Why Employee Ownership Trusts may be an increased part of the M&A scene post COVID-19
I have recently commented on the advantages of Employee Ownership Trusts as an alternative to more traditional exit strategies via share sales and management buy-outs. Most clients who will go on to successfully pass on ownership of a business to an Employee Ownership Trust led business are not driven solely by the capital gains tax free environment, or by the advantages for the company and employees generally. Important while such matters are, in my experience what really resonates with entrepreneurs, especially founder shareholders with a long association with a business, is the opportunity to
- pass on their legacy, to agree price (albeit with a formal valuation required to allow the trustees of the Employee Ownership Trust to proceed)
- reduce warranty and indemnity exposure (which would be expected during a sale to a third party)
- retain a high degree of management influence for so long as the price agreed remains outstanding, in some cases this may extend beyond payment for so long as the sellers have a continued shareholding up to the levels outlined previously
My experience is that the Employee Ownership Trust structure for an exit is not limited to any one sector, transactions being seen for example in aviation, construction, distribution, recruitment, retail, manufacturing, media, professional services and technology. Size of company is not necessarily a bar either and we presently have Employee Ownership Trust transactions in early stage where turnovers range from £2M up to £80M and equity valuations range accordingly.
The scale of John Lewis is an example of an Employee Ownership Trust being relevant to a business for the long term. Originally founded in 1864 with an Oxford Street store, its business came under employee ownership in 1929 and its January 2019 revenue was £11,724M with 83,900 employees.
Most of its growth has been delivered under employee ownership which suggests that success can be achieved from Employee Ownership Trust businesses.
The negative impact of COVID-19 will probably mean that, at least for the next year or so, many businesses will not easily find a willing buyer prepared to pay what a seller considers the right price. We will almost certainly see acquirers taking a cautious approach when considering their approach to potential transactions.
Leaving aside that an Employee Ownership Trust can often be an easier transaction to complete, I expect the issues with third party valuation will encourage more business owners to give serious thought to an Employee Ownership Trust as a legitimate alternative to a sale to a third party and that many management buy-outs will be recast as an Employee Ownership Trust to ensure a transaction is completed to avoid the uncertainties of negotiations with equity and debt providers.
Tim Sadka is a Partner in Rix & Kay’s Corporate Team. With more than two decades’ experience both as a corporate lawyer and in business leadership and management roles, Tim has a proven track record of leading project teams to help businesses realise and deliver their strategic objectives.
The Rix & Kay corporate team has the resources to support Employee Ownership Trust transactions and has strong working relationships with tax, accountancy, corporate finance and business communications practitioners who are themselves well placed to offer support on a collaborative basis.