Employee Ownership Association

The voice of co-owned business

Employee buy-outs

Employee ownership is an increasingly popular solution to ownership or business succession. A growing number of business owners are opting to transfer their company on exit to their own management and staff - via some form of employee buy-out.

Succession Options

Well over 100,000 company owners face business succession or transfer in any year. The Department for Business, Enterprise and Regulatory Reform defines the principal business succession options for owners as a sale to:

  • Members of the owner’s family;
  • The company's employees, including management;
  • An MBO; or
  • External buyers

Selling the company doesn't have to mean a total exit from the business. It can involve a gradual purchase over time; or the owner might retain a stake and even a management role in the new ownership structure.

Why sell to employees?

There are compelling reasons for company owners to sell the business to the staff who already work for it.

  • Successive Governments have created a range of tax advantaged schemes, like the Share Incentive Plan [SIP], which make structuring an employee buy-out feasible and rewarding for owner and employees alike
  • Selling to the workforce is a way for owners to recognise employees' role in helping build the business
  • Employee buy-outs have an excellent record of sustainability compared with management buy-outs, so the enterprise the owner created is more likely to survive
  • Employee buy-outs are less likely than a trade sale to result in closure of premises in local economies which may rely on them for jobs and trade
  • Allowing existing management and staff to buy the company puts control in the hands of people who know it best, and who will be most committed to making it succeed
  • An employee buy-out means continuity for customers and suppliers

What is an employee buy-out?

Employee buy-outs are simply a way of transferring ownership of a company from the previous owner to employees.

In an employee buy-out, cash is required to pay the outside owners, to buy all or most of their shares.

A valuable mechanism for making an employee purchase possible is a trust, acting on behalf of employees. This gives employees a vehicle for using the company’s own resources and/or a loan, to finance the purchase. Without this, employees would have to finance all the acquisition out of their own personal resources.

A typical employee buy-out sequence happens like this:

  • Shares are bought by an employees’ trust
  • The trust is financed by contributions from the company, or from a loan which is repaid from company contributions
  • If the trust is financed by the company over time, it may take some time before the trust has received sufficient funds to finance the purchase of all or even a majority of the issued shares in the company
  • If the trust is financed by a loan, this may enable it to acquire a majority shareholding or even all the issued shares in one go
  • The trust may retain some or all of the shares it’s acquired on a long term basis, or it may distribute shares to employees over time
    • The intention may be for the company to remain wholly or partly owned by employees and/or the trust indefinitely

    Employee Buy-outs Guide

    The Employee Ownership Association is one of the advisers to a new online guide to Employee Buy-outs from the Business Link. The guide gives concise practical advice on why and how business owners should consider an employee buy-out if they're planning to sell their business.

    Click http://www.businesslink.gov.uk/bdotg/action/layerr.l3=1073861225&r.s=
    tI&topicId=1074407571     to link to the site.

 

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