Following a direct marketing campaign by Employee Ownership Scotland (EOS) the owner-directors of BCT invited Employee Ownership Scotland to examine the options for making a phased exit from the business. After examining various options the owners decided to offer a stake to the management and employees through an Employee Share Ownership Plan (ESOP). The Profit Sharing Trust (PST) and Employee Benefit Trust (EBT) are now in place with the PST having made the first acquisition from one of the owners.
Options available to exiting owners
The owners were faced with three clear options and postponement of a decision being a possible fourth. A trade sale, one of the three options, was rejected as this could lead to the closing of the company in Glasgow. This left a management buy-in and a sale to the existing management and employees for further consideration.
A sale to the management and employees through an ESOP was preferred for the following reasons:
- It provided a means to retain and incentivise key employees in this intellectual property based company.
- It will provide a phased exit for the owners.
- It will, in time, create a company owned and controlled by those who represent the intellectual capital of the business and is therefore unlikely to be sold to a third party for the customer base only.
Initially the process was driven by the owners, whom Employee Ownership Scotland had initially approached, as they would be playing a part in the business for some years to come.
As with all potential successions the EOS method was to take a hard look at the feasibility of employee ownership focusing on future profitability, management potential, the marketplace, and the potential to raise capital or use future profits for the buy-out. Following this EOS proposed a corporate finance strategy which would use a loan from reserves to the PST to purchase an initial number of shares this loan being paid off using pre-tax profits channelled through the PST.
In future years the company would lend money to the EBT which would be repaid by channelling pre-tax profits into the PST. This strategy involved no external finance and was very tax efficient.
The owners soon realised that this was an acceptable deal for them. The employees then had to be persuaded of the benefits of ownership and the management had to be sold the potential benefits of committing themselves to the long-term future of the business. All this was accomplished at a series of meetings and presentations with the share price being determined by an independent valuation.
The EOS Role
- Honest broker between buyer and seller.
- Identify potential for management / employees to acquire the business.
- Held meeting with the employees to convince them of the opportunities and benefits of employee ownership.
- Produced a funding plan showing how the deal could be transacted.
- Liaison with lawyers and accountants.
- Assisted in the development of communication and representation structures.