Transcript What should your company be doing?

Selling your Business
to Employees
IoD and ESOP Centre
15 May 2012
Selling to which employees?
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Selected key employees?
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All employees?
Shares for all your
employees?
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A potentially powerful tool for
improving performance
Research evidence*
Like any good tool, it needs to be
applied with skill and some forward
thinking
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e.g. Cass Business School
Some companies owned by
all their employees
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Gripple - manufacturing
Arup – engineering consulting
John Lewis
Scott Bader – polymer manufacturing
Circle Health – operators of hospitals
Skye Instruments – electronic
instrumentation
When might you consider selling
to your employees?
No or very few potential buyers
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Business relies on “human capital”
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Strong cash flow
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You are willing to be paid over several years
You believe the business has good growth
prospects if owned by those working in it
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Others?
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Key questions
• What is your business worth?
and
• Where will the money come from?
Where your employees may be
able to pay the purchase price
• Value strongly linked to people working in the business (e.g.
professional services, consulting, marketing)
• Low asset base
• Few potential purchasers
• Value based on a low multiple of profit
• Tax reliefs for employees purchasing shares
Where market value exceeds what
your employees can afford
Explore bridging the gap with:
• Payments out of your company’s future profits
• Bank borrowing
• Accepting a discounted price
• Other forms of finance
• Private equity (but this will normally lead to an onward
sale of the company)
Case studies
(all real companies)
Selling to your key managers
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Architects practice
Partnership with two partners
25 employees
Turnover £2.3m
Profit £200,000 after partner drawings
Partners wanted to plan for succession
Selling to your key managers
Solution:
• Incorporate the practice
• Transfer it to a limited company for £1.5m
• How does the company pay the £1.5m?
£1.35m left as loan from company payable over seven years
£155,000 paid in shares
• Three new directors also subscribe for 15,000 shares each in
the new company, paying £15,000 each
The result so far
New directors
Former partners
22.5%
77.5%
New company
Further transfers of ownership to
the new directors
Grants of EMI
options over a
further 22.5%*
New directors
Former partners
45%
55%
* Allows new
New company
directors to acquire a
further 22.5% at
today’s low value
Completing the transfer of
ownership to the new directors
When they wish to retire, offer remaining shares
at a price based solely on retained profits
New directors
Former partners
100%
0%
New company
Summary
• Of current value (£1.5m), current owners fix £1.35m,
to be paid out of cash flow
• They hold the remainder as equity (77.5%), and are
willing to reduce that to 55% for nominal payment
from new directors
• For an aggregate investment of £45,000 (£15,000
each) new directors acquire 22.5%
• They can increase this to 45% tax efficiently by
exercise of EMI options
• They can increase to 100% when former partners
retire, on a favourable valuation basis
What if the business was already
a company?
• Same principles could apply
• New company buys old company, in return
for loan notes/preference shares and equity
in new company
• Key effect: current owners can fix value, so
new owners enjoy some or all of growth in
value from date of purchase by new
company
Selling to all employees
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Sound recording business
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Founders wish to sell 100% to “John Lewis” style
employee trust - no individual share ownership
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They are willing to paid out over ten years
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They would like to retire gradually over that period
A simple possible approach:
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Establish an employees’ trust
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The trust agrees to buy out founders, paying £200k
per annum over ten years (subject to adjustment
according to available funding)
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Subject to available cash, the Company funds the
trust to purchase the shares over that period – not
corporation tax deductible
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Trust retains shares indefinitely
A variation
Individual share ownership is felt to be important:
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Sell to a SIP instead of to an employees’ trust
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Company can deduct against corp. tax payments
to SIP
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SIP then passes shares to employees over time.
They can buy shares with tax relief and/or be given
shares free of tax
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Establish internal market to facilitate future sale
and purchase
A second variation
The Company is unlikely to have sufficient cash to pay
£2m:
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Reduce the price
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Bring in external finance
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Consider allowing employees to acquire some
shares directly through a SIP – with tax relief
How the SIP might work
5. Employees can buy
Shares
– income tax relief
1. Pays money to trust, precorporation tax
SIP trust
Company
3. Sells shares to SIP trust
4. Employees can receive
free shares – not taxed
2. Pays money to sellers – may
be able to defer CGT
Seller(s)
Employees