Bruce Farquhar: Consider the Employee Ownership Trust
Succession planning is never an easy topic for business owners. Passing on an independent or family run business as a going concern will be one of the first priorities when looking to retire or move to a different role within the business, writes Bruce Farquhar.
Small to Medium Enterprises (SMEs) and family-run businesses are the backbone of our economy. According to the Institute for Family Business latest research, 85 per cent of UK businesses are family-owned and class themselves as SMEs.
In Scotland, there are 343,535 family-run SMEs, which make up 99 per cent of privately-owned businesses. SMEs drive local employment, a vital part of our communities, therefore it’s essential that our SMEs and family-run businesses have succession planning in place.
However, when it comes to exiting a business, how do owners ensure continuity? Especially if there are no obvious family succession routes?
Employee Ownership Trusts (EOTS), where the business is sold to its current employees, are becoming more established. With privately-owned SMEs employing over 50 per cent of Scotland’s workforce, who to sell the business to is a concern. Many business owners don’t want to see someone else’s name over their door, especially if that door is likely to be located miles away, leaving loyal employees without jobs.
Both the Priory Hotel in Beauly, near Inverness, and Hopetoun Gardens, just outside Edinburgh, took this approach because they wanted to see employees take over the business, protecting its independence.
Hopetoun Gardens owners Dougal Philip and Lesley Watson look back on their decision, in the summer of 2019, to transition to employee ownership, handing over to their very experienced team: “Our success is because we’re gardeners first. Employee ownership helps protect that ethos and we made the right choice.”
Sometimes a sale to a trade buyer can be challenging for business owners and the due diligence process can be long, with many constraints. Simply selling the shares to the company’s management team can ensure the business remains local, but there are downsides. Management buyouts can put stress on individuals, and sometimes the expectations of funders are not aligned with the leadership team. After putting the business up for sale and considering a number of offers, founder of the Priory Hotel in Beauly, Stuart Hutton, decided to switch to an employee-owned structure to avoid a potential buy-out by a chain.
Stuart said at the time of the deal, in December 2018: “The Priory Hotel was too important, and too unique, to see it taken over by someone else. The sale to the Trust has allowed us to combine family ownership with employee ownership and preserve the independence of the hotel.”
Employee ownership can also allow the owner to exit at their own pace, protecting the employment of the workforce for as long as the company continues to be viable. SMEs generate a quarter of GDP in the UK and the tax contribution of family firms in the UK is significant. Business owners will also be looking at how to manage their tax bill when it comes to selling. If key qualifying conditions are met, full capital gains tax relief for the owners on the disposal of a controlling interest to an EOT is possible. Employees can also benefit from a bonus, of which £3,600 per annum will be tax free.
When a company moves to employee ownership, we often see an uplift in corporate performance. An EOT is flexible and can be shaped to suit the aspirations of the business owner and the employee group. The offers to buy Grossart Associates in 2019 were good, but having been their own boss for 30 years, Bill Grossart and John Macdonald didn’t want to be tied-into a pay-out period. The employee ownership solution gave a good price for the business and allowed the principals to phase their exit, ensuring continuity for customers. It was also good news for employees who are now in control of their own destiny.
EOTS can sit alongside executive and all-employee share schemes. The business owner can also retain a shareholding, although they do have to consider how that shareholding can be divested in future.
There is plenty of advice out there to support owners in making an informed choice when it comes to succession planning. The overall aim, in adopting any succession planning model, is to ensure your independent business continues to grow and be part of the local community.
Bruce Farquhar is chair of Anderson Strathern. This article first appeared in The Scotsman.