Our Legal Manager, Louise Fisher, wants family businesses to know there is an alternative to a trade sale, if there are no clear successors.

 

Over many years, and often over generations, family owners nurture and grow their businesses. Family businesses often have collective stewardship, responsible risk-taking and a focus on long-term business goals as their core values.

These values, combined with the family’s loyalty to their employees, commitment to a geographic location and a sense of pride in their success and independence, create the family business legacy. This is a legacy that families quite rightly strive to build upon and want to protect.

When it comes to succession planning, families often hope to find a solution that keeps the family business in the family. If family members have the talent and desire to take over when the senior generation retires, planning centres around capitalising on these talents and creating governance structures that enable the business to thrive into the next generation.

When there are no obvious successors at hand, succession planning becomes trickier.

Traditional non-family succession options, such as a trade sale or the introduction of private equity, can put the family business legacy at risk. Decisions that have an impact on the community and jobs – like diversifying the business, relocating, or even closing down altogether, are in the hands of an unrelated third party who may be indifferent to the firm’s history.

If a family wants or needs to sell, a move to employee ownership is an innovative option that allows the business to flourish while protecting what makes the family business special. At the same time, it unlocks value that has been tied up in the business creating an opportunity for the family to continue to develop their legacy independent of the family business.

When a family owns and runs the family business, the family business legacy is two intertwined legacies: family and business.

A look forward: Independent family and business legacies

The family legacy

Having sold to employees, family owners have an opportunity to diversify their wealth through different types of assets, often for the first time. They might choose to do so through property or investment portfolios, or perhaps the cash can be used to fund family start-ups, allowing family members to make the most of the ‘entrepreneurial DNA’ inherited from the business’ founders.

As the family’s asset base diversifies more and more, it creates a family legacy that is independent of the original operating business. And so, the intertwined strands of the family business legacy begin to separate, and distinct family and business legacies emerge.

The business legacy

The employee ownership model is different from traditional non-family succession solutions that can erode the business legacy. In fact, employee ownership innately protects the business legacy. The new non-family owners work in the business and often have done for many years. They know the business well and understand what it means to the founding family.

The employees will be the custodians of that legacy in the future, protecting the business and its culture and passing on what they’ve learned to future employee owners.

The flexibility of employee ownership allows families to begin to separate the business and family legacies in a way that works for them. From employees being minority shareholders, to owning 100% of the business, employee ownership can be implemented in whichever form works best for the family needs and the business itself.

Employees as minority shareholders

Employee ownership exists when the people who work in a business also have a meaningful ownership stake in it. In the employees as minority shareholders model, the majority of ownership is retained by the family, but a significant minority stake is transferred to employees. Individual employees can buy the shares, or they can be purchased by an employee trust and held on behalf of employees.

The sale of a minority interest in the family business creates some liquidity for the family. At the same time, the tangible feeling of collective ownership can empower employees to use their talents more effectively in the business.

Family retains a minority shareholding

In this model, the majority of the family’s shares are sold to employees directly or to an employee trust (or a combination of both) and a minority family ownership stake is retained. This way the family keeps a tangible connection with the family business, which is often important to them. The benefits of taking more money out of the business but at the same time continuing to have a say in business decisions makes this a popular solution for families.

There are other economic incentives too. If over 50% of the shares in the business are transferred to an employee ownership trust, the exiting family owners can usually sell their shares free from capital gains tax and the new employee owners can receive an annual income tax free bonus of up to £3,600.

Recent research has shown that employee ownership enhances companies’ productivity, resilience and decision-making skills, and that employee owned businesses achieve higher year-on-year sales growth than their non-employee owned counterparts. It’s fair to assume that the bigger the employees’ ownership stake, the more fully these benefits can be realised. Which brings us on to 100% employee ownership…

100% Employee Ownership

 

The transition to full employee ownership can be structured in the same ways as discussed above, but without the family retaining any shares. The advantage of this model is that exiting family shareholders can extract the full value of their stake in the business and at the same time be confident that the business legacy will continue.

Family members with the talent and desire can continue to work in the business, or in a role in the governance of the employee trust. The constitutional documents of the trust can include family trustee vetoes over legacy decisions such as the change of the company’s name, relocation of the business and third-party sale, keeping the family connected with the business legacy.

As the family steps back from ownership and leadership of the business, it provides an opportunity to utilise all non-family talent within the business and to recruit external expertise for senior roles bringing fresh ideas.

A move to employee ownership is often a blend of the old with the new. That’s why many family businesses facing succession challenges find employee ownership to be an epiphany. It provides a chance for owners to extract cash for new adventures secure in the knowledge that the business with its history of success and independence will continue with its employee owners as stewards for the future.

For a great example of how EO can work for a family business, you can read what the judges thought about Alfa Leisureplex Group (a Baxendale client) and their move from family to employee ownership when they won the 2018 Employee Owned Rising Star of the Year award.

Speak to us about your succession solution. Reach me at louise.fisher@baxendale.co.uk

• Are you thinking of applying for an EO Award? There’s still time!