Whilst the present generation has started, or continued to grow the business, the crucial question is 'what happens next'?
Does the business keep its existing structure and simply slot in the younger generation to run it? Does the business diversify so as to create separate divisions with each being run by the children or cousins, and if so is diversification right for the business or is it just being pursued to give the family members a job and a title? Should the business be sold to an outsider and the money split up among the family members to allow them to pursue new ventures? Or.... should some or all of the business be sold to the employees?
So here are some of the options for family businesses:
Family businesses often have a legacy to consider, and there can be a strong sense of loyalty to the employees and to the local community. Sometimes, selling to a trade buyer will ensure that employment is continued, but often there can be a danger that the business might relocate, or down size in favour of another site. An increasing number of family businesses are considering an alternative exit route; selling to the employees. Family business owners should not throw up their hands in horror at this - they can choose to retain an involvement by selling some rather than all of the shares. The structure allows the family to choose how much or how little they would like to remain involved in running the business. In order to protect the benefit of ownership for employees in the future as well as for present employees, they can set up a trust to hold the shares for the employees from time to time in the business; this means that all employees, whether now or in the future, will have the benefit of ownership for as long as they are working in the business.
Research demonstrates that firms owned by their employees are likely to be more profitable and productive; they have happier staff who will go the extra mile to satisfy their customers and to grow the business, because they have a personal stake in the success of the business itself.
There are many benefits from selling some or all of the business to employees. It produces money for the family so as to provide capital for other activities or retirement, or the family can help fund the employees' purchase by way of a staged sale of shares over a period of time. The business can retain its name and goodwill, and can remain in the locality. The traditions and culture of the business can be retained, and the customer and supplier relationships can continue as previously. Importantly, the distracting issue of succession is removed for the long term.
One of the attractions of selling to employees is the flexibility that is available; the structure can be designed to meet the needs of the business and the aspirations of the family. Models can be broadly categorized into three types:
Direct Employee Ownership where employees own the business directly themselves, usually by holding shares.
Indirect Employee Ownershipwhere the business is owned on behalf of the employees usually by a trust. This is how John Lewis Partnership is structured.
Combined Direct and Indirect Employee Ownership a hybrid model where some of the employees hold direct ownership stakes in the company, but a trust or similar body also holds a stake in the business on behalf of the employees.
There are tax incentives available that can make shareholding an attractive prospect for employees, such as the Enterprise Management Incentive Scheme or the All -Employee Share Incentive Plan. The structure can also include some family shareholding, or an element available for external investment.
It is important that family businesses considering any action in respect of succession, whether this is simply passing the baton to the next generation, selling to a third party, or selling to employees, should obtain professional advice. Issues such as tax, governance and funding must be considered carefully, as these are fundamental to the future success of the firm.
The UK Government is currently consulting on two proposals to encourage wider adoption of selling to employees. One of the proposals is that business owners who sell to employees will benefit from capital gains tax relief on the sale of the business. The other proposal is to introduce relief from income tax and NIC on bonuses paid to employees in employee owned businesses.
Co-operative Development Scotland (CDS) is a subsidiary of Scottish Enterprise, working in partnership with Highlands & Islands Enterprise, and offers an advisory service to businesses looking to explore employee ownership. CDS can talk through the different models, and also facilitate visits or discussions with other businesses that have already taken this route. There is some financial support available to help with the transition costs.
Of course, employee ownership is not the right solution for all businesses- it will certainly not be attractive to every business or every owner. However, as an exit option for a family business, it is one of several alternatives worth considering.
The Family Business Team at Anderson Strathern is happy to discuss the particular issues facing a family business, and to provide bespoke and appropriate strategic and legal advice for the business.
Ken Gerber is a partner at Anderson Strathern LLP, solicitors, and holds the STEP Certificate on Advanced Family Enterprise Advising