What is an employee buyout?
Quite simply, an employee buyout is a transaction in which the employees buy the business from its present owner or owners. Typically, employees will own the business via an employee trust and potentially also become direct shareholders.
If the employee buyout uses a workers co-operative structure the members of the co-operative will own all of the company as individual direct shareholders.
Typically, employee ownership takes one of the following forms (For more information about the different models of click below):
- Direct ownership – Individual employees become shareholders of the business. The employees may become shareholders through the use of a tax advantaged share scheme such as a Share Incentive Plan.
- Indirect ownership – Shares in the business are held collectively on behalf of the employees through an employee trust. Employees become ‘beneficiaries’ of the employee trust rather than individually own shares.
- Hybrid – A combination of individual and collective share ownership.
Employee ownership makes sense commercially as real life examples point to substantial increases in motivation, productivity and profitability following an employee buyout.
Would an employee buyout always be an appropriate exit option for owners?
Yes, in most cases. However, the key to any successful employee buyout is proper planning in the initial stages to ensure that the organisation and situation is compatible with an employee buyout. Part of this planning has to be an assessment of how the current position satisfies the critical success factors for an employee buyout.
There are four major critical success factors:
- a willing seller;
- a willing buyer;
- a board of directors / management team / individual capable of leading the business when the owner exits;
- a financially viable proposition.
A willing seller
Clearly, an employee buyout will only succeed if the existing owners of the business are willing to sell the business to the employees and have a realistic value aspiration.
There is no reason why an owner can’t receive a fair value for their business. Additionally, the tax incentives for selling to an employee ownership trust mean that owners might actually be better off opting for an employee buyout rather than a trade sale or other forms of succession.
A willing buyer
In situations where an employee trust will be used to own the business it is quite possible for the Board of Directors of the principal Company to make a decision about whether they are willing buyers and wish to complete a deal. Ideally, any such decision will have been reached in consultation with employees, but sometimes commercial sensitivities can restrict this.
Where employee investment is required there are a number of reasons which will determine whether employees will want to buy the business:
- do employees believe an employee buyout will preserve their employment post buyout?
- will the employee buyout keep the business and jobs in the existing location and how does this compare if the owner opted for a trade sale or liquidation?
- is there a collective belief that the business is viable, can continue to be so and deliver some return to employees?
- do employees trust in the people who will lead the business post employee buyout?
These are critical questions that employees will want to answer prior to making any decision about investing their money.
Board of Directors / Management team / Individual capable of leading the business when the owner exits
Ultimately employees and/or financing institutions need to have confidence that some person or group is capable to lead the business post the employee buyout.
An employee buyout changes the dynamic between management and employee. Employees will now be the owners of the business and the managers and employees are in effect working for their combined shared interests. Ideally, a Board of Directors and/or management team in an employee owned business will be one which:
- is ‘values’ driven and clear about the direction the business should be taking;
- is strong in each key business area (sales, operations, finance);
- has a proven ability to make the business perform;
- is keen to share information with employees, encourage ideas and improvements, rewards and recognises good work;
- encourages working together for the collective good;
- understands that with responsibility comes accountability.
A financially viable proposition
Like any other business, employee ownership requires a business to have a viable commercial proposition and ability to generate cash and profits.
When considering an employee buyout it is essential that the business can identify its future cash flows and understand if these will be sufficient to meet the purchase price agreed with the owners. Employee ownership has been shown to produce superior business performance and results, but it is vital that businesses don’t become overburden by debt repayments.
Every employee buyout is set against a backdrop of different circumstances, therefore we focus on listening to our clients to ensure that we understand their needs and can devise a structure and overall solution that suits them. We use tried and tested tools and techniques that allow us to assess whether a co-owned structure can work for an organisation.
We offer a one-stop approach for any employee buyout and manage all aspects of the transition from start to finish. Our partnership with Blake Morgan LLP allows us to provide expert legal and tax advice throughout the transition and offer a fixed fee for all of the work delivered.
We can also help to source external finance from lenders who specialise in providing finance to employee owned companies such as Co-operative and Community Finance, Capital for Colleagues, and eaga Trust.
We have experience of and are happy to work alongside any existing professional advisors, such as accountants and lawyers, to ensure a successful employee buyout for all parties.
We have an extensive track record of providing specialist support and guidance to company owners wishing to transition to either an employee owned or worker co-operative model of business.
How can we help?
If you want to explore how employee ownership might work for you and your organisation please contact us for an initial discussion. We are happy to meet at client’s offices, or at our London office, or have an initial discussion by telephone, without charge or future obligation.