As a model, employee ownership is becoming increasingly popular, both as a succession solution and as an ownership structure for start-up businesses.
Since 2009, the number of employee-owned businesses headquartered in Scotland has doubled. With an estimated 16,000 SMEs believed to be considering an exit strategy within the next five years, this number is set to grow.
As a business structure, employee ownership presents many, often overlooked opportunities. For example, recent research has proved such businesses are typically five to 10 per cent more productive than those operating under more traditional structures. They boast greater levels of job creation, a lower risk of failure and higher worker satisfaction.
Employee ownership presents many, often overlooked opportunities...such businesses are typically five to 10 per cent more productive than those operating under more traditional structures. They boast greater levels of job creation, a lower risk of failure and higher worker satisfaction.
Sarah Deas, chief executive, Co-operative Development Scotland
However, misconceptions still exist regarding the structure. Here, a number of professional advisers and business leaders dispel a number of myths surrounding employee ownership.
Myth 1: An employee buyout is a very complex transaction
Campbell Clark, Partner at Blackadders Solicitors, advised Specialised Castings on their recent transition to employee ownership.
Speaking of the experience, he said: “The process was very straightforward and collaborative. A business sale can become quite adversarial, with each party fighting their corner. In this case, everyone was effectively on the same side. We completed the transaction in four months and this included a comprehensive communication programme with all the employees.”
Myth 2: The vendor will have to discount their price for the business
Ewan Hall at Baxendale is one of the most experienced legal advisers in the field of employee ownership. Baxendale is an employee-owned business which specialises in providing support to, and raising finance for, employee-owned businesses and social enterprises.
Speaking of this common misconception, Ewan said: “This is not true. The seller has significant control over the process and as long as the value is reasonable and sensible it will be achievable in most circumstances. Almost all the deals we have worked on (over £100m in value over 2014 and 2015) have been at full market value, but without the sometimes painful negotiations involved in a trade sale.”
Myth 3: There is no 'heir apparent' to take over once the owner exits
Dyce-based Woollard & Henry, pictured above, almost closed down when the family business owners decided it was time to exit. Fred Bowden, who worked for a customer, was appointed as MD by the company’s investors following the employee buyout in 2001.
Speaking of Fred’s role in the transaction, non-executive director at Woollard & Henry and well-known Aberdeen businessman, Ed Gillespie, believes the proof is in the pudding. He said: “There were some difficult years as we adjusted strategy to combat a declining market and explore new options. Fred has to take a lot of the credit for the company’s stellar success. He knew when to look for support and take advice and he involved the workforce every step of the way. A new appointee has a lot to prove and when all the employees have a stake they are more likely to get onside.”
Myth 4: The risk to employees is too great
Martyn Shaw, Partner at MacRoberts LLP advises companies on a range of benefits, not just on employee ownership.
Clarifying this issue, he said: “Employees will not carry any personal liability for the debt assumed by the company in an employee buyout. Employees may have the opportunity to invest their own money and tax breaks allow this to be done effectively.
However, we would not advise any employee invests more than they can comfortably afford. The new legislation allowing bonuses to be made free of Income Tax from an Employee Ownership Trust provides a means for employees to benefit from working in an employee-owned company without the need for investment.”
Myth 5: Employee ownership needs a philanthropic vendor with a benevolent vision
Employee ownership wasn’t the first choice for the vendors of software house Computer Application Services - it was an option suggested to provide the owners with an exit when their trade sale fell through.
Bruce Farquhar, partner at Anderson Strathern, advised on the deal. Speaking of the model, he said: “The employee ownership structure can be adapted to fit a number of different circumstances and situations. It was a good option for CAS; the owners got the price they wanted and the company got a stable ownership structure from which they could grow. The employees can now forge their own future, knowing their destiny is in their own hands.”
Myth 6: Employees will take company profits for themselves over reinvesting in the long-term health of the business
Stephen Pennington, MD of Scotland’s largest employee owned firm Highland Home Carers, disputes this misconception.
He said: “We find it is the executive directors who argue for bonuses and share distributions for all staff. The employee directors have to be satisfied there is cash in the bank, our costs are covered and any contingencies are planned for. The sustainability of the business is paramount to them – they need to know we will continue to deliver the best levels of care to our service users.”
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