Assessor of Expeditions for The Duke of Edinburgh’s Award.

You can find out more and connect with Andrew over on LinkedIn.

Need Help? Contact Andrew at Assynt:

If you are serious about selling your business, contact Andrew to arrange an informal chat, in person or over the telephone to assess the options open to you.

You can also contact Andrew by email at: awatkin@assyntcf.co.uk or by completing the form on this page.

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