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Selling your Business to Employees IoD and ESOP Centre 15 May 2012

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Selling your Business to Employees IoD and ESOP Centre 15 May 2012 * * * * * * * * * * Selling to which employees? Selected key employees? All employees? – PowerPoint PPT presentation

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Title: Selling your Business to Employees IoD and ESOP Centre 15 May 2012


1
Selling your Business to Employees IoD and
ESOP Centre 15 May 2012
2
Selling to which employees?
  • Selected key employees?
  • All employees?

3
Shares for all your employees?
  • A potentially powerful tool for improving
    performance
  • Research evidence
  • Like any good tool, it needs to be applied with
    skill and some forward thinking
  • e.g. Cass Business School

4
Some companies owned by all their employees
  • Gripple - manufacturing
  • Arup engineering consulting
  • John Lewis
  • Scott Bader polymer manufacturing
  • Circle Health operators of hospitals
  • Skye Instruments electronic instrumentation

5
When might you consider selling to your employees?
No or very few potential buyers ?
Business relies on human capital ?
Strong cash flow ?
You are willing to be paid over several years ?
You believe the business has good growth prospects if owned by those working in it ?
Others? ?
6
Key questions
  • What is your business worth?
  • and
  • Where will the money come from?

7
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

8
Where market value exceeds what your employees
can afford
  • Explore bridging the gap with
  • Payments out of your companys 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)

9
Case studies (all real companies)

10
Selling to your key managers
  • Architects practice
  • Partnership with two partners
  • 25 employees
  • Turnover 2.3m
  • Profit 200,000 after partner drawings
  • Partners wanted to plan for succession

11
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

12
The result so far
New directors
Former partners
22.5
77.5
New company
13
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 directors to acquire a further 22.5
at todays low value
New company
14
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
15
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

16
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

17
Selling to all employees
  • Sound recording business
  • Founders wish to sell 100 to John Lewis style
    employee trust - no individual share ownership
  • They are willing to paid out over ten years
  • They would like to retire gradually over that
    period

18
A simple possible approach
  • Establish an employees trust
  • The trust agrees to buy out founders, paying
    200k per annum over ten years (subject to
    adjustment according to available funding)
  • Subject to available cash, the Company funds the
    trust to purchase the shares over that period
    not corporation tax deductible
  • Trust retains shares indefinitely

19
A variation
  • Individual share ownership is felt to be
    important
  • Sell to a SIP instead of to an employees trust
  • Company can deduct against corp. tax payments to
    SIP
  • SIP then passes shares to employees over time.
    They can buy shares with tax relief and/or be
    given shares free of tax
  • Establish internal market to facilitate future
    sale and purchase

20
A second variation
  • The Company is unlikely to have sufficient cash
    to pay 2m
  • Reduce the price
  • Bring in external finance
  • Consider allowing employees to acquire some
    shares directly through a SIP with tax relief

21
How the SIP might work
5. Employees can buy Shares income tax relief
Company
1. Pays money to trust, pre-corporation tax
SIP trust
4. Employees can receive free shares not taxed
3. Sells shares to SIP trust
Employees
Seller(s)
2. Pays money to sellers may be able to defer
CGT
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