Carole Leslie

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  1. 6 Steps to a successful employee buyout

    August 4, 2014

    1. Be clear about your own needs and intentions
    As an exit route, the sale to employees is the option that gives the vendor the greatest control over the process. You can set the timescales, choose the structure, decide on how much you want and even influence how the company will look once you have said goodbye.
    It can be very worthwhile to talk through your ideas with someone who understands the process. Talk to former owners and companies who have already taken this route. The more research in the beginning, the smoother the transition later.

    2. Choose the right adviser
    Although research proves that employee ownership is a very successful business model, it is not yet a mainstream ownership structure. It’s therefore important that you select an adviser who understands what you want to achieve, and knows how to help you get there. You don’t want to be paying for someone learning how to do it, or someone who doesn’t know how to get the best possible outcome

    3. Select the structure that’s right for you
    There is no “one size fits all” employee ownership structure, and the best one for your company is one that fits with your organisation, your people and your culture. For example, in the UK’s largest employee owned company, John Lewis Partnership, employees do not have an individual shareholding. The shares are held in trust on behalf of the employees. This is a popular model. In other companies, employees can buy and sell shares and build up value in the company in which they work. There are tax effective ways to facilitate employee share ownership.
    It may be that a family business may want to retain a small shareholding for future generations or the company may want to make a small number of shares available for external investors. It’s important to invest time in considering all options, and the potential consequences of these options. Consider this early in the process in order that you reach the best ownership model for you.

    4. Design the appropriate funding package
    The owner who has created and built a successful business should be able to benefit from a fair price when it comes time to sell that business. The funding of the employee buy-out must be structured in order to achieve the fair price, yet not place an undue burden of debt on the company and its employees. It might be that a “package of funding” is the best solution; using company cash reserves, employee investment and external and vendor financing. If possible, it makes sense to do this in the most tax effective way.

    5. Manage the change
    Despite what some lawyers might like you to believe, a business transfer is not just a legal process. Yes, it is of critical importance to take appropriate advice and to have the correct documentation in place but as an organisational change this requires a broader approach. The employees of the company will become the owners, and to fulfil this role they must have a proper understanding of the rights and responsibilities involved in ownership. Pulling together the different strands; funding, structuring, share transfer, communication, stakeholder management as well as keeping the day job going is a tall order.

    6. Communicate, communicate, communicate!
    Communication is the lynchpin of the process. The key to success in employee owned companies is when the employees think, feel and act like owners. By involving your employees in shaping the company for the future, gaining a real understanding of the rights and responsibilities of ownership, you can ensure that the employees will be as committed to business success as true owners.
    Customers are positive about dealing with employee owned businesses and companies owned by their employees fnd it easier to recruit and retain high calibre staff. Leverage your employee ownership to raise awareness outside of the company
    The move to employee ownership presents a tremendous PR opportunity. Make sure your PR people understand what it means,

    Of course, communication never stops within the employee-owned business. Many companies describe employee ownership as a journey. You will find the employee ownership community to be one where people share knowledge and experience generously. There is a genuine commitment to ethical working and best practice; driving successful, sustainable business which benefits the individual, the company, the community and the economy.

  2. It’s not all about the numbers!

    June 10, 2014

    “Exit is rarely a purely economic decision for a business.” – Michael Kelly, Senior Associate, Macroberts

    I was invited to attend “The Deal”; a workshop looking at business transfer, facilitated by leading law firm Macroberts. Having worked on many transactions, all of them employee buy-outs, I was intrigued to find out how more conventional exits differ. Attendees were a mix of owners of owner managed firms, and business advisers. We were split into two groups and given a transaction to work on. One group was to look at this from the perspective of vendor, and my group was to take the role of purchaser. David Wylie, Corporate Partner, led the workshop by setting the scene. We were given some outline facts, but not much in the way of financial information. This made the accountants in my team a tad nervous: “We need to see the numbers”! Michael Kelly, Senior Associate, who facilitated our group, was clear. “You have to use the information you have. Exit is rarely a purely economic decision for a business”.

    It was a family business. Sound, profitable, good prospects. One of my group identified a winning tactic. “Let’s buy out their major supplier – that gives us some leverage.” This move almost broke the deal. The vendor team perceived this to be an underhand manoeuvre that would lead to breakdown in trust. Indeed, one of their number wanted to walk away then.

    Some of those present felt this was taking “role play” too far, but in my experience, this can be exactly what happens. The vendor has to feel comfortable with the sale. This is particularly salient in a privately held business, where often a chunk of life and legacy is being sold, not just what appears on the balance sheet.

    What did I learn? Lots! I didn’t know that patents were geographic (thanks, Euan Duncan) and was very interested to hear from employment specialist John McMillan how employment issues differ with an asset sale rather than a share sale. Ainsley McLaren, tax specialist, was on hand to guide us through the minefield of taxation issues.

    The most salient learning point from the workshop reinforced what I’d found in deals I’d worked on; the key factor in a business transfer is the people. Yes, price is important. The vendor has to be happy they are getting their earned reward for starting or building up the business. However, there are other factors at play. What are the aspirations of the current management team? What do the shareholders really want to achieve from the deal? Who makes the business successful? What’s the outlook in that sector? What are the real- tangible and intangible – assets in the business? It’s about more than the numbers.

    Macroberts have a winning formula in this workshop. You learn so much from working through the theoretical case study. You get the opportunity to explore issues that might not be immediately obvious, and experts guide you on the potential consequences of any actions and decisions. Selling a business can be a complex transaction whatever the circumstances. The workshops run throughout the year and if any business owner is considering a sale over the next few years, I’d certainly recommend attending. And great to see selling to employees is an option considered!

    For information on Macroberts Deal workshops click here

  3. Surprise – you own your company!

    September 23, 2012

    The news that long established family firm, Scott & Fyfe, is moving to an employee owned structure has been welcomed.  Employee ownership is proving to be a fitting succession option for many business owners, as it allows them the freedom and flexibility to exit on their own terms, whilst achieving an acceptable price for the business. It’s also a good option for the UK economy; employee owned businesses tend to be more productive and profitable, and more likely to remain in their community.  Furthermore, research published just last week shows how beneficial employee ownership can be for employees.  A four year study by Loughborough University, sponsored by ifsProshare, found that employee shareholders were more committed, motivated and more likely to produce quality work.

     However, many observers have expressed astonishment that the employees of Scott & Fyfe were told of the company’s planned restructure after the decision had been made. Surely the new owners, the employees, should have participated in this decision?

    Having worked on many employee buy-outs, I can confirm this is not an unusual sequence of events. When there is little or no need or desire to raise cash from the employees to finance the deal, (with the company taking on any debt to pay off the outgoing shareholders), then the transaction can be completed without any involvement of non-Board employees. There are often commercially sensitive reasons for confidentiality.  It could be due to a competitive market, interest from other buyers, uncertainty over funding.  Sometimes, the company would like to get “the legals” out of the way before they focus on what is often a large culture change programme. I can say it is usually a rather uncomfortable situation.

    Initial reactions to the news fall into two categories: relief and suspicion.  Employees will often know that something is afoot. Men in suits walking around, key executives away at unexplained meetings?  When called into an all company meeting, many employees will fear the worst. “The company’s closing” “I’m going to lose my job”.  When that’s not the case, the rest of the message is often lost.

    Employee ownership can seem too good to be true.  When told that their bosses have sold the business to them, many will look for the hidden agenda. Where’s the catch? In control of our own destiny, no relocation to foreign lands, no major upheaval in ways of working – what is not to like? But there is a catch.  The responsibility for making this business prosper lies with the owners, who are now the employees. That’s a weighty responsibility to give anyone, especially as a surprise!

    The most successful transactions I’ve been involved in have included employees at an early stage, before the business transfer process begins. Often we would form an EBO (employee buy-out) team who would be involved in meetings with lawyers, input into governance structures, finalising documentation, and communicating to colleagues. This goes a long way to creating the transparent and honest culture which is the foundation for employee owned businesses to thrive.  When that is not possible, for whatever reason, the company must work extra hard to ensure that employees understand the rights and responsibilities of owning their business and have real voice in their organisation.  Employee ownership does not start and finish as a technical restructure. “The legals” are the sideshow to the main event.  When employees think, feel and act like owners – that’s when the business transformation begins.

  4. “By making the change, we preserve the past”

    August 16, 2012

    Change is good – but some things are worth keeping.  Many business owners decide to move their companies into employee ownership because they want some things to stay the same. They may want to ensure the business stays in the same location, providing current and future jobs in the community.  There may be a long-standing, loyal customer base who expect certain standards of service, which competitors may not be in a position to deliver. Some owners recognise the contribution employees have made to the business, and want to secure their future.  And some companies just have a unique way of being successful, and employee ownership provides a means of continuing to operate in that way.

    I had the privilege of spending time yesterday with one such company.  Galloway & MacLeod has manufactured and supplied animal feed to the agricultural sector since 1874.  It’s a prosperous company, and a significant employer in the village of Stonehouse, South Lanarkshire. It is a highly specialised business; the composition of animal feed is painstakingly complex and the tracking process is rigorous. Every employee I met was cheerful, knowledgeable and appeared committed to their company. Yet, when asked about the move to employee ownership, the response was often, “Nothing has really changed.”

    Many organisational development consultants would shake their heads at such a response. Yet to me, this was a ringing endorsement that employee ownership was the right move for this company. It is evident that the company’s commitment to excellence hadn’t changed. Innovation is a priority, as is sustainable development.  Customers are central to the business and employees are actively encouraged to maintain their expertise.  As well as being a traditional, old fashioned business, Galloway & MacLeod is right up there when it comes to progress, technology and continual improvement of their product and service for customers.

    What has changed is that the issue of succession is gone, the threat of a trade sale and potential relocation has been removed, and the employees now have a real stake in their company, with more control over their destiny.

    With all the talk about employee ownership being a complex, convoluted and a lengthy process, it was great to hear the company’s Chairman, Ralph MacLeod, say that it was an easy transition (which was supported by Co-operative Development Scotland).  He doesn’t see any downside.  Perhaps as the seller, he could have got a few more pounds for the business had he sold out to one of the large conglomerates, but as he says “It’s about optimising the value, not maximising the financial value”.

    Employee ownership doesn’t have to be difficult, and is often the best outcome for business owners who want to secure the long term prosperity of their business.

     

  5. Employee Ownership – the time has come

    July 4, 2012

    When the EOA first proposed the idea of an employee ownership summit to BIS back in early 2011, we were pleased at the warm reception. We discussed with BIS officials the format, the content and whether there was any possibility of a Government Minister making a key note speech. The objective was to raise the profile of employee ownership as a business model and encourage more business owners to consider this as part of their exit strategy.  How many attendees could we expect?  We guessed 60.  Employee ownership is a topic which elicits positive noises yet not one that’s widely understood or adopted. Yes, it’s a good business model with lots of stellar examples.  But it was still a secret. The challenge was in encouraging business leaders to give up half a day to attend a meeting on something they would be barely aware of. It would be even more difficult to attract advisers e.g. accountants and lawyers to take time off from fee earning to attend..

    July 4th 2012 was the turning point. A summit meeting, held in the City of London, hosted by the Institute for Chartered Accountants of England and Wales launched the Nuttall report on employee ownership. There were more than 200 attendees – from employee owned businesses, from the professions, from financial institutions, from the unions. The event was chaired by BIS Minister, Norman Lamb and attended by the Deputy Prime Minister, Nick Clegg and Cabinet Office Minister, Francis Maude. All three ministers mixed with guests and participated in table discussions. The Department of Business Innovation and Skills did a superb job of organising what was a landmark event. There was media interest across the globe, with column inches in all of the major publications and widespread broadcast reporting.  ”I wish we had a Norman Lamb here” said one of my employee ownership contacts in the States.

    The difference a year makes. In the past year, we have seen a surge of interest in finding new ways of doing business. Tired of the short termism fostered by external shareholders, the unfairness of disproportionate executive pay, the general disenchantment that exists in our traditional commercial world have all created a fertile ground for finding a better way.

    Employee ownership has always had cross party political support but few vocal champions.  Norman Lamb, in his short tenure to date, has made things happen. The Nuttall report will be read with interest, and there is commitment to act upon the recommendations.  The Treasury review into the fiscal landscape surrounding employee ownership is due to report in the Autumn.

    The 4th July Summit is only the start.  The time for employee ownership has come.

     

  6. Seller’s remorse: it’s about more than the money

    March 23, 2012

    For most business owners, selling their firm is more than just a financial transaction.  Many describe it as akin to saying goodbye to their child, and indeed, many entrepreneurs will have spent more time with their company than with their family.  There are the customer and supplier relationships, the loyal employees and often a unique culture and way of doing business.

    Yet, when the business owner seeks out the adviser for guidance on business exit, the most likely option presented will be a trade sale. Sell to the highest bidder, and sit back and enjoy the spoils.  If this is the right answer, why do so many business owners regret taking this route.

    At a workshop run by Telos Partners a few months back, we heard from an entrepreneur who had set up a successful recruitment business.  He sold to one of the multinational players, and he remained as an employee.  More accurately, he planned to. He left within the first month.  He told the group that the culture changed almost immediately.  The personalised service was ‘deskilled”, and quantitative rather than qualitative measures were used.  The bespoke consultancy was becoming a CV factory.  He told the group that he had his nice car, the cash in the bank, but wished there had been another way.

    The irony is that there is another way. Employee ownership must be one of the best kept secrets of British business.  By selling a business to employees, the business owner can manage their own exit from the business, to an extent shape the future of the company, and importantly, ensure that as long as the business remains viable, it can remain in the local area providing jobs,  developing skills and retaining much of what made that business special.

    Oxford academic, Will Davies, carried out a comparison of a business sold to private equity investors, and one sold to its employees.  The report can be read here.  The findings were conclusive.  The private equity sale led to decline in quality, in customer relationships, and employee relations. The employee owned business, Gripple, continues to be innovative, profitable and productive. Employee ownership can lead to a sustainable, successful business.  Selling to employees must become a serious consideration for owners looking to exit their business.