Can employee ownership help defuse the business succession time bomb in Wales?
Can employee ownership help defuse the business succession time bomb in Wales?
A new report from the Wales Co-operative Centre released Monday 19th March
A business succession time bomb could be about to damage the Welsh economy unless innovative forms of exit strategy are promoted to, and employed by, Welsh businesses. This is the key message of a new report published by the Wales Co-operative Centre today.
The report ‘Employee Ownership: Defusing the business succession time bomb in Wales’, highlights the dangers facing the Welsh economy of an ageing population of business owners. Owners generally do not prioritise time for succession planning and have a very low awareness of the probable pit-falls of their available business succession options in the current economic environment. The report examines the opportunities afforded by different forms of employee ownership, as a form of exit strategy that has strong benefits for both the owners and the employees.
The report, which has been written by the Centre for Mutual and Employee Owned Business in the University of Oxford and endorsed by the Federation of Small Business in Wales, calls for
- More awareness of the need to plan for business succession at an earlier stage – up to five years before the planned exit point – to avoid a high business transfer failure rate
- Clarification of the routes to employee ownership, reduce the complexity and standardise business models
- An equity finance fund utilised to effectively support employee ownership schemes and buy-outs
- More extensive research to be commissioned on the depth of the problem and the full risks bad succession strategies pose to the Welsh Economy
Estimates suggest that as many as a third of all business closures in the UK are a result of business transfer failure – often caused by poor business succession planning.
In an economy where Welsh business owners stay with their business longer than their peers across the UK, and a fifth have been running their businesses for twenty years or longer, the implications of ignoring succession planning could be significant.
Business succession issues receive little policy discussion in Wales. This is despite the fact that all the evidence shows that business succession is most likely to go wrong if it is ignored and badly planned by the businesses concerned. The report identifies weaknesses in the dominant business succession routes for Welsh SMEs and Micro-Businesses, such as Family Succession and Trade or Private Equity Sales.
Less than 30% of family-owned business make it to the third generation of owners. Often the business is seen as a burden on the younger generation and there is no aptitude or enthusiasm for running it. Trade sales are seen as a preferred route for most business owners but these owners tend to over-estimate how easy it will be to find suitable buyers, if any, and how important they are personally to the business. Owners are often surprised to find they cannot get either the price, or the sympathetic local buyer, they hoped for. Buyers may also seek to asset strip the company for short-term gain with knock on effects on the sustainability of the jobs remaining in the company.
The report calls for serious consideration of employee ownership as a viable approach for owners looking to plan their exit strategy. A gradual management transfer process to employee ownership can ensure relations with employees, customers, suppliers and the local community remain intact once the founder has exited entirely. Employee buy-outs alleviate many of the risks of business succession, they:
- Safeguard continuity
- Support long term sustainability of the business
- Allow a gradual transfer
- Allow business owners to realise monetary value for their equity
A substantial body of evidence suggests that employee owned businesses out perform their competitors on a range of measures including productivity and sustainable job creation. Employee owned business have been more resilient through the recession and generally emerged from it quicker.
The report recommends that Welsh Government, business organisations and support agencies develop:
Business Succession Awareness
Succession failure is caused largely by inadequate or rushed planning. Stakeholders have a strong role to play in encouraging business owners to start their succession planning process early – ideally at least five years before they plan to leave the business.
Highlight routes to Employee Ownership
Create a one-stop shop that integrates the knowledge of Wales Co-operative Centre, Federation of Small Businesses in Wales, Finance Wales, Co-operative and Community Finance and the Employee Ownership Association for owners contemplating an exit strategy.
Equity Finance for employee buy-outs
There is a strong case for government to provide and/or underwrite an equity fund dedicated to facilitating micro-business buy-outs – specialist equity funding would allow owners to sell their equity to a fund which then gradually sells shares on to the employees.
More evidence on the business succession issues in Wales
There is inadequate empirical evidence of the potential monetary costs of business succession failure to the Welsh economy. There is also not enough data on the routes currently being selected including employee ownership.
Some success stories in Wales include:
Aberystwyth based Aber Instruments producing measuring instruments for fermentation in brewing. Originally started up by four founders the founders decided to investigate their succession options at an early stage. Keen to keep the business in Aberystwyth, the founders looked at employee ownership as an option. An employee benefit trust was set up to buy shares from the founders and employees are also allowed to buy shares directly. Today Aber Instruments is 85% employee owned. 55% is held by an Employee Benefit Trust, 30% is held directly by employees and 15% is held by the remaining founders – all of who will have exited the business within two years.
Skye Instruments produces electronic instruments used to monitor the impact of micro-climate variations on crops. The owners came across the idea of employee ownership via the Wales Co-operative Centre and were attracted to the possibilities for using it to secure the businesses location in Mid Wales. After initial difficulties in finding accessible and clear advice on how to approach the process the owners presented several options to their staff who voted for an employee benefit trust. This was set up in 2009 and 40% of company shares are now in the trust. The remaining 60% of the shares will be sold to the trust over the next 6 years and whilst the owners will have exited financially, the hand over process will be ongoing and they will retain involvement in the business.
Allan Meek set up SCS group in Caerphilly to produce ventilation and smoke control systems in new residential businesses. The business was very successful and Allan started to consider succession options. He considered trade sales and a Management Buy-Out but was concerned with the lack of long-term sustainability the models offered. An Employee Buy-out seemed to provide exactly the type of succession route he was after, in putting the interests of the business first. An Employee Benefit Trust was established with 15% of the company’s shares being owned either directly or indirectly by employees. The recession has slowed Allan’s plans to pass over the business to full employee ownership but as he is in no hurry to leave he feels no need to explore other exit routes and the employee buy-out will go ahead but over a longer period of time than originally envisaged.
Primepac Solutions Ltd
PrimePac, based in Ebbw Vale, is a worker co-operative that fills bottles, tubes and sachets for a range of clients and leading brands in the health and personal care sector. The Company formed when parent company Budelpak decided to withdraw from Wales following a fire which destroyed their factory. 19 former employees invested their redundancy money and set up PrimePac. They developed a business plan, purchased equipment and began trading in 2005. They now employ 22 permanent staff and between 10 and 20 temporary staff. Wales Co-operative Centre was able to provide legal and business planning advice and help the company access funding. PrimePac now has a turnover of £1.8million and has paid out dividend to shareholders greater than the amount they originally invested.
Wales Co-operative Centre Chief Executive, Derek Walker, welcomed the report, commissioned as part of a series of reports for the International Year of Co-operatives 2012,
‘Business succession is an issue that is ticking away underneath our whole economy in Wales. Succession planning is often poor and doesn’t take into account the state of the market at the time when owners would look to sell their businesses, or the knock-on effects a poorly implemented transition can have on employees, stakeholders such as suppliers, the business as a whole and the communities around it. Employee ownership offers another approach to business owners that can empower employees and reward them for their contribution to developing the business. In Wales we have a number of businesses that have already implemented different models of employee ownership and are already benefiting from it. We would like to see this approach in the mainstream of business succession planning in Wales and see this report as the first step towards that’.
Iestyn Davies, Head of External Affairs at the Federation of Small Businesses in Wales also commended the report,
‘It’s vital that there is adequate awareness of the benefits of early succession planning. Highly competitive businesses can fail as a result of bad transfer planning and this report shows that employee ownership is a viable solution to ensuring our indigenous enterprises are safeguarded for the future’.
The Wales Co-operative Centre’s specialist Business Succession Team is running a series of free breakfast events throughout March aimed at business owners who are considering their exit strategies.
- Wednesday 21st March, Towers Hotel, Swansea
- Thursday 22nd March, Tredomen Business and Technology Centre
- Tuesday 27th March, Bangor Management Centre
- Wednesday 28th March, Ruthin Castle Hotel.