Expert Briefing Session
Employee Buyouts - Ewan Hall, Baxendale
4 February 2014
Employee Buyouts
Objective
• Understand the key decisions and elements involved
in a transition to employee ownership
• No two are alike, but there are common themes
Ask questions at any time!
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Ownership
Agenda / What’s Happening
• Baxendale
• Why an Employee Ownership Transition?
• Differences from a “conventional” exit
• Structuring the Deal: Price / Funding / Protections /
Taxation / Leadership / Engagement
• Structuring the Post-Transition: Ownership /
Governance / Engagement and Communication
• The Future
• Final Thoughts
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Ownership
Baxendale
• Employee ownership specialists
• Advise on alternative ownership models
• 13 year track record of offering advice, funding and support
• Worked with more than 80 private and public sector
organisations – often with their existing advisers
• Sold domestic boiler company to employees in 1983
• Believe that employees should share in wealth they have
created, have a real voice in company
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Ownership
Sample Structure of a Transition
• The parties:
 Company: the organisation that is to transfer into employee
ownership.
 Owner(s): who own the company at the outset.
 Employees: who may acquire some or all of the shares.
 Employee Benefit Trust: which may acquire some or all of
the shares
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Ownership
Sample Structure of a Transition
• The parties cont.:
 Share Incentive Plan: where employees are to acquire
shares directly, this is often done through a SIP.
 Bank / Funder: funds the transition, usually secured on the
assets of the company (may be the owner).
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Ownership
Parties
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Ownership
Funding
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Ownership
Payment to Owner and Share Transfer
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Ownership
Why an Employee Ownership Transition?
1. Employee Driven Transition
2. Owner Driven Transition
3. Hybrid (e.g. owner’s vision, but process driven by
employees)
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Reasons may influence structure
Role of Advisers
Role of Co-operative Development Scotland
Role of Sector
Ownership
Why Employee Ownership?
• The Owners:
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Control exit
Succession
Legacy
Realise price / value of business
Ownership
Why Employee Ownership?
• The Company:
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Continuing independence
Values of business are maintained
Business can stay in current location
Productivity and innovation
Ability to recruit talent
Ownership
Why Employee Ownership?
• The Employees:
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Ability to share in rewards
Financial stake in business
Control of destiny
Future succession clear
Ownership
Why Employee Ownership?
• Society:
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Faster job creation
Sustain jobs in local community
Greater income equality
Health benefits
Ownership
Differences from ‘conventional’ exit
• Conventional Exits:
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Trade Sale
Management Buyout
Family Succession
Listing
Ownership
Differences from ‘conventional’ exit
• Control: No third parties (apart from maybe funders)
affecting the decisions and timetable.
• Legacy: An objective is often to secure the legacy of
the business / owner.
• Due diligence: Should be limited.
• Post-transfer structure: usually more important.
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Ownership
Differences from ‘conventional’ exit
• Fairness: Objective may be for all to benefit rather
than an individual or small group of individuals.
• Timing: Can take longer than a conventional exit.
• Owner involvement post-transfer: Owners often
involved post-transfer, even if only in a non-executive
capacity.
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Ownership
Structuring the Deal
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Price
Funding
Protections for Sellers
Protections for new owners
Taxation
Leadership
Engagement and Communication
Ownership
Price
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Usually commercial valuation
But not always arm’s length negotiation
Expectations of Sellers – becoming more realistic?
HMRC?
May need to revisited over the course of the process
No agreement on price – no deal
Ownership
Funding
1. Lender: Third party funder (bank, specialist lender)
provides funds, usually secured on the assets of the
company.
2. Employees: Perhaps through SIP. Could be given
incentives to invest early (e.g. bonus shares).
3. Seller: Deferred consideration / staggered exit. If used,
need to consider protections for Seller.
4. The Company: Company cash. Will also fund the
repayment of any Lender or Seller finance.
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Ownership
Funding
• Can have an impact on timing
• When you involve third parties you lose an element of
control over timetable
 No agreement on price – no deal
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Ownership
Protections for Seller
• Reasons for protections:
− Deferred Consideration
− Discounted Price
− Protection of Legacy (e.g. preserving skills in a
particular area; the name above the door)
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Ownership
Protections for Seller
• Possible protections:
− Veto rights
− Right to be a director / trustee
− Non-embarrassment provisions
− Security
− Pre-emption rights
− Right to re-purchase shares / convert debt
• Must be balanced against allowing freedom for the
business and new owners
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Ownership
Protections for New Owners
• May require warranties – especially if paying a full
price.
• May depend on the extent to which the employees are
familiar with all aspects of the business.
• Flexible repayments?
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Ownership
Taxation
• Capital Gains Tax
• Income Tax
• Inheritance Tax
• See Masterclass later in the year
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Ownership
Leadership
• Not everyone will buy into / understand the transition
from the beginning
• Successful transitions almost always require
individuals who will take the lead in the process. This
could include:
 The current owner
 Elected representatives
 New management team
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Ownership
Leadership
• Will also be important going forwards to maximise the
benefits of employee ownership.
• Note that leadership does not always mean someone
who is in charge – the individual needs to understand
the objectives and will commit time and energy to the
transition.
• Can sometimes be closer to a cheerleader role.
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Ownership
Engagement and Communication
• Pre-transition - will vary with the circumstances
• Vital post-transition to maximise advantages of
employee ownership
• Pre-transition, will often depend on the expected
involvement of the employees (e.g. are they part
funding the transition?)
• Elected / nominated working group is common
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Ownership
Engagement and Communication
• Employees will usually realise something is
happening
• They may have been thinking about succession at the
same time as owners (or even before)
• Beware inadvertently making misleading statements –
especially regarding timetables
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Ownership
Structuring the Post-Transition
• Ownership
• Governance
• Engagement and Communication
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Ownership
Models of Employee Ownership
• Direct Employee Ownership
• Indirect Employee Ownership
• Combined Direct and Indirect Employee Ownership
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Ownership
Direct Share Ownership
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Ownership
Direct Share Ownership
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Ownership
Direct Share Ownership
• All the shares in the organisation are held directly by
the employees
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Ownership
Advantages
• Direct Ownership: employees actually own the
organisation
• Economic Benefits: all the economic benefits of share
ownership go to the employees
• Simplicity: usually a simple concept to grasp
• Control: the employees control the organisation
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Ownership
Disadvantages
• Checks and balances: no third party to look to the
long term and future employees
• Sustainability: how does ownership transfer?
• Administration: share transfers etc.
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Ownership
Implementation
• How to put shares in the hands of employees?
 Employees pay full value for the shares
 Employees pay discounted value for the shares (tax
implications)
 Use HMRC approved share scheme, e.g. Share Incentive
Plan
 Share Options
 Issue partly paid or unpaid shares (tax implications)
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Ownership
Implementation
• What, if any, criteria should be applied when
determining if and when an employee can acquire
shares?
• What rights should attach to shares and to
shareholders?
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Ownership
Indirect Share Ownership
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Ownership
Direct Share Ownership
• All the shares are held on behalf of the employees,
usually in a trust for the benefit of the employees
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Ownership
Advantages
• Sustainability and Stability: Ownership is fixed and
stable
• Economic Benefits: The trust can provide economic
benefits to employees (although not always very tax
efficient)
• Simplicity: One shareholder
• Long term: Trustees usually have responsibility to
look long term
• Forum: Trust can act as forum for employees
• Tax: Should Qualify for the new CGT relief
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Ownership
Disadvantages
• Is it employee ownership?: No employees own any
shares
• Economic Benefits: Capital value remains locked in
trust – what incentive is there to increase it?
• Connection: Will employees feel remote from
ownership?
• Administration: A tax return will need to be filed for
the trust each year
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Ownership
Implementation
• Key issue is establishing the trust and its remit:
 Trustees
 Powers
 Discretion of trustees
 Assets on a winding up
 Jurisdiction
 Letter of Wishes / Recommendation
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Ownership
Hybrid
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Ownership
Hybrid
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Ownership
Hybrid
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Ownership
Advantages
• Direct ownership: Employees actually own shares.
• Economic Benefits: Can accrue to employees. Trust
will sometimes waive right to dividend to maximise the
dividend to employees.
• Sustainability: Ownership of a block of shares is fixed
and stable. The EBT will sometimes have a fixed
minimum shareholding.
• Tax: Should qualify for new CGT relief if EBT holds
>50%
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Ownership
Advantages
• Long Term: The trustees usually have an obligation
to look to the long term interests of the employees.
• Forum: The EBT can act as a forum for employees.
• Buying and Selling Shares: The EBT can buy and
(maybe) sell shares. Very useful when acquiring an
ex-employee’s shares.
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Ownership
Disadvantages
• Complexity: Especially with a SIP when you will have
two trusts.
• Administration: Record internal share market, tax
returns for trusts.
• Value of the business: A significant part of the value
of the business will be locked in the trust.
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Ownership
Implementation
• See previous models
• Should the EBT have a minimum shareholding?
• Should there be a limit on individual employee’s
shareholdings?
• If the EBT holds the majority of the shares, should it
also have a majority of the voting rights?
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Ownership
Governance
• Allocation of powers / decision-making within the
organisation.
• Accountability.
• Can facilitate Engagement.
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Ownership
Conventional Model
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Ownership
Employee Ownership
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Ownership
The Parties
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Employees
Directors
Shareholders
Employee Benefit Trust / Trustees
Supervisory / Representative Body
Seller?
Founders / Founding Family?
Ownership
The Powers
• Default powers exist for:
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Shareholders (ultimate controllers of the company)
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Directors (day to day control of the company)
• Within some limits, you can amend these default
powers to grant greater or lesser powers to these
groups – and grant new powers to other groups (e.g.
employees)
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Ownership
The Powers
• There is no definitive list of powers (they will vary), but
issues to consider include:
 Who appoints directors?
 Who appoints trustees?
 Are certain decisions so fundamental to an organisation that
everyone should be involved (e.g. a sale of the business)?
 But avoid management by committee – you need an
effective management structure
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Ownership
The Powers
• Majority / Unanimous / Super majority vote?
• Consent from more than one body?
• Opportunity for consultation / discussion prior to decision?
• Quorum for meetings
• Should there be a permanent block on certain decisions?
• Confidentiality
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Ownership
Engagement and Communication
• Vital to maximise the benefits of employee ownership
• Can have a number of roles:
 Awareness
 Education
 Transparency / Trust
 Accountability / Governance
 Inclusiveness / Partnership
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Ownership
Engagement and Communication
• Detail will vary, but some broad principles:
 Time: will be needed
 Proactive: should not be passive
 Structure / Responsibility: formally allocate responsibility to certain
bodies / individuals
 Two-way: communication should work both ways
 Dynamic: usually needs to be able to evolve and change over time
 Confidentiality: consider if applicable
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Ownership
The Future for the Organisation
• The importance of flexibility
• Revisit structures and models in the future
• But:
 consider whether certain elements should be immovable –
or subject to special consents
 should one generation of employees be able to ‘cash out’ at
the expense of earlier and future generations?
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Ownership
The Future for the Sector
• £70m of tax reliefs from the government in 2014
• Employee Ownership Day
• Evidence showing the benefits growing
• 2012 / 13 – Number of EO businesses increased by
over 10%
• Objective of 10% of GDP
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Ownership
Final Thoughts
• Extremely flexible model
• There can be a degree of complexity involved
• No two will be alike
• Beware the tax tail (or any other tail) wagging the dog
• The importance of leaders / cheerleaders
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Ownership
Ewan Hall
ewan.hall@baxendale.co.uk
07880 382 102
http://www.baxendaleownership.co.uk/
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Ownership
Future Briefing Sessions
•
Funding the employee buy-out, 9 April 2014 , Glasgow
•
Tax implications in employee ownership, 7 May 2014, Glasgow
•
Employee share ownership, 10 September 2014, Edinburgh
•
Governance in the employee owned business, 5 November 2014, Glasgow
For more information visit: www.cdscotland.co.uk