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Expert Briefing Session Employee Buyouts - Ewan Hall, Baxendale 4 February 2014.

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Presentation on theme: "Expert Briefing Session Employee Buyouts - Ewan Hall, Baxendale 4 February 2014."— Presentation transcript:

1 Expert Briefing Session Employee Buyouts - Ewan Hall, Baxendale 4 February 2014

2 Employee Buyouts

3 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! 3Ownership

4 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 4Ownership

5 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 5Ownership

6 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 6Ownership

7 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). 7Ownership

8 Parties 8Ownership

9 Funding 9Ownership

10 Payment to Owner and Share Transfer 10Ownership

11 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) Reasons may influence structure Role of Advisers Role of Co-operative Development Scotland Role of Sector 11Ownership

12 Why Employee Ownership? The Owners: Control exit Succession Legacy Realise price / value of business 12Ownership

13 Why Employee Ownership? The Company: Continuing independence Values of business are maintained Business can stay in current location Productivity and innovation Ability to recruit talent 13Ownership

14 Why Employee Ownership? The Employees: Ability to share in rewards Financial stake in business Control of destiny Future succession clear 14Ownership

15 Why Employee Ownership? Society: Faster job creation Sustain jobs in local community Greater income equality Health benefits 15Ownership

16 Differences from ‘conventional’ exit Conventional Exits:  Trade Sale  Management Buyout  Family Succession  Listing 16Ownership

17 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. 17Ownership

18 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. 18Ownership

19 Structuring the Deal Price Funding Protections for Sellers Protections for new owners Taxation Leadership Engagement and Communication 19Ownership

20 Price 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 20Ownership

21 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. 21Ownership

22 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 22Ownership

23 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) 23Ownership

24 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 24Ownership

25 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? 25Ownership

26 Taxation Capital Gains Tax Income Tax Inheritance Tax See Masterclass later in the year 26Ownership

27 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 27Ownership

28 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. 28Ownership

29 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 29Ownership

30 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 30Ownership

31 Structuring the Post-Transition Ownership Governance Engagement and Communication 31Ownership

32 Models of Employee Ownership Direct Employee Ownership Indirect Employee Ownership Combined Direct and Indirect Employee Ownership 32Ownership

33 Direct Share Ownership 33Ownership

34 Direct Share Ownership 34Ownership

35 Direct Share Ownership All the shares in the organisation are held directly by the employees 35Ownership

36 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 36Ownership

37 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. 37Ownership

38 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) 38Ownership

39 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? 39Ownership

40 Indirect Share Ownership 40Ownership

41 Direct Share Ownership All the shares are held on behalf of the employees, usually in a trust for the benefit of the employees 41Ownership

42 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 42Ownership

43 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 43Ownership

44 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 44Ownership

45 Hybrid 45Ownership

46 Hybrid 46Ownership

47 Hybrid 47Ownership

48 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% 48Ownership

49 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. 49Ownership

50 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. 50Ownership

51 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? 51Ownership

52 Governance Allocation of powers / decision-making within the organisation. Accountability. Can facilitate Engagement. 52Ownership

53 Conventional Model 53Ownership

54 Employee Ownership 54Ownership

55 The Parties Employees Directors Shareholders Employee Benefit Trust / Trustees Supervisory / Representative Body Seller? Founders / Founding Family? 55Ownership

56 The Powers Default powers exist for:  Shareholders (ultimate controllers of the company)  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) 56Ownership

57 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 57Ownership

58 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 58Ownership

59 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 59Ownership

60 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 60Ownership

61 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? 61Ownership

62 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 62Ownership

63 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 63Ownership

64 Ewan Hall ewan.hall@baxendale.co.uk 07880 382 102 http://www.baxendaleownership.co.uk/ 64Ownership

65 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.ukwww.cdscotland.co.uk


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