Employee ownership could be the solution to business succession in Wales, says Wales Cooperative Centre
Employee ownership could be the solution to business succession issues in Wales, says the Wales Co-operative Centre in a report released earlier this year.
The new report suggests that 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.
“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.
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, the report calls for:
Greater awareness of the need to plan for business succession at an early 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, reducing the complexity and standardising business models;
An equity finance fund utilised to effectively support employee ownership schemes and buy-outs, and;
More extensive research into 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.
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.
The research found that less than 30% of family-owned business make it to the third generation of owners, concluding that 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 demands 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:
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.
But it is not all doom and gloom Some success stories in Wales include the following EOA members:
SCS Group – 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.
Aber Instruments – 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.