Delivering Employee and Community Buyouts - Business ...

Delivering Employee andCommunity Buyouts

A GUIDE TO THE SUCCESSION PROCESS

A technical guide for development workers and business advisers

Co-operativesUK

Delivering Employee and Community Buyouts

A GUIDE TO THE SUCCESSION PROCESS

A technical guide for development workers and business advisers produced by

Co-operative and Mutual Solutions

Economic Partnerships

Wrigleys Solicitors

for the Growing Rural Businesses through Collaborative Solutions project


Co-operativesUK2

First published in May 2003 by Co-operativesUK Ltd, Holyoake House, Hanover Street, Manchester, M60 0AS

© Crown Copyright 2003

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by anymeans electronic, mechanical, photocopying, recording or otherwise, without the prior permission of HMSO (applications to:[email protected])

Front cover picture: Hesket Newmarket Brewery, a community buyout in Cumbria. Photograph: www.paulcarter-photographer.co.uk

Back cover picture: Belgrano Services, an employee buyout in North Wales. Photograph supplied by Wales Co-operative Centre,courtesy of Co-operative News

Editing by David Parker, Helen Seymour and Nicky Connell

Design and production by Alpha Communication, www.alpha.coop

Printed in Great Britain

Acknowledgement

This guide has been produced as part of the Growing Rural Businesses through Collaborative Solutions project, funded by the SmallBusiness Service’s Development Fund for Rural Renewal under the Phoenix Fund. For further information please email:[email protected] or visit www.cooperatives-uk.coop


Delivering Employee and Community Buyouts 3

Foreword 4

Introduction 5

Routes to Succession 6

Assessment of the Business 7

First approaches and responses 7

Assessing commercial viability 8

Assessing commitment 11

Assessing the ease of legal transfer 14

Preliminary assessment of feasibility 15

Raising Finance 17

The business plan 17

What banks are looking for 18

Sources of finance 23

Due diligence 25

Legal Structures for Succession 26

Taxation 29

Learning and Participation 32

Succession Checklist 34

Case Studies 40

Community Buyout 41

Employee Buyout 49

Multi-Stakeholder Buyout from an Externalisation 53

Divestment from a Larger Business 55

Retirement of an Owner 57

Further Reading and Resources 62

Contents

THE PROJECTThis guide has been produced as part of an initiativesupported by the Development Fund for Rural Renewalunder the Phoenix Fund, which is managed by the SmallBusiness Service. The Phoenix Fund is designed toencourage entrepreneurship in disadvantaged areas. TheDevelopment Fund for Rural Renewal aims to promoteinnovative ways of supporting enterprises in businesscommunities adversely affected by Foot and MouthDisease.

The initiative – the Growing Rural Businesses throughCollaborative Solutions Project – is about people workingtogether and finding joint ways forward for their commonbusiness needs. It is about collaboration and collaborativestructures – co-operative solutions of various kinds.

It has two thrusts or objectives:

• The first is about getting businesses to work togetherto meet their needs together – whether this be jointmarketing, joint branding, joint purchasing or jointservice provision

• The second is about forging alliances, either betweenemployees or within the community, to buy out asuccessful business when, for any reason, the ownerwishes to step down. The business can then continue,jobs are safeguarded and services can continue to beprovided. This is called business succession.

The partners working on the project are:

• Co-operativesUK, the lead body taking overallresponsibility for the project management

• Co-active, the partner delivering the project in Devon

• Economic Partnerships, the partner delivering theproject in Northumberland

• Enterprising Communities – Voluntary ActionCumbria, the partner delivering the project inCumbria, with support from Co-operative andMutual Solutions

• The Plunkett Foundation, which is providing theresearch resources and some of the toolkits for theproject.

THE AUTHORSCo-operative and Mutual Solutions (CMS) is anemployee-owned business providing specialistconsultancy to co-operatives and social enterprises. CMS’three consultant directors have over 30 years’ combinedexperience of developing co-operatives and socialenterprises (worker co-operatives, employee-ownedbusinesses, community businesses, social firms, creditunions and other community finance initiatives).

Contact: [email protected]

Economic Partnerships Ltd, based in Northumberland, isa team of specialist social enterprise development adviserswith a long experience of working in the field. They havebeen involved in government policy development, haveplanned and managed multi-million pound developmentprogrammes, helped establish some of the mostsuccessful social enterprises around.


Wrigleys Solicitors is a niche firm of solicitorscomprising some 80 staff offering advice specifically forboth private and charity/social economy clients.

Working from its offices in Leeds and Sheffield, Wrigleyshas many years' experience of working withowner-managers on the sale of their businesses toemployees, on the establishment of an employee sharescheme, and with employees on the acquisition of thebusinesses in which they work.


ACKNOWLEGEMENTSParticular thanks go to Gareth Nash, Dave Hollings, GeofCox and Susan Priestley, and the staff of Co-active,Voluntary Action Cumbria and the Plunkett Foundation.

Geof Cox, together with Toby Johnson and the OpenUniversity Co-ops Research Unit, is the author ofTurnarounds - a development workers’ guide todemocratic conversions and buyouts.

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Foreword


PRIORITY FOR RURAL COMMUNITIESIn its Small Business Service Policy Statement Think SmallFirst the Government identified three priority areasrelating to its goal of making the UK the best place tostart and grow a business by 2005.

The three priority areas are the prevailing culture andenvironment, the regulatory framework for business andsupport for businesses at each stage of the life cycle. Thisproject relates to the third priority area – support forbusinesses at each stage of the life cycle and geared toevery stage of their development.

While considerable resources are targeted at businessstart-ups and growing businesses, ensuring a businesssurvives has not been afforded the same interest, and yetthis is an issue faced by a significant proportion of privatebusiness owners. It is also an issue which is particularlypertinent to rural communities, businesses and publicauthorities covering rural areas. Services in ruralcommunities may be subject to closure because theowner wants to move on or retire, or a death hasoccurred. Public authorities may be faced with takingsteps to close rural services for budgetary reasons and theprivate sector may not feel there is the necessary returnon investment.

Transfer of ownership

The Enterprise Directorate General of the EuropeanCommission estimates that

• Approximately one third of European businesses willtransfer ownership in the coming decade (rangingfrom 25% to 40% depending on Member State)

• Retirement is still the main reason for businesstransfers but transfers due to personal reasons are onthe increase

• A growing number of business transfers will take placeoutside the family. Business succession is taking on acritical nature as fewer family members wish to takeon the family business.

Succession is becoming ever more important as a result ofthe general ageing of the population and pension, lifestyleand other issues such as corporate restructuring.Demographic changes are contributing both to ageingprofiles of owners and a greater number of matureentrepreneurs.

The sources of succession situations are many and variedand are examined in detail in this guide. The case studies(starting on page 40) examine successful (andunsuccessful) examples of:

• Community buyout

• Employee buyout

• Multi-stakeholder buyout resulting from anexternalisation

• Divestment from a larger business

• Retirement of an owner.

It takes time

A successful succession can take anything from three toeighteen months to complete.

In retirement situations it may be possible and beneficialfor the owner to hand over to the employees and act as amentor to the new owners/managers in a consultancyrole. It may also be possible to persuade the owner totake the purchase price over time thereby reducing thecapital needed to be raised at the start.

In crisis situations (such as closure, receivership andliquidation), although speed of action is often critical (toensure the assets are not dispersed or a competitor doesnot step in) the process almost always takes longer thanenvisaged.

Externalisations from a public authority to a co-operativeor community business can also take a long time tocomplete. This may be because a range of stakeholders(staff, trade unions, community members and councilmembers) needs to be involved and because the processesof public authorities need to be adhered to.

Community buyouts may take time for slightly differentreasons. Community members may need to be persuadedthat a community buyout has the potential to succeedand visits to similar examples would be useful.Community members would be undertaking this work intheir spare time (as volunteers) with help fromprofessionals. A feasibility study may be required (fundswill need to be raised), and then the money to purchasethe business will need to be raised. This last activity maytake time particularly if the business was only marginallyprofitable, or if a capital asset requires financing or ashare issue is to be made.

In general it is never too early to start planning. It is onlyin this way that employees, community members andother potential stakeholders can prepare for their new roleas owners of a business. This Guide examines the processfrom first meeting to completing the deal and all thestages in between.

Introduction

DIFFERENT SITUATIONSThere are many different situations that can lead to atransfer of ownership. These include the following:

Community buyouts

Rural communities often depend heavily on microbusinesses for their services, eg garage, pub, shop and/orpost office. In addition there will be other small servicebusinesses critical to the vibrant life of rural communities.The closure of these businesses can threaten the viabilityof village communities and can be the stimulus for thecommunity to come together to purchase and run theservice.

Receiverships and liquidations

Although receivers and liquidators are not necessarilyattuned to the idea of an employee buyout, the logic ofmanagers/employees purchasing the business (or aprofitable part of the business) may be explored as anoption and has been successfully completed on occasion.Crisis situations of this kind are problematic to manageand the outcome is often difficult to predict.

Benevolent successions

Some of the largest and most successful democraticbusinesses have been established through the originalowner giving the business to the employees (usually outof religious or political conviction), or selling it to themunder very favourable conditions.

Sympathetic disposals

Where the original owners want to retire, change career ormove away and there is no obvious heir but there is along-serving loyal workforce, there may be theopportunity to organise an employee buyout – alongbroadly commercial lines (the original owners willprobably want to fully realise their investment) butnevertheless under much more favourable conditions thana sale on the open market would provide.

Divestment and contracting-out

Where large companies want to sell off a subsidiary oraspect of their business, or contract a service out ratherthan employ people directly on it, it may be possible forsome or all of the original workforce to buy the businessor undertake the contract themselves. Although from thelarge company's point of view this may be a cost-cuttingor rationalisation exercise, it is possible for good,profitable democratic businesses to be created in thesesituations. In some large corporate acquisitions a bundle

of businesses are transferred and the purchaser may notbe interested in them all. The employees in thosebusinesses may be well placed to purchase the business.

Externalisations

A number of large democratic businesses have beenestablished in response to political pressure to privatisemunicipal services. The emphasis within currentGovernment policy on integration at both a strategic anda local level in such areas as regeneration, health andeducation suggests new ways of achieving policyobjectives in partnership with co-operatives and socialenterprises. Within the new policy environment, publicauthorities are being encouraged to move away fromproviding services to people towards enabling services tobe provided by or with communities.

Lateral development

Existing democratic businesses rarely adopt acquisitionstrategies, but opportunities do exist for them to initiateor assist purchases of competitor, parallel, supplier orcustomer firms.

Rescues

These are the best known but unfortunately also the mostdifficult of successions as they imply the saving of asignificant part of a business which is in some difficulty.Nevertheless, there are examples of outstandingsuccessful rescues.

Phoenixes

These are not strictly speaking successions, but newbusinesses established by the former employees of a failedbusiness, no doubt utilising their old skills and perhapssome of the product ideas, contacts and equipment(which might have been purchased at very low pricesfrom the liquidator) of the old business. Phoenixes areoften a fall-back option for a failed rescue attempt,usually involving a small group of the most committedemployees carefully planning the new venture over severalmonths. Probably for these reasons they are oftensuccessful.

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Routes to Succession

FIRST APPROACHES AND RESPONSESSuccession situations are highly diverse and requireappropriate responses. Depending on the situation thefirst approach may come from the employees, themanagers, the existing owners, a trade union officer, thepublic authority’s representatives and/or members of thecommunity. This group will be referred to as the'initiators'

The difficulty facing an adviser lies in coming to a realisticassessment of the viability of the succession withoutdampening the enthusiasm of the initiators. At a laterstage, the adviser may have to advise the initiators not tocontinue, or to set out a number of significant obstaclesthat will have to be overcome. However at first theadviser’s goal is to inspire confidence in the principle ofsuccession as a practical option, and also confidence in hisor her own competence and professionalism.

Have an appropriate example to hand

The adviser may have been able on first contact, when thefirst meeting was arranged, to establish at least the tradeand size (the most crucial measures being the turnover,the number of employees and the fixed asset value) of thetarget business. The example of a similar succession willdo more than anything to establish confidence in the ideaas a really viable option. Subjects for case studies can begathered from this guide, relevant publications andwebsites contained in the bibliography section, and ofcourse from the adviser’s own contacts and experience.

Most effective of all is to arrange a visit to a similarbuyout or to invite someone who has been involved in asimilar succession. However, the time and work involvedin this may not be worthwhile unless the adviser is fairlysure the succession will go ahead, and it may be better topostpone this technique to a slightly later stage.

Clearly describe the aims

The key to success in succession situations is flexibility –open-mindedly recommending the right legal/financialstructure for the particular circumstances and for thoseinvolved, rather than 'selling' them a particular model.Further, the adviser must bear in mind that existingowners may not be especially interested in democracyand will have to be sold the succession option mainly onthe grounds of, say, its tax efficiency, or the prospect ofthe business continuing and services and jobs being saved.However, the adviser must also be clear about where hisor her 'bottom line' is.

The adviser may feel that there are non-negotiables, for

instance, the opportunity for all existing and futureemployees to participate in the ownership andmanagement of the business, in the context of thelegal/financial structure of transition arrangements whichultimately ensure real democracy. This could mean, forinstance, in a final attempt to secure agreement on somekind of buyout, giving the existing management acontrolling interest, as long as they are required to selltheir shares back to the employees on leaving, and thatthe employees as a whole have sufficient shares to blockany change in this requirement. Such an arrangement isfraught with danger, and will be discussed further in thisguide, but might set the business on the road to majorityemployee ownership and control, albeit after an indefinitetransitional period.

Set out how the succession will proceed

As will be seen, there is no single model for successions:the very essence of the 'technical' skill involved insuccessions is the judgement, based on the nature of theexisting business and the aims of the existingowners/employees, community members and/or publicauthority, of the best route to achieve a successfulsuccession. Nevertheless, there are certain steps whichwill be common to all successions, and certain kinds ofsupport will be available to all. The following, at least, willbe essential:

• Discussion and clarification of the aims andexpectations of the initiators

• Fact-finding visit to the business premises, includingtalks, if possible, with key employees

• Review of relevant documents, such as the existingMemorandum and Articles of Association and themost recent audit (in some circumstances these mayhave to be obtained from Companies House or by'back-door' means)

• Establishing a steering group which might becomposed of managers, employees, communitymembers and other relevant stakeholders (publicauthority representative and/or trade union official)to enable the detailed work to progress

• Preparation of a short report on the feasibility andproposed means of succession, with a proposedtimetable and initial cost estimate

• A person to co-ordinate the succession from start tofinish. A ‘relationship management’ approach is oftenappropriate in succession situations where ongoingsupport is required but with access to appropriatespecialisms.


Assessment of the Business

• Presentations to the employees or communitymembers – assuming they are not all in the initialgroup. This is essential to ensure that all potentialstakeholders are involved in decisions and that futurecommunication channels (which are likely to form anintegral part of the new business) are opened at theoutset

• Review and recommendation of appropriate sourcesof finance

• Training as is found to be necessary both during andafter the succession.

Certain kinds of succession, especially rescue situations,will require much more work than this, such as thoroughfinancial investigation. The step-by-step procedures laidout in this guide for succession will enable the adviser toextend the above list even at the stage of the initialexploratory meeting, according to emerging details of thesituation of the target business and the aims of theinitiators.

Start an assessment

The adviser should also use the first meeting to start anhonest assessment of the viability of the succession (inaddition to establishing the credibility in principle of thesuccession option). The key aspects of this assessmentwill be:

• Commercial viability - Is the business (or a possiblecore business within it) strong enough to survive? Ifnot, is a phoenix possible?

• Commitment - Are these people serious? What dothey really want? Do they have the time and theenergy to see it through?

• Ease of legal transfer - Does the business exhibitcharacteristics that ease succession, or are theretechnical obstacles that might require higher fees forspecialist legal or other advice? Is a longer timescaleneeded than is realistically available?

Commercial viability and commitment are by far the mostimportant aspects of the assessment and in these areasmost advisers will already be highly skilled. It is unlikelythat any legal transfer factor will prove an insurmountablebarrier to success.

ASSESSING COMMERCIAL VIABILITYIt is important to have a thorough understanding of thegeneral techniques of assessing commercial viability –break-even analysis, market research, costing and financialforecasting. Such topics are adequately covered ingeneral terms in a number of other easily availablesources of information.

The question that will be addressed here, therefore, is:

What are the problems in assessing commercial viabilitythat are specific to democratic employee and communitysuccessions and buyouts?

In beginning the assessment, the adviser must bear inmind a surprising number of special considerations inaddition to the usual criteria for business viability. Theseare as follows:

The reasons for the succession

What are the reasons for the succession proposal and arethey genuine? Remember that there may be severalreasons. The existing owners of the business mightgenuinely want to involve and reward employees, but anadditional factor in the equation might be a desire tospread the financial risks in an approaching period ofuncertainty. This is certainly one of the advantages ofdemocratic ownership – but everyone should be aware ofany such increased risks.

In the case of community successions, there may be avariety of reasons why a trade sale may not be a viableoption for the owner. There may be an opportunityhowever for a community succession if the business cansustain a member(s) of staff and allow for reinvestment toimprove the business on an ongoing basis.

If a succession is being proposed in response to somedifficulty, it is also necessary to ask whether a successionwill actually solve the problem.

Past performance

At the first meeting a general description should besought of the nature and past performance of thebusiness. In most cases, especially in buyouts or wherethere is any question of financial or trading difficulties,this will be the subject of very detailed enquirythroughout the succession process. The initiators shouldbe warned at the earliest possible stage that if substantiallosses have been made any borrowing will be difficult(although not impossible).

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Past organisational structure

At the first meeting the adviser should try to understandhow the business has been organised. It is particularlyimportant to establish whether the business has beenorganisationally self-sufficient in the past. For instance, ifit is part of a larger company or group of companies, itmight be dependent on other units in a number of ways.Some work may have been carried out for connectedbusinesses elsewhere. Management tasks, such asaccounting, may have been done at 'head office'. Sucharrangements could leave structural or skills weaknesses ina newly independent business. Also, poor businesspractices, such as relaxed delivery and paymentarrangements, are common between connectedcompanies and these should not be carried over into thenew democratic business.

Paying the buyout price

Even if the business has been healthy, it may not have thecash flow in future to meet repayments of borrowingnecessary to meet any buyout price. Such problems arenormally most acute if a buyout involves land andbuildings or a lot of expensive equipment and relativelyfew employees. This will be examined further in duecourse, as will the costs involved in actually organising thebuyout. Once again, however, it is as well to get someidea of the possible value of assets, especially land andbuildings and of past cash flow, at the earliestopportunity.

Alternative costs

A key aspect of any buyout price should be kept in mindeven at this early stage: what would be the cost of any

alternative to a buyout? This in turn will have twoaspects: the cost to the sellers and the cost to the buyers.

If the sellers have no alternative buyers but havedetermined to sell, they will have in mind the cost tothem of winding up the business, which may well behigher (if, for instance, there are considerable redundancyentitlements) than any price they could obtain at auctionfor the equipment, etc. In an extreme case they may wellbe willing not only to sell the business for a nominal sum,but also to assist the purchase either financially orpractically (say, by placing contracts with it).

Conventional guides to buying a business always containthe advice that buyers should arrive at their ownvaluation and stick to it, always being ready to walk awayand look for another opportunity rather than entertainany deal that might stretch them. Obviously, having anumber of alternatives does give considerable strength innegotiations. Unfortunately, employees and communitymembers are rarely in this privileged position. They willusually have the alternative of simply looking for work orto secure the service elsewhere (although this may not bea very realistic prospect in some areas or in some trades).In addition, they will often have the alternative of startinga similar business from scratch. This might be enormouslydifficult and expensive in all kinds of ways, but if not, thecosts involved in such an alternative can provide a ceilingfor the buyout price. In rescue situations, there may alsobe the alternative of waiting for the business to collapsethen buying it, or selected assets, from the receiver.

Continuity

It may be either an advantage or a disadvantage to abuyout that production and sales are interrupted and thedecision on how important continuous trading may bewill therefore depend on considering the particularcircumstances of the business in question.

In most cases continuity will be important to commercialviability, because of the need to retain suppliers,customers, employees and so on and to continue togenerate income to meet overheads. On the other hand,the extra time for training and business planning providedby a break in trading might prove more valuable,particularly if it also serves to secure redundancypayments.

Also to be considered are financial facilities, such as abank overdraft. It is crucial to establish as early aspossible not only whether similar facilities will beavailable to the new democratic business, but also onwhat terms. Suppliers might want to take the opportunityto reduce credit terms, for instance, or bankers



Debts won’t disappear

A sole trader thought he could avoid his business debtsby incorporating the business as a co-operative. Theadviser informed him that the creditors would either betransferred – in which case the new co-operative wouldhave to pay them – or they would not be transferred –in which case he would still have to pay them. Theywould certainly not just disappear! Interestinglyenough, this was not the only reason for the proposedsuccession and it went ahead anyway. The newco-operative started with a clean slate except for anagreed sum for the equipment transferred to it, to bepaid over several months and this did help the oldowner, now a member of the co-operative, to settle theold debts.

(particularly in the case of a divestment where facilitieswere guaranteed by the parent company) may ask foradditional security. Any break in trading will make iteasier for banks and others to change their terms.

Special factors

There may be other factors affecting the commercialviability of a succession or buyout that simply do notaffect new businesses. The initiators and their adviserswill have to satisfy themselves completely that after athorough and open-minded investigation any such factorshave been uncovered. An example here would be acompany pension scheme, which might involveconsiderable contingent liabilities and indeed other hiddentraps for any succession proposal. This is examined inmore detail on page 13.

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Initial questions on commercial viability

Why has the succession proposal been made?

Are there any alternatives to succession?

Have family routes been explored?

Has a trade sale been considered and rejected?

Is the business profitable? Did it make profits lastyear and the previous year?

What is the turnover? Is it going up or down?

Is the business independent, or is it connected (otherthan by normal trading relations) to any otherbusiness?

Are any major aspects of the business carried outelsewhere or by agents (eg accounts, payroll, debtcollection, sales)?

Is the business dependent on a single customer? If so,on whom? (Such a customer may become the keyplayer in the succession.)

What are the main assets (eg land and buildings,vehicles, plant and equipment) and what are theirapproximate values?

Are the assets leased or owned?

Is there a bank overdraft?

How many employees are there? Are they full orpart-time? How long have they worked there?

Will they want to secure their redundancy payments –whether or not they support a succession?

How much might employees contribute financially?

Will key employees be sympathetic to a succession?

Is it important that there is no break in trading?

Are there any business difficulties on the horizon (egneed for new investment)?

Who are the main competitors? What are theirplans?

What are the trends in the market?

Is there a company pension scheme?

Can copies be obtained of:• the last audit?• the most recent management accounts?• recent financial forecasts?• any recent asset valuations?

Benefits

The buyout of UBH International meant that 95founder members were able to save their jobs and 25new ones were created. The business is 100%employee owned, with the employees electing threemembers of the Board. There are mechanisms set upto ensure genuine involvement and sharing ofinformation. As owners of the business the employeesare entitled to a share of the profits (see case studypage 49).

ASSESSING COMMITMENTAssessing the commitment of both the existing ownersand the potential democratic owners is the most difficultaspect of assessment – and the most difficult to adviseon. It is also an aspect of business assessment, at leastwith regard to the new democratic owners, in whichpublic and private sector business support organisationsmay have little experience to draw on. There are anumber of co-operative development bodies withsubstantial experience in this field, as well as a number ofprivate sector consultants.

In terms of assessing commitment there are very realtensions:

• The need to establish firm commitment at an earlystage by asking employees to commit themselves tomaking a financial investment in the new business.

• Not overwhelming the employees with too manycommitments at an early stage, and therebypostponing any question of investment to later in thebuyout process.

Clearly, there is no right or wrong way of handling this.The best advice is that the adviser should trust his or herown judgement and 'feel' for the situation and peopleinvolved. The following brief notes on the factors thatmay need to be taken into account will assist the adviser:

Are key employees sympathetic?

Any succession or buyout will be much simpler if at leastsome members of the existing management team aresympathetic. Apart from anything else, they will havedetailed knowledge of past plans and performance andaccess to financial and other information, and will be ableto take on much of the business planning side of abuyout.

If the existing management team is not sympathetic it isfirst necessary to establish the reasons for this. Somereservations are inevitable and justified: business doessometimes require difficult and unpopular decision-making, and managers may well need to be protectedagainst summary dismissal by an angry meeting. Suchconcerns can be addressed in a number of ways, either inthe constitution of the new democratic business or in themanagers' service contracts. The whole question ofremuneration can also be addressed in a range of ways(some of which will be examined further below). Thepoint at this stage is to take on board such concerns, offerreassurance and initiate discussion of possible solutions.

If the managers still prove unsympathetic, it may be

possible to bring in a management team from outside, ora new team from within. These strategies are extremelydifficult, and in general not as attractive tofunders/financiers as management continuity (unless ofcourse the business is in difficulties, in which case somenew management input would be welcomed). They canbe pursued in a number of ways:

• Recruit a new team, or at least a team leader, fromanother similar business

• Recruit a new team from the existing workforce

• Enter into an arrangement with the managementteam of a similar democratic business.

There may also be key employees outside themanagement team: for instance people with vital marketcontacts, technical skills (detailed knowledge of computersystems is often limited to one or two relatively juniorpeople) or leadership qualities.

It is critical at an early stage to understand the attitude ofany trade unions to the succession situation, particularly ifthere is more than one involved, and the nature of theirrelationship. At workplace level, branch officers and shopstewards may be involved in the buyout team or steeringgroup but it will be important to ensure that regionalofficers are kept aware of progress and problems. Tradeunions in general and some local officers in particular areoften much more aware of the options available toemployees in succession situations and they can be apowerful ally.

Is there sufficient community support?

A threat to a business providing important services to acommunity may well encourage local people to cometogether to find a solution. A community succession maynot be the first thought on their minds but if contact canbe made by an adviser and enthusiasm engendered at anearly stage, the option can be given due consideration.

Community meetings are usually relatively easy toarrange in many rural communities. It is an accepted wayof sharing information, pooling ideas and getting thingsdone. A community meeting called to discuss thethreat/closure could be advertised by word of mouthand/or leaflets. The first meeting needs to establishwhether the idea of a community succession is thought tobe viable (in principle) and whether there is sufficientinterest (at this stage) to take it forward.

Residents will have knowledge and experience of thebusiness in question and skills to bring to the process. Alist of people present (including their addresses andcontact details) should be made so that the momentum



can be carried forward. A small steering/working groupshould be elected from those present if the successionidea is to be progressed.

Are there any troops?

It has been said that there are two questions in anyassessment of a buyout: Is there a business here? and Arethere any troops? This reduces the questions ofcommercial viability and commitment to their bare bones,and makes clear that along with experiencedmanagement, an essential requirement of a genuinelydemocratic buyout is the support of a substantial numberof the whole workforce.

In large buyouts, the commitment of the workforce canonly really be established through a presentation,questions and votes at mass meetings, and their finalwillingness to make a financial commitment. It is often agood idea to establish a savings scheme at an early stagefor employees or community members to start savingsmall amounts week by week towards their investment inthe business. The money will be returnable should thebuyout not succeed, although a small part can be putaside into a sinking fund to meet buyout expenses, suchas advisers' fees. This sinking fund will be non-returnable,but if the buyout succeeds employees can be issued withfree shares or loan stock in its place. Most banks andbuilding societies will be happy to assist with such asavings scheme.

Often, during large buyouts, the adviser will have to relyon the 'feel' among the members of the succession orbuyout team for how workforce commitment isdeveloping.

The situation with the workforce is in any case quitedifferent from that of the old owners, managers or tradeunionists. Usually the workforce will either give theadviser their support or they won't – either way therewon't be any of the problems of 'hidden agendas' thatmay be encountered among so-called 'leaders'. This is not

to say that there won't be mixed motives. It is quitelikely, for instance, that the workforce's main concern willbe to preserve their jobs, then to maintain pay andconditions, and only thirdly to run the businessthemselves. This is common sense rather than a lack ofcommitment: food on the table is more important thanvotes in the boardroom. But often the adviser can rely onthe power of the idea of democracy to help win theworkforce over. A financial investment is important heretoo: most people will insist on a real say if they have putmoney in.

In the case of a community buyout the ‘troops’ willcomprise

• current employees (if any)

• potential employees

• people who are on the steering group and who mayjoin the Board

• people who are willing to undertake work but who arenot interested in a formal Board role

• People interested in using the service.

For the community buyout to be viable, getting the rightmix of all these constituencies is important.

In working with communities, it is necessary to be awareof the role of people who are very active in thecommunity and who undertake a wide variety of activityin a voluntary capacity. While these people’s leadership ispotentially vital, it is also important to harness theenthusiasm, skills and experiences of a wider group.

It is vital to gain and retain people’s support through avariety of means. These might include: communitymeetings at which the steering group provides feedbackand gets people’s ideas for further action, and socialevents at which people can discuss the proposalinformally. The feasibility study may also be anopportunity for professionals to work alongside residentsthereby ensuring that community ownership is embedded.

The need for secrecy

One aspect of succession situations that presentsparticular difficulties for the assessment of commitment isthat there is sometimes a need for secrecy. This can arisein a number of ways. For example the owner of abusiness considering selling to the employees, may wantto explore the idea in some detail before he or she puts itto them. Another situation is where a trade union isnegotiating a redundancy package and its position wouldbe weakened if the owners discovered that a phoenixbusiness was being planned. This not only means keeping

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Drive, determination and communication

The buyout of Shilbottle Village Shop came aboutthrough the drive and determination of the membersand being good communicators, making others feelinvolved and included so a momentum was kept up.They now have a functioning and refurbished shop.Members enjoy a sense of ownership and say in whathappens and the shop has enabled many people tomake new contacts and nurture a sense of community(see case study, page 47).

the plans from the owners, but from the workforce as well– it would be naïve to imagine that in a large workforcesuch information would not find its way to the wrongears.

Even after the plans are openly presented to theworkforce, there may be a number of aspects of the workof the buyout team that may have to be kept secret –commercially sensitive information, for instance, or plansaffecting individual employees. Particularly in largebuyouts, advisers will encounter a very different worldfrom the small new start businesses they are probablymore used to. When there is a lot of money at stakehuman behaviour is often disappointing.

The adviser must think through the sensitivity andconsequences of each decision, balancing theseconsiderations against the need to involve everybody asmuch as possible, and to always exercise caution asregards how open the succession process is, particularly inits early stages.

The pensions minefield

The transfer of pension arrangements can become anextremely complex and difficult aspect of the buyoutprocess.

There are often special difficulties attached to buyouts offormer municipal services, because local authoritysuperannuation schemes have particularly generous terms,and also special tax concessions for some investments.This makes it difficult for employees to maintain the samestandard of pension arrangement. Similar problems,though perhaps to a lesser extent, might arise in anybuyout of part of a larger organisation with its ownpension scheme, or indeed where any major restructuringof the workforce is necessary.

This whole question is closely involved with commitment,especially if the demography of the workforce is adverse.If the buyout could involve some loss of pension rights,for instance, this is likely to loom large in the eyes ofemployees nearing retirement.

If the existing business has a pension scheme, therefore,and particularly if it has a mature or ageing workforce, theadviser must discover the main terms of the scheme andbegin work on how it is to continue, or how its value canbe transferred to another scheme, at an early stage. Atrustee of the company scheme will be able to providesome of the answers, and of course people trying to sellalternative schemes will always be willing to 'help', but inall probability some independent advice will be required.



Questions on community commitment

Who currently owns the business? What are theirplans?

What alternatives have been explored to date – tradesale, family succession – and with what success?

If the service were to disappear what alternativearrangements would the community make (ie howdifficult would it be for them to secure a similarservice and what would the impacts be for certaingroups in the community)?

Is there sufficient community interest in the idea of acommunity succession/buyout?

Is there a core group of residents who are willing toform a steering/working group together withprofessionals (adviser, etc)?

Questions on management/employeecommitment

Who currently owns the business? What are theirplans?

Is the current management sympathetic to the idea ofa democratic succession?

Does it have any alternatives?

Are any other key people likely to oppose asuccession?

Is the business unionised? Which trade unions areinvolved? Is the workforce organised or unified in anyother ways?

Will the workforce welcome a succession plan? Whatalternatives does it have? Could it easily find workelsewhere? Will it make a financial contribution?

Is there a pension scheme? What is the age profile ofthe workforce?

What are the natural divisions in the workforce (egshops, departments or shifts, trade unions or skillareas, white or blue collar)?

Is it necessary to keep the succession plans secret forthe time being?

ASSESSING THE EASE OF LEGALTRANSFERThe adviser must determine the the legal/financialstructure of the existing business and consider how easyor difficult it will be to transfer ownership.

All business structures can be divided into two categories:

• Unincorporated - including sole traders, partnershipsand most trusts and charities

• Incorporated - including industrial and providentsocieties, guarantee companies, public limitedcompanies and private share companies.

This section looks at the main technical charateristics ofthe most common business structures and at the mainissues for succession. Legal structures for successions arediscussed in more detail on page xx

Unincorporated businesses

All of these will normally require incorporation as part ofthe succession process (although not necessarily – itmight be better for tax or redundancy reasons to convertto a 'collective partnership', at least as a transitionalarrangement). This, and the fact that unincorporatedbusinesses are likely to be relatively small, means that inmany cases 'model rules', such as those drawn up byCo-operativesUK, are easily used. The main constraint isthe need to transfer the business assets to the newdemocratic business and more particularly the means ofpayment, if any, to the old individual owners for thistransfer.

The basic characteristic of unincorporated businesses isthat they are not separate entities from their owner-managers: as regards tax, contracts and any other legal orformal purposes the owner-managers act and are treatedas individuals and of course have unlimited liability for theobligations of their business. The personal circumstancesof the old owners, especially with regard to tax, aretherefore likely to be of some importance.

Sole traders

A sole trader is an individual in business 'on his/her own'.It does not mean a one-person business - many soletraders employ significant numbers of people.

Partnerships

Any group of between two to twenty people who trade'with a view to profit' in such a way that they share therisks and profits (ie are not employees) will be considereda partnership whether or not they have a partnership

agreement. If they do not have their own agreement,their relationship will be governed by the Partnership Act1890, which provides a basic standard agreement.

Bridging the gap to some extent between theunincorporated businesses and one of the main featuresand advantages of the incorporated business, namelylimited liability, is the relatively new concept of limitedliability partnerships. It has always been possible for'sleeping partners' to limit their liability to the capitalthey have invested, but the limited liability partnershipextends this to potentially all partners – even thoseactively engaged in the partnership business.

Trusts and charities

A trust is a body established by some kind of trust deed,usually to administer funds on behalf of a group of peopleor for some more widely benevolent purpose. A trust canbe incorporated as a guarantee company, which is thenknown as a 'trust company', but often still referred tosimply as a trust.

A charity is an organisation, usually a trust, but nowadaysincreasingly also a guarantee company, recognised by theCharity Commissioners (known as a 'registered charity') orgranted charitable status by the Inland Revenue (anexempt charity). In England and Wales only ‘societies forthe benefit of the community’ can gain exempt charitystatus.

Again, trusts and charities are not really businesses,although they can trade to some extent. Advisers aremost likely to meet trusts and charities either asvoluntary bodies wishing to incorporate as some kind ofcommunity co-operative, or as additional aspects of aconverted business, such as a profit-sharing trust tofacilitate the tax-efficient transfer of shares to employees.

Incorporated businesses

Industrial and provident societies

Industrial and provident societies (IPS) are eitherco-operatives or 'societies for the benefit of thecommunity'. Until the mid-1980s, when co-operativecompany structures were first developed, all co-operativeswere registered as IPSs. Advisers may encounter IPSs assubjects for succession, or they may consider setting upan IPS to purchase the assets of the existing business.

Guarantee companies

Many advisers will be most familiar with this form ofcompany and from a technical point of view it is usuallyeasy to convert. The members of a guarantee company

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have each guaranteed to pay an amount to the companyin the event of it not being able to meet its debts.Normally, the guarantees are limited to a nominalamount, often £1. Succession can take place simply bychanging the Memorandum and Articles of the company,although in some cases, for instance if the company is infinancial difficulty, the transfer of its assets and activitiesto a new company or partnership might be preferable. Inthis case, the succession process will also probably involvewinding up the old company. Conversion from aguarantee company to a society is possible, andsuccession to a new society or a share company is also away forward.

Public limited companies (PLC)

In general, because of the size and nature of their sharecapital, the succession of a PLC into a genuinelydemocratic business is extremely difficult and even asuccessful asset purchase is unlikely. Advisers are onlylikely to come across PLCs as vendors of a subsidiary oraspect of their business, where the buyout process will beas below.

Private share companies

These are by far the most common form of company andvery likely to account for most of the successions onwhich advisers work. Each member of the company hasat least one share (there are frequently only two or threemembers in small companies and often they are husbandand wife or other relatives). Whatever the members havepaid or agreed to pay for their share or shares is the limitof what they are liable to pay if the company cannot payits debts.

Succession can be by changes to the Memorandum andArticles, but this will not be as straightforward as withguarantee companies, because shares will also have to betransferred. As shares are commonly traded incircumstances where there is a great deal to be gainedand lost, there are comprehensive rules governing theirtransfer. In general, it is first necessary to arrange theshare transfer, and then the new shareholders can changethe Memorandum and Articles of Association. Successioncould also be to a new society or a guarantee company.Again, in most circumstances it will be preferable totransfer the assets and activities to a new democraticbusiness structure.

PRELIMINARY ASSESSMENT OFFEASIBILITY

Forming a preliminary view

Assessment is, of course, an ongoing part of thesuccession process: at the initial exploratory meeting theadviser will have formed only a preliminary view of thefeasibility of the proposal and begun to gatherinformation for the next stage.

It will have become clear by now that successionsituations are resource intensive, and although it might begalling to turn away a proposed succession when there isany chance of success, a hard-headed view of thelikelihood, rather than the possibility, of success issometimes necessary.

In the light of this, some general comments are justifiedas to certain characteristics of businesses that usuallyease succession. These comments are also intended toassist in the identification of certain trade sectors or typesof business that might form the best targets forpromotion.

• While it is important not to jump to any conclusionsabout commercial viability, succession is certainlylikely to be easier if the business at the centre of thesuccession process is profitable and independent.

• It is sometimes necessary to look more critically atthe question Are there any troops? It is not onlynecessary to have the support of a sufficientproportion of the workforce and of key individuals,but it is probably also necessary for there to be theright kind of balance between the number ofemployees – or at least the number of people willingto invest – and the likely costs of a buyout. Forexample, if the business is very high-tech andemploys only a few people but has massive capitalinvestment, it will prove very difficult to raisesufficient funds. The basic rule here is:

Capital intensive = difficult to convert

Labour intensive = easier to convert

• In a community buyout, it may also be necessary toseek finance from members of the communityparticularly if a capital asset is to be purchased. Thisenables the community succession to test the‘commitment’ water and allows access toperformance related (rather than fixed interest)capital in which the providers of capital only receive adividend if the community buyout is profitable.



• For community buyouts in particular there is a rangeof grants which should be explored both for thefeasibility study and for start-up finance. These canhelp to alleviate the finance to be raised and theinterest costs to be born by the new business in theearly years. This is discussed further in Raising Finance(page 23).

• The 'natural' cash flow of the type of business mightbe crucial, the general rule being the higher the cashflow the easier the buyout. Conversely, businesssectors that have low cash-flow, particularly if theyare also capital intensive (say, property development)will prove very difficult to convert. Again, this will befurther explored under Raising Finance (page 17).

• In a large buyout the process will be considerablyeased if the workforce is already organised, forinstance if there is a strong (and sympathetic) tradeunion organisation and tradition of solidarity in thebusiness, and especially if the workforce leaders arewidely trusted and respected and can act with realauthority. Almost all successful large buyouts haveshared this characteristic. This may also be importantwhere political influence is crucial.

• It is not only the relative size and organisation of theworkforce that is important, but also its demography.Maturity is probably an essential requirement but onthe other hand if most of the employees, or keyemployees, are nearing retirement age, and especiallyif there is a good existing pension scheme, they maywell prefer the option of early retirement.

Contents of the feasibility report

In most cases an adviser should prepare a preliminaryfeasibility report before completing the work involved inestimating the buyout costs.

In almost all cases the work of contacting advisers andother consultants, interviewing them to establish whatthey can offer, perhaps some further discussions andfinally obtaining a written estimate, will take place atsubsequent stages and should involve the whole buyoutteam. Nevertheless, an attempt should be made to givesome idea of the likely costs in the initial feasibility report– or at least to sound a note of caution in the report if itis clear that there will be substantial costs.

The feasibility report contents are as follows:

• Introduction and summary

• Brief history of the business

• The market and competitors

• Personnel

• Production

• SWOT analysis (Strengths, Weaknesses, Opportunities,Threats)

• Financial projections

• Proposed succession procedure and preliminaryestimate of succession timetable and costs

This is not a business plan. It is merely a presentation ofthe adviser's views, at this stage, of these areas, withparticular reference as to how they affect the overallviability of a succession or buyout. In some areas – forinstance the financial projections – only preliminaryestimates will be possible at this stage. Nevertheless, thefeasibility report is a kind of working draft business planand should provide a firm basis for the detailed planningwork to come.

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Community commitment

The 58 original members of the communityco-operative Hesket Newmarket Brewery each invested£1,500 as shares to raise the capital to buy the business(see case study, page 45).

Summary

These business characteristics make buyouts easier:

• profitability

• independence

• labour rather than capital intensive

• positive cash-flow

• organised workforce

• favourable demography

One of the most important developments in successionsand buyouts over recent years has been thedemonstration that employee buyouts can put togethervery large financial packages. This is the first lesson onraising finance: don't be put off by the amount involved –almost anything is now possible.

Having made this claim it must equally be noted that thedeals which were highly leveraged did not always prove tobe sustainable. Just as many management buyouts havehad a tendency to ‘sell on’ after a few years so that thepurchasers can realise their investment and capital gain,the same temptation has befallen some employeebuyouts.

Banking policies and financial fashions do change and thismust be borne in mind when reading this section. There isa range of financial mechanisms that have been used tofinance community and employee successions, and whileit is certainly the case that commercial techniques havebeen used to finance succession situations, the raising ofworking capital remains a key issue.

THE BUSINESS PLANIn business start-ups, first the business plan is finalised,then it is implemented. Many advisers will try to insist onthis strict order of things in succession and buyoutsituations, but they are unlikely to experience such luxury.What takes place instead is an altogether muddierprocess, which addresses the most urgent questions first,produces a series of approximations, bluffs its way onthese for a bit, gradually clarifies the best options, takeson provisional forms, confidently presents these to banks,reconsiders the options, and is only really finalised the daybefore the papers are signed.

What finally emerges will be a fairly conventional businessplan. The preparation of such plans is at the heart ofmost advisers' jobs and there is no need to further discussthe business plan content here.

There is, however, one crucial area of difference betweenthe adviser's responsibility in planning a new start andplanning a succession or buyout. This is not a technicaldifference but one of judgement.

New businesses are generally started by people who havechosen quite freely to take that route and those risks. Ina succession situation the employees or members of thecommunity are not in quite the same position. If they arenot actually members of the buyout team, they may haveonly a partial understanding of what the successionentails, how the business will develop and how it will bemanaged. Any decision to invest in the business willprobably be based on considerations such as loyalty, fearof unemployment, trust in their representatives, and incommunity buyouts on the need for the service, ratherthan on any objective assessment of the business's future.

Of course, advisers must make every effort to fully informand involve the whole workforce/community, as alreadydiscussed, but they are kidding themselves if they thinkthey can completely overcome the barriers to this. Theytherefore have a particular responsibility to act in theinterests of the whole workforce/community, particularlyif they are all investing some of their own money. Thequestions they need to ask are the same as with anybusiness:

• Will this really work?

• Does it feel quite right?

However, in succession situations there is a greaterresponsibility to make this judgement and stand by it veryforcefully, whereas with a new business it is perhaps moreacceptable to express concern but leave the final decisionon viability mainly to the group, or to suggest a middlecourse (such as trial trading), which will probably simplynot be available in a succession situation. This is again thethorny issue of the leadership role, rather than theadvisory or facilitation role, that is demanded bysuccession situations and buyouts.

The bank should be looked on as the adviser's ally instanding by their judgement of the business plan. Theneed to present a reasonably finished business plan to thebank (before finance is agreed) provides a very usefuldeadline, and the objective, even sceptical appraisal ofviability by the bank should give the adviser much moreconfidence in making his or her own objective judgement.


Raising Finance

Big money

UBH International raised over £2million leveraged fromemployees’ contributions of £450,000 (90 @ £5,000)and without the need to dilute the manager/employeeequity (see case study, page 49).

WHAT BANKS ARE LOOKING FORAdvisers are already aware of the policies and prejudicesof banks and the general guidelines for approaching them,but factors that are specific to successions and buyoutsneed to be outlined.

However, a further distinction must immediately bedrawn: that between broadly benevolent or plannedsuccessions on the one hand and rescues on the other.The former may attract the prejudice: if it works, don't fixit. Rescues, on the other hand, might attract the oppositeview: if it has failed once, don't fund it. The easy logic ofthese slogans is deceptive: they are prejudices because thenew business plan might, in either case, be a basis forimproved performance in the particular business inquestion. Such prejudices cannot be dismissed: they mustbe challenged precisely by the strength and credibility ofthe business plan and especially by those who are toimplement it.

The people banks are looking for

It is the people involved that constitute the mostimportant factor influencing banks. Furthermore, bankswant to see the managers free to manage, without day-to-day shop-floor interference. In large businesses(particularly those just entering into democraticownership and which are therefore still discovering whatdemocratic management really is) specialist managers areabsolutely essential. The necessary depth of skill inbusiness administration may not be found in otheremployees – at least in the early trading period. Suchmanagers must have the freedom to take decisionswithout constantly referring them to various committeesor meetings, and more importantly without fear ofsummary action being taken against them by an angrymeeting.

Underlying this point is the general need for appropriateand effective arrangements for democratic participation.These must make the managers both answerable to the

workforce, perhaps after a transition period, and at thesame time free from petty interference, and free to makeunpopular decisions if necessary. The arrangements mustfacilitate both consensual, open management and strongdynamic management. A system of checks and balancesis required that will work to stabilise the management –this is one reason why Employee Share Ownership Plansare generally easier to fund than simple co-operatives. Afurther aspect of this problem is that banks will have theexpectation that the business's managers will befinancially tied in to its performance, because they arerisking their own money and, moreover, because theystand to gain a great deal if the business is successful. Allof these issues are discussed further below – the mainpoint here is to note what banks will broadly be lookingfor.

In general, banks will also want to see some continuity ofmanagement, to give them confidence that somebodywho knows the ins and outs of the business is in aninfluential position. If the business has experienced somedifficulties, they will look for changes to strengthen themanagement team in crucial areas.

The adviser must be aware that if none of the oldmanagers can be involved in the buyout any borrowing islikely to be extremely difficult. The only possibility in thiscase is to find a new management team with some kindof track record. This can be done in three ways (or acombination of them):

1 Recruit a new team, or at least a team leader, fromanother similar business.

This might be attempted either by personal contactsor by advertising. However, it will not be easy, mainlybecause the position will be speculative: thecandidate will have to put a great deal of time andenergy into leading the buyout, but also accept thatshould the buyout attempt prove unsuccessful therewill be no job. Nevertheless, there may be suitablesympathetic candidates, such as recently retired orunemployed managers, who would be happy to getinvolved speculatively, perhaps for a limited periodwhile new management from within the existingworkforce is trained.

2 Recruit a new team from the existing workforce.

This is an even longer shot because by virtue of thesituation itself the candidates are unlikely to have thenecessary track record. What might just work is tofind people with the right aptitude and someexperience who are willing to start thorough trainingwhile strengthening the team, and reassuring the bank

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Raising Finance

Finding understanding funders

Brian and Dave who bought Ashington Autospares fromthe retiring owner found it hard to find advisers andbanks who understood what they were trying to do.Eventually, after much frustration, the Royal Bank ofScotland provided a mortgage to buy the building, andfurther help came from the local district council andIndustrial Common Ownership Finance (ICOF) whichprovided a loan (see case study, page 59).

in the meantime by employing experienced non-executive directors to oversee the management.

3 Enter into an arrangement with the managementteam of a similar democratic business.

This has been possible in the bus industry, forinstance, and was explored by Leicester CityBus andChesterfield Transport. It was agreed that ownershipof CityBus should be shared 25-30% to Chesterfield'sEmployee Benefit Trust, 25-30% to Leicester'semployees directly and 40-50% to Leicester'sEmployee Benefit Trust. The arrangement did notcome to fruition (or hasn't yet) but it was acceptableto the banks. However the obvious difficulty here isthe scarcity of large democratic businesses and theirgeographic distribution.

Borrowing for rescues is of course particularly difficult,and big rescue buyout attempts find it difficult to achievereally substantial borrowing (phoenixes are only a littleless difficult). The first essential is of course a very strongsuccession strategy. Banks will be looking for a verysubstantial restructuring, and in all possibility acontraction, not only of the management but also of thebasic business activity.

The figures banks are looking for

Apart from the people and any continuity arrangements inthe business plan, banks will naturally tend to focus on itsfinancial aspects. There are few hard and fast rules:precisely because banks see themselves as lending topeople, rather than to plans, and the right approach cancount for a lot. On the other hand, individual bankmanagers now tend to have very little autonomy so forany substantial lending the following rules of thumb areuseful.

Gearing

Many figures are bandied about as to what 'gearing'(debt/equity ratio) banks will accept. Since most newstarts, and many mature co-ops, continue to borrow whenthey are 'infinitely geared' (ie they have no equity, whichin guarantee company structures can only be in the formof retained profits anyway) all such figures should betaken with a pinch of salt. It is certainly true, however,that banks prefer a 1/1 (or £ for £) ratio. They will usuallyaccept a 2/1 or even a 3/1 ratio, but above this they willcertainly start to look very critically at the business plan,and make demands for further safeguards with regard tothe management structure, security, and so on. Largergearing ratios are possible but they will almost certainlyonly accept such figures if the financial projections show

very clearly the reduction of the gearing within a shortperiod (by quick repayments, fast capital growth, largeretained profits, further finance, etc).

Interest cover

This is another, perhaps less familiar ratio: net profit(before interest and tax)/interest. It assesses thebusiness's ability to repay its loan commitments. This isoften expressed as a percentage, ie:

net profit + interest + tax x 100interest

Banks will be looking for at least twice as much profit asinterest, a ratio of 2/1 or interest cover of 200%.

Cash flow cover

Similarly, banks will want to see cash surpluses of at leasttwice the level of total interest and loan repayments.

Sensitivity analysis

The above requirements are really aspects of the'sensitivity' issue. Banks want to see plenty of room forerror in the projections, so that if profits or cash flow arenot as high as expected, interest and loan repayments canstill be made. They will certainly carry out other 'what if'calculations: what if sales go down by 5%? inflation goesup by 2%? the cost of such-and-such turns out to be 10%higher? Careful business planners will, of course, alreadyhave explored all the likely scenarios. The most sensitiveassumptions are usually the following:

• Selling prices and quantities

• Stock levels (or stock turn)

• Overheads

• Debtor and creditor periods (ie the average time ittakes to collect or pay bills)

• Wage costs (staff numbers)

• Interest rates.

Note that figures such as stock turn and debtor andcreditor periods are often analysed by means of financialratios. The debtor period, for example, is calculated asfollows to give the average in days:

debtors x 365annual sales invoiced

Stock turn is expressed more simply as the number oftimes the stock is turned over in a year, thus:

annual cost of salesaverage stock


Raising Finance

The relative importance of different ratios changes withdifferent types of business. Debtors will be mostimportant in areas like services and construction, stockturn in distribution and retailing, and so on.

Although great store may be placed on the comparison ofratios the adviser must remain aware that they only reallyshow past trends and cannot predict future performance.Where there is a great deal of competition betweensimilar organisations trading in the same or similarbusiness of the succession project the ratios can alsoindicate market position. Nevertheless comparison ofratios is a process which most lending institutions will useas part of the decision making process.

Security demanded by banks

Security is the most difficult area for democraticbusinesses – but unfortunately for many banks it stillseems to be the be-all and end-all of borrowing. Thisreinforces the point made earlier that banks usually preferto lend on assets rather than against cashflow, and this isalmost always the ‘gap’ which is the most difficult to fill.Equal (or near equal) amounts of equity from theemployees or community members may help to ensurethat the business manages to lever in the finance itrequires. There is always a danger thatmanagers/employees/community members will be askedto guarantee overdraft, leasing or other finance.Guarantees are discussed in more detail below.

Equity

Gearing is one aspect of this – it is of such interest tobanks for three main reasons:

• Equity is higher risk than bank debt (ie it is lowerdown the 'pecking order' for repayment in aliquidation), so the more of it there is, the less thebank's money is at risk;

• Dividends on equity can only be paid out of profits,but debt interest is fixed and must be paid whatever –so the larger the equity the greater the business'sflexibility in meeting its finance costs, especially indifficult times;

• The cost of equity is less subject to unforeseeneconomic changes (like rises in interest rates).

Employee or community members’ equity will not alwaysbe required but there is a reasonable probability that itwill. This is not only to do with raising the finance butalso to do with commitment and with the stability ofmembership, for instance, which is outside the scope ofthis guide. Advisers will need to consider very seriously

the necessity for employee or community investment ifsubstantial finance is required.

Even if the employees and/or others are to buy shares,and the gearing is quite low, the bank will probably requireadditional security. This takes two main forms: personal(or third party) guarantees and legal charges.

Guarantees

Some lenders have adopted a policy of not asking forpersonal guarantees on the grounds that the additionalstress they tend to produce in managers is counter-productive. Such a sensible approach is rarelyencountered in high-street banks: but might be a usefulpiece of information in the adviser’s negotiations withthem!

If possible, personal guarantees should be individuallimited guarantees, rather than joint and several. In theformer arrangement each individual guarantees a specificsum, whereas in the latter they each guarantee it all(which means that the bank will be able to pursue theindividual they regard as most likely to repay the wholeamount). If only joint and several guarantees areaccepted, it is essential that joint indemnities are alsosigned amongst the guarantors themselves. This is aformal agreement that they will all share any paymentunder the guarantees equally between them.

Sometimes local authorities or specialist regional/nationalloan fund can be used to provide third party guarantees,usually as part of a larger package. Some local authoritiesseem to quite like the idea of guarantees. The advisershould find out the attitude of relevant local authorities.

In large buyouts, guarantees become much less relevant –mainly because the amounts involved are completely outof proportion to any personal or indeed (available) localauthority resources. In such cases the legal charge andthe 'asset backing' become proportionately moreimportant.

Legal charges

Legal charges can be either fixed or floating.

• Fixed charges are charges over specific assets – justlike a mortgage – and give the bank some of therights of ownership over that asset: for instance thebusiness cannot sell it without the bank's permission,but if the business defaults on its loan the bank cansell the asset to recover its money.

• Floating charges are over the assets in general ratherthan any specific asset, and give no such rights unlessthey are ‘crystallised’ by certain events, such as the

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Raising Finance

business falling behind on its loan repayments orgoing into liquidation. Even in these circumstances,however, a floating charge is not as secure as a fixedcharge because it is lower down the ‘pecking order’for payment in a liquidation. A fixed charge entitlesthe bank to be paid first, whereas a loan secured by afloating charge will be paid before ordinary creditorsbut only after preferential creditors (which includeemployees and government departments). Whatbanks will be looking for here, of course, is that therealisable asset values (which will be lower than the‘going concern' or 'book' values) are larger than theirloan, usually by at least 30%.

The adviser should remember that one of the advantagesof a company limited by shares is that a bank or otherlender can take additional security over the sharesthemselves. This is less likely were there a substantialnumber of individual members, particularly in communitysuccessions. This factor can greatly influence the form oflegal structure to be used in a succession wheresubstantial capital needs to be raised.

How to approach banks

More than one bank should be approached, and otherlenders should not be ignored. On the other hand, it isprobably a mistake to 'do the rounds’ – if two or threelenders prove unenthusiastic, the adviser shouldre-examine the approach. Also, bear in mind that lendersdo talk to each other – an unusual proposal mightbecome the subject of discussion which will prevent alender seeing it with fresh eyes.

One technique some advisers swear by is to make thefirst approach to the bank's head office – the theory beingthat if a proposal is passed down to a branch from headoffice it will automatically receive respect. However, thisadvice tends to come from advisers in places like Glasgowand London, where an initial approach to a head officewhich happens to be in the same city as the branch thateventually appraises the loan looks like less like anattempt to 'play the system'.

What banks want to see in employmentcontracts

Needless to say, the adviser should make sure that newemployment contracts are designed to reflect democraticpractice and a concern with equal opportunities, and areissued to all employees. These can be based substantiallyon the existing model employment contracts in theco-operative movement, such as those prepared byCo-operativesUK. All employees' service is continuousunless this has been surrendered to obtain redundancypayments. Service conditions cannot be worsenedwithout the specific consent of each individual employee,or they would be entitled to resign and claim'constructive dismissal' which is likely to be unfair and,because their service is also automatically continuous,means that the new democratic business will have to paythem compensation if they were employed in the oldbusiness for over 12 months. Where the Transfer ofUndertaking (Protection of Employment) Regulationsapply, as they will in most if not all successions, it maynot even be possible for employees to consent to changeswhere they arise in connection with, or relate to, the'transfer'.

However, there is one area in which it may be necessaryfor service contracts to depart substantially from normalco-operative practice. This arises because banks, and in allprobability the managers themselves, will want specialprovisions built into managers' contracts. These provisionsfall into two areas: performance related pay andprotection from summary action by the workforce.

Performance related pay

In most management buyouts the shares are held in fairlysubstantial chunks by the managers only. These shareswill only increase in value if the business performs well,and conversely if the business performs badly themanagers will lose their investment. In most cases theywill have borrowed the money they used to invest in theshares, and therefore risk losing the house, or whateverthey used to secure their personal loans. It is thissubstantial personal financial commitment by the verypeople that will be running the business that makesconventional management buyouts relatively easy tofinance. This is not because their investment is a big partof the total funding requirement – it probably isn't – norbecause they have made any real sacrifice – in most casesthey receive immediate pay rises to cover their loanpayments – but simply because, with a full knowledge ofthe business, they have been willing to take the risk, andstand to make a great deal of money if they succeed.Banks love the idea that somebody else who really knows


Raising Finance

Share company credibility

Cwmni Gwynt Teg Cyf needed to raise £1.5million todevelop a wind farm. Although a community projectthe members decided to set up a company limited byshares because that structure was more familiar to theirpotential funders. (see case study, page 43).

the business is willing to take a greater risk, and is furtherlocked in by the scale of the incentive to succeed.

An adviser is therefore likely to encounter a strongexpectation that the democratic buyout will place similardemands and rewards on managers. This expectationshould perhaps be resisted, but it can also be negotiatedin various ways. In all but the smallest buyouts there arebound to be wage differentials, and it may be politic tointroduce an element of performance related pay whichto some extent shadows what managers would havereceived from the capital growth of a share investmenthad there been a management buyout. There are anumber of established mechanisms for achieving thiswhich have been incorporated into service contracts.

Much more controversial is the option of actually allowingmanagement a larger shareholding than other employees.This may call into question the whole purpose anddefinition of 'democratic business'. It is worth saying thatthe workforce's feeling of involvement in the business willbe much more seriously affected by the managementhaving a different basic 'stake' than by managementreceiving higher pay. It is also doubtful whether managersthemselves would want a bigger stake unless they couldachieve a controlling interest. The only circumstance inwhich this could be entertained is as a transitionalarrangement in a last ditch attempt to save some kind ofbuyout. However, any such arrangement will be unsafe,because however carefully the Articles of Associationprovide for the return of the shares to general employeeownership when the particular managers involved leave(and changes to the Articles can be blocked by a 26%non-management employee shareholding) theperformance of the business could easily be manipulatedby unscrupulous managers either in their short-terminterest or in order to make the further dilution ofdemocratic shareholding unavoidable.

Protection from summary action

Provisions protecting management from summary actionby the workforce can be built into the democraticbusiness' Articles of Association and its secondary rulesand practices. The issue should first of all be discussedwith as many of the workforce as possible – and in anycase the whole workforce should be fully informed – sothat everyone understands that the management mustfeel free to make unpopular decisions if they canultimately show that they are acting in the business's real– perhaps long-term – interests.

In addition, it may well be necessary and appropriate toincorporate such protection into the managers' individualcontracts, along with provisions securing their services for

a minimum period, so that the banks are satisfied not onlyas to the general stability and responsibility of themanagement, but that the individual managers they havemet across the table will be able to complete the plansthey have put forward. This could mean that if themanagers do leave within the specified period (normally2–3 years) they might be sued for breach of theircontracts, but conversely the business will risk penalties ifit dismisses them in this period. Again, appropriateprovisions have been incorporated into contracts for anumber of previous buyouts.

Key person insurance

One last matter relating to individuals' terms andconditions. The bank might well ask for 'key personinsurance'. This means they require the business to takeout life insurance policies – and meet the premium costs– which will repay the bank borrowing if the businesssuffers as a result of a key individual (man or woman)becoming unable to work.

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Raising Finance

SOURCES OF FINANCESuccession situations are financed through grant, debt,equity and usually a mix of all three. The legal structureof the new entity will dictate the type and source (to alarge degree) of the finance it is able to attract.

Grants

Grant finance is ideal because it is non-repayable. It isdifficult to give general advice because most grant sourcesare local and often dependent on the changing status of alocal area. Most local authorities have some kind ofbusiness grant support arrangements, but the maximumgrants tend to be very small. If the buyout is a rescue ofa significant employer in the area, a special one-offapproach – outside any standard business grantprocedures – should always be made to the localeconomic development or regeneration department,which could take on the responsibility of co-ordinating anassistance package involving the local Business Link,Learning and Skills Council, County/District Councils andso on.

Debt

Leasing

Leasing can quite easily form a major part of the financialpackage, and should certainly always be considered.Leasing and/or hire purchase are financial facilities whichallow a business to use an asset over a fixed period inreturn for regular payments. The finance company buysthe asset(s) on behalf of the business and rents or leasesit back to the business. In the case of hire purchase, afterall the payments have been made, the business becomesthe owner of the asset(s) (and is therefore able to claimcapital allowances) either automatically or on payment ofan option to purchase fee. The fundamental characteristicof a lease (finance or operating) is that the asset(s) neverpasses into ownership of the business.

The only disadvantages with leasing are the high costsand the potential requirement for guarantors. However itcan make the difference between a buyout proceedingand failing, particularly if a leasing company can be foundwhich is willing to ‘sweat’ the assets (ie advance a highpercentage of the assets to the new business).

One further possibility that should not be overlooked,especially where the owner wants to sell to the workforceor community, and in divestment or some rescuesituations, is that of leasing the equipment from theformer owner, or paying part of the price in instalments.It is possible for the adviser to be very creative in putting

together the financial package essential for the successfulsuccession.

Factoring

The term ‘factoring’ is used to describe a whole series ofdifferent arrangements, ranging from fairly straightforwardborrowing using individual debts as security through tofull invoicing and debt-collection services. Such anarrangement might be a significant source of finance for aservice business, most of whose assets might be in theform of large debtors. Factors or invoice discountersprovide businesses with debtor finance secured againstunpaid invoices. A factor will buy the trade debt (invoice)and typically pay between 65% and 85% of the value ofthe invoice as soon as it receives a valid copy. Thebusiness is usually charged a fixed arrangement feetogether with interest on the outstanding balance. Thiscan make the cost of factor finance quite high. Thebalance minus charges will be paid to the business oncollection by the factor. A factor collects the debt fromthe customer directly whereas the responsibility forcollection of debts which are invoice discounted lies withthe business and the service is normally undisclosed tocustomers.

Overdrafts

Overdrafts are usually an appropriate way of financingshort term working capital requirements. Although theyare a relatively simple and useful mechanism (interest isonly payable on the outstanding amount) they are arelatively expensive form of finance and are usuallyrepayable on demand. In addition, the bank will almostcertainly require some form of security.

Term loans

A term loan may be used to fund a business purchase,fixed asset and/or core borrowing. The level of interest ofa term loan is usually fixed for the term of the loan orlinked to the base rate. Loan terms can be tailored to suitthe life of the asset or to match the cash flow of theproject to be financed. The Small Business Service (SBS)Small Firms Loan Guarantee Scheme guarantees loansfrom banks and other financial institutions. Loans arepotentially available for periods between 2 and 10 yearson sums from £5,000 to £100,000 (£250,000 if a businesshas been trading for more than 2 years). If accepted, theSBS guarantees 70% of the loan (85% if trading for morethan 2 years) for businesses with a turnover of up to£1.5m (£5m for a manufacturer) in return for an interestrate premium.

Advisers should also be aware of national loan funds for


Raising Finance

co-operative or other 'social' investment, such as ICOF,the Co-operative Bank and Triodos Bank, and indeed anylocal funds (see pages 62 and 63 for details).

Equity

Except in the smallest buyouts, such as service businesseswithout any substantial fixed assets, there is almostalways the opportunity for some private investment bythe members of the new democratic structure – mostlikely the employees. Even if this investment can only bemodest, and makes no significant contribution to the totalfinance requirement, it does at least 'show willing' andwill give some comfort to other lenders. The possiblearrangements for such investment fall outside this guide.

It is obviously important to discuss the level of employeeinvestment at an early stage. This will be a negotiationaround:

• What each employee can afford

• What the total financial requirement is.

Most buyouts seem to be able to achieve investmentfrom the employees. They may need personal loans froma bank to make this investment, and banks are normallyvery receptive to this business. If there is a reasonablenumber of such loan requirements the adviser shouldapproach a number of banks to negotiate a special deal.The adviser will be looking for:

• A lower interest rate than on standard personal loans

• No security (make it clear that the business is notguaranteeing the loans)

• Not subject to status, other than the individual beingan employee of the business.

All of these have been achieved in similar arrangements inthe past. The succession process is offering the bank anopportunity for new business, and the adviser may evenbe in a position to make their life easier by establishingpayroll deduction of repayments. Advisers shouldtherefore drive a hard bargain. Banks will be mostreluctant to say that the loans will not be 'subject tostatus', but the bank manager might nevertheless indicatethat no-one will in fact be refused.

In most democratic buyouts the investment has been keptthe same for each employee, and this is probably a goodpolicy. A fall-back position is to allow differentialinvestment but within limits, and only in forms that donot affect voting rights.

A saving scheme should be set up at the earliestopportunity to help the employees to make theirinvestment in due course. The additional importance ofthis arrangement in testing workforce commitment, andin enabling them to feel involved, has already beenemphasised. For small workforces the simplestarrangement will be best: the buyout team appoints atreasurer who opens a building society account, eachemployee simply hands the treasurer a regular weeklyamount, which is paid into the account as a lump sum togain better interest (although this will have to be paid netof tax). The interest can be used as agreed: to meet smallincidental expenses of the buyout, or credited to eachsaver, or a mixture of these. Think this through, however:if the decision is taken to allow employees to save atdifferent rates, or withdraw money, the treasurer's interestcalculations might become very complicated. With largerworkforces more sophisticated arrangements will in anycase be needed – for instance it may well be possible todeduct contributions direct from wages – and the advisershould talk this through in some detail with the bank orbuilding society: they should be able to advise on the bestpossible arrangements.

For community buyouts there is a significant cost savingin opting for an industrial and provident society shareissue rather than going through a company. This isbecause the share issue does not fall under the provisionsof the Finance Act 1986 (as long as the shares are nottransferable, ie there is no market for the shares). There isno requirement therefore to issue a prospectus approvedby an authorised investment adviser.

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Raising Finance

Banks can be co-operative

In the case of UBH International, personal loan advisersfrom the Co-operative Bank were on hand to supportthe 90 employees and a freephone number wasestablished (see case study, page 49).

IPS share issues

Because Hesket Newmarket Brewery is a co-operativesociety with non-transferable shares the provisions ofthe Finance Act did not apply and it saved money onprofessional fees for its share issue (see case study, page45).

DUE DILIGENCE‘Due diligence’ is the term used (often by financiers andlawyers) to describe the process which is gone through inorder to ensure that the purchasers and thefunders/financiers are sure of what it is that they arebuying – that the business is sound, free from anyliabilities, encumbrances and that there do not exist anyserious risks ahead (at least in the near future) or at leastif they do exist they are aware of them and can factorthem into their consideration. In the case of a smallbuyout due diligence will be carried out by the businessadviser together with other specialists – it may not be anonerous process. In the case of a larger buyout and/orexternalisation due diligence will almost certainly besubstantial and will be a requirement of the financiers.This may include:

• Financial due diligence which may cover areas such asaccounting systems, controls, forecasting systems,cashflow, equipment leasing contracts, etc;

• Legal due diligence may cover major contracts,banking terms and conditions, contingent liabilities,regulatory matters, employee and management termsand conditions, pensions, insurances, health and safetyissues, intellectual property, and property details, etc.

If the business owns property it may be necessary toobtain a report on title. The purchaser will also beinterested to know if levels of insurance are adequatetogether with recommendations on cover for the future.

It must be added that the very process of transfer is astressful one in which employees or community membersare undertaking additional work on top of their duties ortheir jobs. Substantial due diligence will only add to thatstress.


Raising Finance

DIFFERENT OPTIONSThere are a number of legal structures that can beadopted to facilitate succession. The most appropriategenerally depends on factors such as the purchase price ofthe business, the finance available to the initiators, thesize of the business, the number of employees, and themanagement structure they wish to adopt.

The purpose of this section is to give a little moreinformation on the different options that are available.Advice should be sought on which is the most appropriatefor the particular succession project.

The process of achieving employee or communitysuccession usually involves the employees or thecommunity either buying the assets and undertaking ofthe business which employs them, (the target company)or the employees or the community purchasing the sharesin that business, directly or indirectly. There areadvantages and disadvantages to each option whichshould be explored by the advisers.

Most of the legal structures discussed below are'incorporated'. That means that a separate legalpersonality is created in law which owns the businessseparate from the individuals who own the shares in thatincorporated personality (or 'company'). The individualshave limited liability if the business fails. For examplewith a company limited by shares the maximum liabilityof the shareholders to contribute to the losses of thecompany is limited to the value of their shares. The pricethe individuals pay for this protection is a greaterdisclosure burden under the requirements of theCompanies Acts and similar legislation.

Company limited by shares

A company limited by shares is the most common formof company for business purposes. Employee ownershipin a company limited by shares is usually facilitated bythe employees becoming the shareholders. A company

limited by shares may not be common for communitysuccession, but it cannot be ruled out.

The employees may establish a new company (Newco) topurchase the assets and undertakings of the targetcompany. The employees may purchase the shares in thetarget company directly from the retiring owners. Theemployees may establish their own company whichpurchases the shares in the target company from theretiring owners. The proportion of share capital held bythe employees will dictate the amount of control theyhave over the company as a whole as owning sharesentitles the employees to vote at general meetings of thecompany.

Share capital provides equity. If the business fails, theshareholders are the last in the queue to be paid out –banks and other funders tend to feel more comfortable ifthere are funds ‘at risk’ before theirs.

In a purchase of a small company the employees mayexpect to own all the shares. Where the purchase price ishigh and/or where there are a larger number of employeesit may be appropriate to establish an employee benefittrust which would become a shareholder in the newcompany. Another option is to seek an outsideshareholder. Less frequently, the owners might facilitate apurchase by selling their shares in stages, with a majorityof shares passing to employees at the beginning.

Some of the employees will usually become directors ofthe company, and in larger companies non-executivedirectors may be appointed. Retiring owners may beasked to stay on as directors for a year or so after sellingthe business to assist in an effective transition.

There are two common types of shares: ordinary sharesand preference shares.

• Ordinary shares usually carry one vote for each shareand therefore the more shares an individual has themore votes he or she has. Shareholders workingtogether can increase their power further. Their valuedepends on the size of the shareholding comparedwith the value of the company as a whole.

• Preference shares have a fixed value and often haverestricted, special or no voting rights. They usuallyhave preferential rights to a dividend and torepayment. Preference shares are often considered asa loan in the form of shares. They are morecommonly used in purchases of larger companies.

There are some potential problems with the use ofcompanies limited by shares in succession cases. First, asordinary shares usually carry one vote per share,

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Legal Structures forSuccession

Two employee companies

Savant Enterprises Limited comprises two companies:the employee benefit trust, Savant Group (EBT) Limitedhas the controlling interest in the operating company,Savant Group Limited. The EBT has 75% of the votes atthe general meetings of the operating company andappoints one of the four directors. The remaining threeare executive directors from the operating companyitself (see case study, page 57).

maintaining equal votes between the individualparticipators can be difficult. This may be overcomethrough the use of different classes of shares or byrestricting the normal voting rights. Secondly, while acompany may purchase its own shares, if permitted by itsArticles of Association, it must follow a rigid procedurethrough passing special resolutions and if the purchase isto be financed out of the capital of the company thedirectors are required to make statutory declarations as tothe solvency of the company. The use of EmployeeBenefit Trusts can assist with this particular issue.

The point is that the adviser must be aware of theflexibility that each structure can bring and be creative inreaching a structure that meets the particular needs ofthe initiators.

Co-operativesUK has developed model rules for registeringcompanies limited by shares.

Industrial and provident society (IPS)

An IPS is an alternative structure to the company limitedby shares. Although it is very similar, it being a corporatebody with share capital and limited liability, afundamental principle is that of democratic control by itsmembers. In an IPS, regardless of the number of sharesowned by a member, the society is governed on a onemember one vote basis. This business option can beappropriate where the employees are anxious to ensurethat the business is run on a co-operative, democraticbasis or where a community wishes to take over a localauthority function as a not-for-profit organisation, or tobuy a trading enterprise.

The regulator, formerly the Registry of Friendly Societies,now part of the Financial Services Authority (FSA),requires that the rules of the society comply with theseven co-operative principles (established by theInternational Co-operative Alliance) if it is to be aco-operative, and examine the rules on registration toensure this is the case. If it is to be a not-for-profit bodythe FSA considers whether its rules genuinely provide thatthe society is for the benefit of the community. Unlikecompanies legislation, IPS legislation is specificallydesigned for co-operatives and for societies for the benefitof the community. Co-operativesUK has developed modelrules for registering IPSs as co-operatives and societies forthe benefit of the community.

Company limited by guarantee

Sometimes a company limited by guarantee is establishedas the successor. A company limited by guarantee doesnot have share capital and rather than shareholders it has

a number of members who each agree to contribute(usually £1) towards any debts of the company. It is thestructure that is often used by not-for-profit organisationsand is also used where the employees wish to establish aco-operative. Since a company limited by guarantee hasno share capital its capital must be obtained from loans,grants and retained profits.

Because many community and not-for-profit organisationsare registered as companies limited by guarantee, this willbe a familiar legal model for those involved in acommunity succession. Advisers must remain aware ofthe general advantages and disadvantages of thisstructure, particularly when compared to the IPS.

Guarantees do not provide equity. This renders thestructure unsuitable for larger successions where bank orother secured lending will be required.

Partnership

It is of course, open to the employees to form apartnership to purchase the assets and undertaking of thebusiness, and to carry on the business as a partnership.Obviously, entering into a business as a partnership can bea risk for the partners as they are not protected by limitedliability.

Each participant is jointly and severally liable for all thedebts of the business. This is unlimited liability. In returna partnership is subject to less regulatory control and it isstrongly recommended that a formal written partnershipagreement is put in place dealing, not least with issuessuch as capital contribution, profit shares and the waylosses are to be divided as well as a method of allowingindividuals to exit the business.

Partnerships do not have equity, and a lender’s securitywill generally be given personally by each partner againsthis or her individual assets. In general terms a partnershipis not a suitable vehicle for a community succession as itis not a separate legal entity and therefore does notprovide limited liability.



Two community companies

Kielder community buyout led to the setting up of acompany limited by guarantee which is a registeredcharity with regeneration objectives. Membership ofKielder Limited is open to all residents of the Kielderparish. Kielder Limited also owns a trading companylimited by shares to carry out the non-charitable andtrading activities. (see case study, page 41).

The issues above relate to the more recent structure ofthe limited liability partnership, whereby in return for agreater degree of disclosure and regulation (though notthe full impact of the companies legislation) the individualpartners can enjoy limited liability, limited to the amountthey actually put into the business.

Employee share ownership plan (ESOP)

A more sophisticated method of ensuring employee shareownership is to create an ESOP. This is the most complexof the structures that are available, but it can provideseveral tax advantages for the retiring owners, thecompany and the employees. An ESOP can be used inconjunction with a company limited by shares and an IPSestablished as a co-operative. It cannot be used in acompany limited by guarantee.

There are two principal elements to an ESOP – a profitsharing trust and an employee benefit trust. Either canoperate independently without the other. They can alsobe used together. A profit sharing trust might be moreappropriately called a share distribution trust since itspurpose is to put shares into the hands of employees.

A profit sharing trust can simply be used to incentiviseemployees without connection to a succession strategy. Aprofit sharing trust is allocated profits from the companywhich uses the money to purchase shares. The companycan agree with the employees that if the profits reach acertain amount then the employees can participate inthem in this way. The shares can be purchased fromexisting shareholders or by the issue of new shares. Theshares are allocated to employees in accordance with aformula agreed by the company with the Inland Revenue.The longer the shares are kept in the profit sharing trust,the greater the tax advantages are for the employees.

As part of a succession strategy a profit sharing trustmight be introduced by retiring owners to incentiviseemployees before a sale as well as to provide amechanism for the dilution of their shareholding. It mightalso be introduced by the employees' own Newco so thatnew employees of Newco can become shareholders. Itcan also be used together with an employee benefit trust.

An employee benefit trust is another trust whose purposeis to hold shares on behalf of employees and to facilitatetheir purchase or allocation to employees. Some taxincentives are available to retiring owners who sell (orgift) shares to an employees’ benefit trust. It cantherefore be used as part of a succession strategy incompanies, particularly those with more than 10employees. One of the differences between the employeebenefit trust and the profit sharing trust is that the

employee benefit trust can borrow monies to purchaseshares from the retiring owners. The repayment of thesemonies can be more tax efficient for Newco than Newcohaving a direct loan.

An ESOP by its very nature is restricted to employeesuccession and cannot be used to finance a communitybuyout, unless of course all members of the communityare to be employed in the succession business.

Co-operative

There is no particular co-operative legal structure.Co-operatives can be established as companies, IPSs and,in theory, limited liability partnerships. Co-operativesmust follow the seven principles agreed by theInternational Co-operative Alliance, being democraticallyowned, member led businesses operating for the mutualbenefit of the members. Within that framework co-operatives can take a wide variety of forms eg worker,community, consumer, farmer or housing co-operatives.In the case of employee buyouts a worker co-operativestructure would be the most appropriate form. In thecase of community buyouts a community co-operativestructure would be the most appropriate.

There is no requirement for employee or communitytransfers of ownership to be to a co-operative. Anemployee buyout might be via the mechanism of anESOP while a community buyout might be via a societyfor the benefit of the community.

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Note

At the time of going to print (May 2003) the UKGovernment was carrying out reviews of various legalframeworks and consultation on new structures whichmay have a bearing on the information given and theopportunities available. These include the CompanyLaw review, the review of Charity Law, developments inIndustrial and Provident Society law and regulation andproposed new structures the Community InterestCompany and the Charitable IncorporatedOrganisation. Co-operativesUK can provide updates onall these to those pursuing employee and communityownership options.


A BRIEF GUIDEThe aim of this section is to provide the adviser with abrief guide to the main tax considerations faced bybusinesses and the individuals running them. The contentof this section can only seek to highlight issues that mayarise and in no way attempts to make definitivestatements as to the law. The taxation rates and rulesrelate to the tax year 2002/03.

Under English law there are three main mediums bymeans of which a business may be carried on: sole trader,partnership and company. In addition there are the lesscommon forms of ownership – IPSs, co-operativeownership and ESOPs.

The adviser must be aware that the interplay between thevarious forms of tax will be an important consideration,not least for the old owner who will want to limit his orher exposure to pay tax.

Some taxes are common to all types of businessownership. These are shown below. Other taxes areapplied differently depending on the structure. These areshown overleaf.

Common taxes

Value added tax (VAT) and stamp duty are applied in asimilar way to all businesses, whether they be sole traders,partnerships or companies.

One slight difference is that a group of related companiescan form a tax group, in which case the companies in thegroup do not have to charge or account for VAT ontaxable supplies passing between them. Certain inter-group transfers may also benefit from reliefs orexemptions to stamp duty.

Value added tax (VAT)

If a business makes taxable supplies it must charge VAT onits supply of goods and services. Where the value oftaxable supplies does not exceed the current thresholdlevel of £54,000 per annum, the business need not (butmay) register for VAT and accordingly need not charge VATon the supply of goods or services. VAT will still be paidon supplies to the business. Not only is the businessresponsible for charging VAT to customers, but it mustalso account for the VAT charged to Customs and Excise.However, it may deduct the amount of VAT that it haspaid to suppliers from this figure.

The rates of VAT payable will depend upon the nature ofthe supplies that are being made by the business. Somesupplies are zero rated or exempt. There is no need tocharge VAT on these supplies (or in the case of zero rated

supplies the correct VAT charge is at nil% rather than thecurrent standard rate) but in the case of exempt suppliesthere will be restrictions on claiming back input VATcharged on supplies to the business. However, othergoods and services are standard rated on which VAT mustbe charged, currently at 17.5%.

Stamp duty

Stamp duty is a tax on documents. It is not a tax on thetransfer itself. Accordingly, if there is no documentcapable of being stamped, then there is no stamp dutypayable. This has formed the backbone of much of thetax planning in this area.

There are different rates of tax payable. Some documentsare exempt for the purposes of stamp duty. Others, suchas those making gifts, attract a fixed duty of £5.

The sale or transfer of shares attracts stamp duty at a rateof 0.5% on the value of the consideration.

The duty payable on the transfer of other assets forexample land will depend on the value of theconsideration. It ranges from 1% to 4%.

Differences in taxation

See overleaf.

TAX ISSUES ON SUCCESSIONA succession will either involve the transfer of assets fromthe original owner, whether that owner was a sole trader,partnership, company or another structure, or the sale ofshares in the existing incorporated business of the originalowner, to the initiators. The adviser must be familiar withthe different tax considerations that may apply.

Transfer of assets

The transfer of assets from one business to another willbe a chargeable supply which means that VAT will have tobe charged, in addition to the purchase price which theoriginal owner will seek. It is likely that VAT will becharged at the standard rate (currently 17.5%).

However, where the initiators intend to use those assetsto carry on the existing trade then it may be possible toobtain relief from the VAT charge under the provisions ofSection 49 Value Added Tax Act and Article 5 of the ValueAdded Tax (Special Provisions) Order 1995 (as amended),such that the transfer is to be treated as a 'transfer as agoing concern'. In such cases no VAT will be payable. Itmust be remembered that a break in trading may result inthe loss of this relief and this may have to be factored into the funding requirements.

Taxation

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Taxation

Sole trader

Income tax

Income tax is payable by the trader on all his or her tradingincome in the year. Currently different rates apply dependentupon the level of income. The rates are the same for the selfemployed and employees. The trader is allowed a personalallowance, and other payments may be taken to reduce actualincome (eg permissible payments to a pension scheme).

National Insurance contributions (NIC)

Sole traders are regarded as self employed and accordingly theself employed rates of National Insurance are payable. Theserates compare very favourably with the NIC payable byemployees.

Capital gains tax (CGT)

Tax is payable on any gain (profit) realised from the disposal of achargeable asset. An annual exemption is available to anindividual to reduce the gain.

Other reliefs, such as indexation (to take account of inflation)and taper relief (where credit is given for assets held over aperiod of time) may be available to reduce any gain. Taper relieffor business assets is more generous than for non-businessassets. Most assets used by the sole trader in the conduct of hisor her trade, will qualify for business asset taper relief.

Some reliefs, such as rollover and holdover relief defer the taxcharge to a later date. In the case of such relief, the gains thatwould otherwise be charged to tax are invested in some newassets (which may be a new business). The charge to tax willbecome due, if at all, when that new asset is disposed of.

Inheritance tax (IHT)

On death, the sole trader (or rather his or her personalrepresentatives) must pay inheritance tax on the value of theestate including the business.

As the tax falls on the estate of the deceased, the logicalsolution to the problem is for the individual to reduce his or herestate by giving away assets. A gift of an asset, other than to adiscretionary trust, is a potentially exempt transfer for IHTpurposes. In over simplified terms, this means that providing thegiftor survives for seven years after the date of the gift, then theentire gift will escape IHT. In addition some small annual giftsare excluded altogether from the IHT regime.

Business and agricultural property reliefs are available to reducethe IHT bill, potentially to zero.

No IHT is charged on a death transfer to a spouse, or to charity.

Partnership

Income tax, NIC andcapital gains tax

The tax considerationsare essentially as thosefaced by the sole trader.Each partner is deemedto own a share of thebusiness and is taxedon his or her share as ifs/he was a sole trader.

There are sometimesissues as to whether ornot an individual is agenuine partner orsimply a senioremployee who is'masqueraded' as apartner. The incometax and NIC treatmentfor employees andpartners differs.

Inheritance tax

On death, partnershipproperty may pass tofamily, not necessarilyto the other partnersand this point should bespecifically dealt withby all partners.

Business property reliefmay be available toreduce the value of theestate.

Company

Corporation tax

A company does notpay income tax or CGT.Instead it payscorporation tax on allits profits in the year,which include bothincome and capitalgains. The rate ofcorporation taxcurrently depends onthe size of the companyand varies between 0%and 30%.

Indexation relief forcapital gains is stillavailable for companiesafter April 1998.

Transfers of assetsbetween companies inthe same (tax) group donot give rise to a capitalgain, but care must betaken should thereceiving companysubsequently leave thetax group.

Inheritance tax

Companies do not payIHT.

Differences in taxation between types of business ownership


Of course VAT charges to the business can be recoveredfrom the VAT that the business charges on its taxablesupplies, so that in the long run if VAT is payable it wouldbe recovered. Essentially, therefore, payment of VATbecomes a timing issue. The need to pay VAT in additionto the purchase price can present a substantial problem tothe initiators who will need to find some way of financingthe payment until it can be recovered in the normalcourse of the business.

Stamp duty may also be payable by the initiatorsdepending upon how the purchase price was apportionedbetween the different assets that made up the transfer.Where the assets can be transfered by delivery, forexample physical assets such as equipment andmachinery, no stamp duty need be payable. Title (orownership) to tangible assets such as land and buildingsas well as intangible assets such as goodwill andintellectual property (Trade Marks, copyrights etc) willpass through written documents and stamp duty ispayable. The level of stamp duty depends upon the valuetransferred. Under £60,000 will be assessed at nil% duty,but must still be produced and charged a basic, producedstamp fee (currently £5 flat rate). Over £60,000 and theduty increases from 1% to 4% of value transferred.

In the hands of the original owner receipt of the purchaseprice is likely to be charged to capital gains tax, orcorporation tax if the original owner’s is an incorporatedbusiness. It will depend upon the original owners’individual circumstances what reliefs and allowances mayapply to reduce any charge to tax.

Where the original owner was an incorporated businessthere is a complication for the individuals involved in thatbusiness. It is the business or company itself that receivesthe purchase price. The company will therefore havesimply converted the tangible and intangible assets thatwent to comprise the business activities into cash. Thecompany will then need to determine how best todistribute that cash to the individuals, usually by way of adividend.

In so far as the initiators are concerned there will be asimple conversion from the cash asset to the tangible andintangible assets they have acquired through the transfer.The adviser should however be aware of the possibility ofallowances which may be used to offset the value ofassets in the accounts of the initiators and that theacquisition costs, and in particular the apportionmentbetween the various assets, will have long-termimplications for the initiators, including for examplewriting off the value of goodwill and intellectual propertyover time.

Transfer of shares

A transfer of shares requires that the original owner’sbusiness has, for at least some time prior to thesuccession, been carried on through an incorporatedbusiness. The adviser will be aware of the need to ensurethat all shareholders in the existing business are party toany succession transfer. There will be legal formalitiesthat will need to be complied with for the share transfersto be valid.

With a share transfer the assets comprising the businessdo not change hands. They remain in the ownership ofthe company conducting the business. The shares transferrepresents a change in the owners of the company itself –a small but important distinction.

The purchase price will be apportioned between thevarious shareholders who agree to transfer their shares tothe initiators, usually on the basis of a base price pershare.

Again there will be a capital gain in the hands of theoriginal owners of the shares and, depending upon theirindividual circumstances, a charge to capital gains tax. Ofcourse the shares could have been held by anothercompany so that the receipt in the hands of thatcompany is potentially charged to corporation tax and thecompany concerned must separately deal with the mostappropriate way of returning value to its shareholders, egthrough a dividend.

The initiators will now have acquired shares in the existingbusiness which otherwise remains unaltered. (This doesnot of course address the issue that new managementmay be required.)

As the only matter being transferred is the shares, the taxtreatment is relatively straightforward. Stamp duty ischarged on the value of the transfer at a rate of £0.50duty per £100 transfer value (equivalent to half a percent,rounded up to the nearest £5 duty).

Taxation

A NEW APPROACHA successor democratic business will almost certainlyrequire new approaches to:

• Skills development and learning

• Member empowerment and participation.

The Government has shown its enthusiasm for theconcept of lifelong learning (a broader concept than thepreviously accepted definition of training) and this hasbegun to alert providers and learners to the potential of amuch broader range of learning activities. The StrategyUnit (previously called the Performance and InnovationUnit) has set out proposals for a strategic framework foradult workforce development in consultation with a rangeof private, public and third sector partners.

Workforce development consists of activities whichincrease the knowledge, skills and abilities of individuals toplay an effective part in the work place. Local Learningand Skills Councils (LSCs) will have drawn up a localworkforce development plan and will review thisperiodically. There may be the opportunity to seekfunding for skills development under these schemes fromthe local LSC.

Skills development and learning

In all succession situations - employee buyouts,community buyouts, externalisations or any of thesituations described earlier in Routes to Succession -significant changes will potentially occur in peoples’ roles.Democratic businesses need their employees andmembers to develop their existing skills and to learn newskills:

• The operational skills to deliver the product/service toa high quality consistently and competently

• Skills in business and management in order to takeappropriate opportunities and develop the businessfurther

• Skills required for the democratic operation of thesuccessor business and the maximisation of thedemocratic advantage for business development andgrowth.

The successor business will be democratic and in order foremployees, community members and other stakeholdersto participate in the running of the new business, radicalcultural change will often be necessary.

Employees and/or community members will be taking onBoard roles and they will need to be equipped to workeffectively as directors and to work alongside managers

and paid staff. Many people will be taking on differentroles including financial and project management,marketing and customer service and personnel.

Employee buyouts

In small employee buyouts the previous owner may haveundertaken a wide range of tasks him or herself, egbookkeeping, management accounting, sales, customerservice and personnel matters. It will be important tounderstand fully the extent of this in order that the taskscan be distributed or another person can be employed totake on some of the activities. Traditional businessesoften do not fully utilise the skills of their employees andin particular the skills which they have gained outsidework.

Community buyouts

In community buyouts there is the opportunity to drawon the talents of a wide range of people whose skills andexpertise have perhaps not been recognised before. Thesuccession process will begin to identify communitymembers who are willing to come forward and takeresponsibility for certain tasks. Experience indicates thatthe ability to employ paid staff is often important to thesuccess of the new business. Community members maybe happy to take on the role of Board member but mayfeel reluctant to take on the delivery of the service in full.

Community buyouts often attract highly motivated staff.The management of a community enterprise requirespeople to have or learn a variety of skills – these includebusiness management and the ability to work inpartnership with members of the community.

Externalisations

Skills issues will also be critical for both staff andmanagers to the viability of an externalisation. Somemanagement tasks may well have been undertakenoutside the group or division being externalised. In thecase of a large externalisation, they should be addressedat a relatively early stage so that all employeesunderstand the cultural change that will be necessary inorder to survive in a ‘stand alone’ situation. Skillprogrammes and learning situations give staff anopportunity to engage with their potential new situation

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Learning and Participation

The value of voluntary skills

In one employee buyout situation an employee wasthe voluntary treasurer of a social club with a similarturnover to the target business.

and are a good vehicle to build identity, group cohesionand to gain acceptance for changes to working practices.

Member empowerment and participation

The old adage ‘information is power’ holds true in ademocratic succession situation. If the process outlinedhas been followed, the succession team and the widerstakeholder group (employee or community members)will have been enmeshed in a participative exercise whichhas encouraged collaboration, built confidences, begun toclarify responsibilities and most of all ensured that thegroup feel that they have ownership. If this process hasworked well, it should not be difficult to developappropriate management structures and style.

Employee buyouts

In a small employee buyout it may be that all employeesare directors. In larger succession situations there may bea management team (some or all of whom are on theBoard) together with non-executive directors and workerdirectors. Although the worker directors may have beenpart of the succession team and will therefore have beensubjected to many and varied learning situations, theymay need support to deal with potential conflict ofinterest situations so that they can balance theirresponsibilities as directors of the new business with theirresponsibilities to their co-workers.

During the succession process and when the new businesscommences trading, there will be a need to developconfidences in the staff so that they can contributeeffectively. This might include encouraging thedevelopment of staff teams and promoting delegated andinclusive management styles. In the past muchinformation (finance, contracts, sales, etc) will probablynot have been shared with employees. The newdemocratic business will want to turn that on its head. Aswell as general meetings in which all employee memberswill be involved, case study businesses use regularmeetings in the canteen and bulletin boards ascommunication tools.

Externalisations

In externalisation situations the involvement andparticipation by members and employees is vital to longterm success (this is particularly true in largeexternalisations). Increased involvement and participationhas the potential to significantly improve service qualityand job satisfaction. It is a key to success for the newbusiness and is likely to be an important strand in thesuccession process.

Community buyouts

A community buyout will need to be responsive to themembers of the local community and build on theenthusiasm and commitment generated throughout thesuccession process. The founding Board will need toensure that it is representative and develops the skills tomanage the new business. There may well be arequirement to learn management and personnel skills ifpaid staff are in place. In addition members can beinformed and consulted through the use of newsletters,general meetings and promotional events. It will beimportant to identify potential new and replacementBoard members from amongst the membership.


Learning and Participation

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Succession Checklist

A ROUGH GUIDEThe succession checklist on the following pages is intendedas a rough guide to the tasks that will probably need to beundertaken on most business successions, whether they beemployee, community or other stakeholder buyouts. Thesuccession stages are outlined under the following columnheadings.

Time guide

An indication of a possible time scale is given – but ofcourse this will be subject to enormous variation accordingto circumstances. It is wise to keep looking ahead ifworking through the list because in many cases work canbe started on a prolonged task at an earlier time andprogressed alongside other tasks, rather than waiting for its‘logical' timing.

Task

It needs to be borne in mind that not all work can bebroken down into discrete tasks. Negotiating with the oldbusiness owner/managers, for instance, will be a processthat develops its own logic and timetable which will runalongside other tasks. Another such area – and just asimportant in its own way – is keeping stakeholdersinformed (see box).

People/method

The work will bring together a number of key groupsincluding

• A business adviser or development worker

• The old business owner/managers (and possibly theiradvisers such as accountants, solicitors, etc)

• The prospective new business owner/managers (whomay also need their own solicitor, accountant, etc)

• A succession team which will manage the successionprocess

• Perhaps a wider stakeholder group – for instance thelocal community in the case of a community buyout

• Other interested parties, such as the business'ssuppliers or contractors

Key issues

Under this heading will be found notes on what to lookout for at each stage and how to handle the mostimportant issues that could put 'a spanner in the works'.

Keeping people informed

It is very important to keep stakeholders well informedthroughout the buyout process. At least some of thefollowing means should be employed to this end

• a regular newsletter, which can be a simple A4sheet, outlining the work completed by thesuccession team and its advisers and any otherdevelopments each month

• regular stakeholder meetings, which shouldinclude arrangements to review and formulatebasic strategy

• questionnaires on crucial issues

• open training courses and seminars – even wherethese are primarily for the future directors andmanagers, they should be open to all interestedstakeholders

• 'surgeries', when members of the succession teamare available at a regular time and place to answerindividual questions and concerns

• social events, such as regular times at a local pub,to allow informal contact and discussion andrelieve any tensions (take this idea seriously – itreally works).



Time

Week 1

Week 2

Week 3

Week 3

Week 3

Task

On first hearing about thepossible succession situation,look for case studies or otherexamples of similar successions.

Explore succession ideas withinitiators, and perhaps other keystakeholders – make sure the oldbusiness owner/managers areinformed

Hold 'stakeholder meeting' andform 'succession team' tooversee succession process.

Regular succession teammeetings will be the mostimportant planning and controltool in the succession process.

Look for additional advice andfinance.

The succession process itself willcost money – in addition to, andin advance of any buyout priceto acquire the old business.

Sketch business proposition and financial case.

People/method

Business adviser/development worker

Meeting(s) by invitation

Stakeholder meeting

Business adviser and succession team

Business adviser, butbased on informationsupplied by thesuccession team. It isadvisable to makeone member of theteam responsible forco-ordinatingfinancial planning.

Key issues

A success story people can identify with is thebest way to inspire confidence in the earlystages.

A good case study can also be used to work outbusiness planning issues and as an accessiblepresentation later.

Find out what people really want – and exposeany conflicting agendas.

The succession team must have legitimacy, soeven if it's a foregone conclusion that any widerstakeholder group will endorse its members, it isbest to formalise this in an open anddemocratic meeting.

The team should be big enough to berepresentative but small enough to be able tomeet and act quickly and efficiently. About fiveis a good number in most situations, but thiscan be extended if it is felt necessary torepresent natural divisions in the stakeholders.

Many advisers, such as the staff of localenterprise agencies, can meet some costs(including their own payment) by raising fundsfrom local authorities or other agencies such asBusiness Link or the Regional DevelopmentAgency (if this buyout is of regionalsignificance).

A 'sinking fund' of subscriptions for stakeholdersmay be an option – possibly repayable with ashare in the successor business.

With most successions a business has beenoperating at least at break-even, so it mightseem that the financial case is cut-and-dried.The key issues are:• whether the business can carry on at least as

well as before and meet the extra financecost of any buyout price;

• to unpick the costs which the new businesswill no longer bear and assess the extra costswhich the new business will incur.

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Time

Week 4

Week 4

Week 4

Week 4

Task

Make a list of likely difficult-to-resolve issues so that they can begiven adequate time andattention in the successionprocess.

Presentation of businessproposition and basic financialcase back to succession team andperhaps wider stakeholder group.

Open formal 'in principle'negotiations with old businessowner/managers.

Research Market1 Find desk research sources of

market intelligence and startresearching detail of marketsize, trends, etc

2 Define target markets by type,size, etc and list mainpotential customer groups andhow they can be reached

3 Identify and researchcompetition – obtain theirpromotional material

4 Consider a questionnairesurvey of customerrequirements, and aprogramme of visits toimportant customers. (In anycase, inform customers ofplans to date and assure themthat the business iscontinuing)

5 Hold 'brainstorming' sessionon new market opportunities

People/method

Business adviser/succession team

Business adviser/succession team/stakeholder meeting

Succession team/business adviser

The informationcollection should beled by a delegatedmember ofsuccession team butsupported by othervolunteers and bythe adviser.

Key issues

This will include a number of 'technical'legal/financial issues that regularly delaysuccessions, such as• transfer of contracts issues (eg suppliers not

extending credit to the 'unproven' successorbusiness; landlord not approving leaseassignment)

• staff terms and conditions (TUPE, pensions,etc)

• unforeseen insurance requirements orincreased costs.

These will progress as required throughout thesuccession process.

Although the old business should haveestablished markets it is essential that thesuccession is used to look again at markettrends and new opportunities – and to reviewpricing and other policies which may havebecome out-dated.



Time

Week 5

Week 5

Week 6

Week 6

Task

Financial Planning 11 Review likely demand in the

light of market research2 Estimate income from above

and undertake initial scoping ofdirect and overhead costs

3 Start work on planningfinancial administrationsystems (what needs to bedone, when, by whom andwhat equipment will beneeded).

Marketing Planning 1Organise workshop session withmarketing trainer to identify basicmarketing strategy and whatpromotional materials are needed.

Marketing Planning 21. Finalise any changes to name

and 'mission statement'.2. If necessary draft copy and

commission corporate imageand promotional materials.

3. Start planning re-launchevents.

Organisational Planning 11. Review premises and

equipment in the light ofchanges to market andfinancial orientation – workout any necessaryrefurbishment and list newequipment and otherrequirements

2. Sketch new organisational andmanagement structure.

People/method

This can be done bythe succession team,but againco-ordinated by onemember andassisted by thebusiness adviser.


Just as one memberof the successionteam should beresponsible forco-ordinatingfinancial planning,another shouldco-ordinatemarketing planning.The whole teamshould discuss andapproved key items.

This should be doneby the successionteam in closeconsultation withthe adviser.

Key issues

An initial idea of viability will have been gainedduring the scoping of the business andfinancial case (week 3). This now needs to bebuilt upon and will continue as a vital threadthroughout the succession process.

In a succession situation there will almostalways be costs which the new business willlose (perhaps over time) such as the owner’ssalary, dividends, etc but there will also be arequirement to take on new cost – replacingthe tasks undertaken by the now absent formerowner. In an externalisation situation thepublic authority will have undertaken‘management’ tasks on behalf of thegroup/division and these will need unpicking.

It is important to finalise any name or otherfundamental change as early as possible sothat there is enough time to commission a'corporate image' from graphic designers.

A modest re-launch, requiring little planning, isadvisable – perhaps a reception with invitedrepresentatives from the local authority,business organisations and friends. This can befollowed up with a higher profile event afterrunning for a few months.

The management structure will be based on anumber of considerations, but is fundamentallya compromise between what managementroles are needed and what mix of skills areavailable. It is of course always possible tosimply recruit an experienced general manager.

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Time

Week 7

Week 8

Week 8

Week 9

Week 10

Week 10

Week 11

Task

Prepare legal/financial structureThe key documents for registeringthe company (the Memorandumand Articles of Association) orother structure should be designedat this stage.

Hold exploratory talks withpotential funders/financiers

Presentation of plans to date to all stakeholders.

Select first directors and registercompany or other structure.

Personnel Planning 1Work out management andadministration job descriptions,including salaries, and prepare toadvertise if necessary

Financial Planning 21 Work out direct and overhead

costs2 Work out rough buyout costs3 Build financial model

Finalise agreement with the oldbusiness owner/managers – atleast on any buyout price.

People/method

Business adviser


Business adviser/succession team/stakeholder meeting


This should be doneby the successionteam in closeconsultation withthe business adviser.


Succession team/business adviserIf necessary instructsolicitors to draw upoffer or transferagreement.

Key issues

This involves planning how the successorbusiness will be funded – if it is a communitybuyout and can be grant-funded it will needsomething like a non-profit-making 'guaranteecompany' structure; if it is to raise equity orcommercial borrowing it will need somethinglike a share company structure.

The most important aspects of the businessplanning should be reported back to meetingsof all stakeholders at regular intervals (at leastmonthly). At this stage especially it isimportant to present the succession team'sconclusions as to the appropriateorganisational, management and staffingstructure for approval.

It is possible to elect the directors at thismeeting. However, if the succession team hascontinued to have the full confidence of thestakeholders, it is probably best for them (orsome of them) simply to become the firstdirectors. Continuity of management betweenplanning and start-up phases is crucial and ifstakeholders become unhappy with any of thedirectors they can always be removed at alater date.



Time

Week 12

Week 12

Week 13

Weeks 15to 18

Week 19

Week 20

Task

Personnel Planning 21 Organise training workshop for

directors on their responsibilitiesand general companyadministration

2 Ask all key people to write a shortnote of qualifications andexperience for inclusion in thebusiness plan etc

3 Design staff training and personaldevelopment arrangements

4 Design support and supervisionarrangements.

Financial Planning 31 Obtain any necessary tax

clearances 2 Finalise business plan, apply for

start-up funding, secure facilities,etc.

Organisational Planning 21 Develop quality standards2 Appoint an accountant (you may

also need a solicitor)3 Complete design of finance and

administration systems4 Organise training workshop (1

day) on finance andadministration systems.

The Home Straight1 Finalise business plan and

modelling2 Final negotiations with funders

and financiers3 Final negotiation on and

redrafting of legal agreements.

Completion1 Signing of legal transfer

agreements2 Signing of bank and other facility

agreements

Interview (if necessary) and appointmanagement and administrationposts.

People/method





Key issues

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Case Studies

The following case studies have been selected because they are examples of buyouts in a rural context. For moreexamples of co-operative successions and buyouts investigate the Further Reading and Resources section at the end of thisbook or contact Co-operativesUK.

Community buyout

Kielder page 41

Cwmni Gwynt Teg Cyf page 43

Hesket Newmarket Brewery page 45

Shilbottle Village Co-operative page 47

Employee buyout

UBH International page 49

North East Direct Access page 51

Multi-stakeholder buyout resulting from an externalisation

Home to Work page 53

Divestment from a larger business

Gas Services Northern page 55

Retirement of an owner

Savant Enterprises page 57

Ashington Autospares page 59


Community Buyout

KIELDER

Fact file

Name of enterprise: Kielder Limited and Kielder Community Enterprises Limited

Location: Kielder, Northumberland

Legal structure: Charitable company limited by guarantee and share capital subsidiary company

Type of activity: Rural regeneration encompassing charitable activities and community trading enterprises

Date established: March 2001

Type of members: Residents of the area of benefit and interested organisations

Key features

• A community in decline for over a decade followingthe withdrawal of the main employer in the area

• Wide diversity of community needs required to bemet through a complete lack of local businessenterprise

• Limitations on business forms requiring the use of aseparate charity and trading subsidiary to meet thecommunity objectives and legal and financialstructure.

• Local membership

History

Kielder is a remote village in Northumberland in the NorthTyne Valley near the Scottish Borders. The community wascreated after the Second World War to serve the hugeborder forests. The village of Kielder is surrounded by thecountry's largest forest and next to Britain's biggest manmade lake.

Intended to be three times its actual size (1991 censusconfirmed population of 233) the community went intodecline when the area's largest employer, the ForestryCommission, made many in the area redundant over thepast decade or so. Building the dam between 1976 and1982 provided fresh public sector job opportunities thathelped mask the impact of the forestry changes (that hadmoved substantially away from labour intensive timberharvesting methods), but has itself created a dependencyon the two major local employers.

The community has lacked any tradition in the vein ofmining and steel communities and often found itsdemands inappropriately expressed resulting in the localemployers being unable to respond. Lacking both culture

and traditions the community has needed to find ways ofco-operating within itself as well as with the landowners.

Kielder has continued to suffer a declining populationcaused by remoteness, lack of accessibility, lack ofentrepreneurship, lack of appropriate and affordablehousing, narrow economic base and a lack of employmentopportunities. Retaining Kielder's youth was even moredifficult when the state owned Forestry Commission putmany of the village's houses up for sale and advertisedthem in London at low prices. This built on the loss of onethird of the housing stock when the dam was completedand the surrounding lands flooded.

Local people prepared a business plan involving training forbusiness set up and employment, provision of workspace,setting up a bus service, reopening the petrol station andopening a youth hostel. They were also concerned toprotect and conserve the area, including Kielder Castle.With legal advice from Wrigleys Solicitors in Leeds theyformed a company, later registered as a charity, withregeneration objectives.

Structure and governance

The main company is limited by guarantee and is aregistered charity managed by a board of 7 trustees, all ofwhom are members and therefore live locally. They areassisted by two non-executives from nearby business andgovernment. The maximum number of trustees is 12. Toensure good governance and in line with CharityCommission guidelines, the trustees must retire (but maybe re-elected) after three years.

Membership of Kielder Limited is open to all who reside inthe Kielder area together with organisations which share acommon interest.

The charity is regulated by the Charity Commission.

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Community Buyout

Separately there exists a wholly owned trading companylimited by shares undertaking non-core charitable andtrading activities.

Current activities and business strategy

Some elements of the business plan of Kielder Limitedwere not charitable, for example, encouraging tourism, andother trading. These activities are now under the tradingsubsidiary Kielder Community Enterprises Limited, whichruns the petrol station.

The trading company purchased a derelict garage site inthe village and now sells petrol and diesel to residents,businesses and visitors. The village’s very remoteness givesit a competitive advantage, and the filling station is alsoable to draw on the numerous visitors (approximately300,000 a year) to the local tourist attractions of theforest and lake.

Another problem as a rural community was underemployment rather than unemployment. Of course it isonly the relief of unemployment which qualifies as acharitable object, and therefore any relief of under-employment has to be done through the tradingsubsidiary.

The charity has received grants from Tynedale Council tohelp people start up businesses and to provide facilitiessuch as playgroups.

The main exercise of the charity and trading subsidiary hasbeen to get new industry into the village. The local schoolhas been turned into a multi-function community centre,library, doctors' surgery and youth and toddlers club. Thecompany is also in the process of refurbishing existingbusiness premises on the garage site in order to bring online an additional income stream from rentals from lightengineering, retail and garaging activities.

In 2001 Kielder received £500,000 grant funding from theGovernment Single Regeneration Budget for a four yearprogramme to rebuild the community.

The charity is also working closely with local governmentto establish new community transport routes for residents’and visitors’ benefit. Plans include obtaining an eight-seater vehicle to double up as a licensed taxi, supported bygrants through Tynedale Rural Transport Partnerships andsubsidies from Northumberland County and TynedaleDistrict Council. The charity has recently made a loan tothe trading subsidiary (rather than investing in its shares)for start-up and development purposes of £25,000.

Member benefits

There is a community aspect to the membership: onlythose registered to vote in the Parish of Kielder havemembership voting rights (although businesses in the areasupporting the objects are also able to become membersof the company).

As Kielder Limited is a charitable company limited byguarantee, members do not receive dividends, nor do theyreceive any benefits except as beneficiaries. Asmembership is restricted to the Parish of Kielder, however,members feel a strong sense of community, see the resultsof regeneration projects and experience a new culture ofenterprise.


Community Buyout

Key features

• A community enterprise in an industry dominated bylarge corporate utilities and foreign investment

• Substantial diversification from traditional activities inan isolated rural community

• Overcoming substantial hurdles in credibility,development and funding involving a substantiallearning curve for the members involved

• Project supported by Wales Co-op Centre, ConwyEnterprise Agency and Conwy Economic Developmentand Regeneration Partnership. Advice provided fromWrigleys Solicitors

History

Moel Maelogen is an isolated farming community in NorthWest Wales in the shadow of Snowdonia. There are fewlocal employment options but a tradition of hill farmingthat for families in the local community stretches backthrough many generations. The geography does not lenditself to viable alternatives to the traditional farmingactivities such as crops or larger livestock and the landremains subject to restrictions following the ChernobylNuclear disaster of 1986 and recent foot and mouthoutbreaks. One natural crop remains available in almostendless supply – wind!

The Government has confirmed a commitment toelectricity generation from renewable sources amountingto 10% of consumption by the year 2010.Notwithstanding this great hurdles are faced by projects ofthis kind, particularly in obtaining the requisite planningpermissions in the face of local oppositions.

The project consists of three wind turbines and associatedinfrastructure including connection to the nationalelectricity grid establishing an electricity substation andaccess for construction. Capital costs of the projectamount to a sum in the region of £1.5million, which,together with development costs including site evaluationsurveys etc, brings the total finance required toapproximately £2.5million.

With no practical experience of either developing orrunning a wind farm, the families faced a substantialhurdle in persuading financial backers that the project wasviable and that they had the requisite skills to carry itthrough.

To overcome the issue of credibility the families soughtfrom an early stage in the project, a business partner withexperience in developing wind farm projects. This createdan immediate problem for the families in that the onlyorganisations with such experience that responded to theirapproaches were large national utilities giving rise toconcern that the project would lose its community basis orcontrol.


Although a community based co-operative project it wasdecided to proceed by way of a company limited by sharesas that structure was more familiar to the variousorganisations from which funding was sought. The threefamilies most intimately involved with the project haveretained one share each maintaining their equal status.There are three directors again appointed from each of thefamilies.

The Memorandum and Articles of Association do not

CWMNI GWYNT TEG CYF

Fact file

Name of enterprise: Cwmni Gwynt Teg Cyf

Location: Moel Maelogen, Conwy

Legal structure: Company limited by shares

Type of activity: Wind farm / renewable energy project

Date established: April 1998

Type of members: Community owned

Number of members: 3

Latest annual turnover: in first year of production

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Community Buyout

contain any restrictions on the standard provisions,therefore there is no inbuilt protection for any one or otherof the families. This structure was considered desirable inorder to make the project most attractive to potentialfunders in view of the substantial capital costs involved inthe project.


The families have been able to enlist the invaluablesupport and assistance of EnergieKontor, a German winddevelopment company, which is co-ordinating thetechnical part of the project and is providing bridgingfinance to fill the gaps in construction and energisation.EnergieKontor as evidence of their belief in the viability ofthe project will fund, own and operate one of the threeturbines forming the project.

With the project management experience of EnergieKontorthe project has been able to overcome the substantialissue of credibility. This has enabled the families to obtainthe final element of funding.

Cwmni Gwynt Teg Cyf is the first private company in NorthWales to secure Objective 1 funding, approximately£360,000 from the European Regional Development Fund.Further funding of £1.7million has been raised from TriodosBank N.V., an ethical investment bank based in Hollandwith offices in Bristol. This bank funding has as a necessitybeen secured against the capital assets of the project(comprising both the wind turbines and the land on whichthey are sited). Triodos Bank N.V. has extensive experiencein financing renewable energy projects and in addition tothe provision of funds was able to provide practical adviceand assistance to the families on contractual issuesrelating to the civil and electrical engineering build anddesign aspects as well as on operation and maintenance ofthe completed project. The families controlling the projecthave themselves invested almost £500,000 with assistancefrom the Environment Loan Scheme run by Barclays Bank.

The learning curve for the three farming families has beenimmense but they are now building on that experiencewith plans to potentially buy out the third turbine, ownedand operated by EnergieKontor, to restore the wind farm toits original vision as a local community project, and with apossible development of a second wholly ownedcommunity project in a nearby location.

The construction of the wind farm is now almostcomplete. Civil and electrical works have been tendered tolocal businesses and the turbine towers, constructed inWales, have already been installed.

The farmers have been able to generate tremendous andsustained support from the local people and business

community, which has helped them at all stages throughthe development of this project.

Energisation is scheduled for March 2003 and it isanticipated when fully operational the site will have anoutput equivalent to the energy consumptionrequirements of 2,500 homes.

Member benefits

The project has been developed from within an isolatedrural community faced with severe financial hardship andfew if any alternative local employment or businessoptions.

The project's success will go some way to providing thefamilies involved with both immediate and long termsolutions to the problems of income generation andbusiness and community continuity throughdiversification. This project demonstrates not only thecommitment of the families involved but alsodemonstrates the availability of support from the widerbusiness community.

All involved have benefited greatly from their involvementand their experiences are of value for the development offurther projects and in providing assistance to otherfarming groups and communities.

The focus on a community led project distinguishes theMoel Maelogen Wind Farm from the majority of wind farmand other renewable energy projects in England and Wales,which see ownership and control in the hands of non-localorganisations from national electricity companies toforeign investment funds.


Community Buyout

Key features

• Villagers and their supporters bought the brewery tomaintain a key part of the local economy.

• Each of the original 58 members invested £1,500 asshares to raise the capital to buy the business. Eachmember has an equal stake and one vote.

• The community co-operative structure of the businessprovides a means of bringing in additional expertise(eg marketing, sales, finance) to support the brewerymanager’s skills.

• There is a high degree of local support to the business.This was vital in helping the brewery get through theFoot and Mouth Disease epidemic.

• The success of the co-operative has helped to supportother businesses in the village, notably the pub and anadjacent guesthouse.

History

Jim and Liz Fearnley, the owners of The Old Crown, decidedto open a micro-brewery in buildings round the back ofthe pub. The brewery grew over the years, supplying manylocal pubs and employing two people. In 1998, theFearnleys retired from the pub and in 1999 they alsodecided to retire from running the brewery.

By now the brewery was a key part of the villagecommunity. Besides brewing many people’s favourite beer,it employed two people and its popularity with walkersand climbers boosted tourism in the village. Villagers andfriends of the brewery decided to secure its future – bybuying the brewery themselves as a co-operative.

A steering group of five was appointed to draw up more

detailed proposals. These were accepted at a furthermembers’ meeting in October. The steering group beganto cast round for people who could help them. Thisincluded Voluntary Action Cumbria, Cumbria CountyCouncil, Lancashire Co-operative Development Agency anda local firm of solicitors. Because the buyout wasstructured as a co-operative society with non-transferableshares, the provisions of the Finance Act 1985 did notapply. The steering group was therefore able to avoid theexpense of producing a full offer document.

In the end 58 villagers and well-wishers (including themountaineer, Sir Chris Bonnington) agreed to invest £1,500each. The £87,500 raised was meant to cover the purchaseprice and initial working capital. In actually running thebusiness, the members have found that more workingcapital would be helpful. On 17 December 1999, thebrewery was sold to the co-operative.

The first year was very successful. However, in 2001 theFoot and Mouth Disease epidemic hit the business hardand a loss of £4,000 was recorded. Since then the breweryhas made a strong recovery and expects to make a profitagain in 2002.


The brewery is a community co-operative with themembers being local villagers plus well-wishers (many ofwhom use the village as a base for walking). It isregistered as an IPS. Members buy shares in theco-operative to raise capital. In theory members couldhold between £1 and £20,000 in shares, but theco-operative decided that every shareholder should buy£1,500 so that everyone had an equal stake in the

HESKET NEWMARKET BREWERY

Fact file

Name of enterprise: Hesket Newmarket Brewery Limited

Location: Hesket Newmarket, near Wigton, Cumbria

Legal structure: Industrial and Provident Society community co-operative

Type of activity: Brewery

Date established December 1999

Type of members: Local villagers and people with a connection to the village


Latest annual turnover: £60,000

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Community Buyout

business.

The members elect a committee of five who direct theoperation of the brewery. The brewery employs a manager(who is not a member of the committee, although heattends to give advice) and one other member of staff.The members of the committee take a hands-on approachbeing involved in financial management, marketing andbids for grants. Other members do work voluntarily, forexample one member does telesales for two mornings aweek.

Within a small village, members find out about the affairsof the brewery by word of mouth. A newsletter is alsoproduced to keep more far flung members of theco-operative informed. An AGM is held in November ofeach year.


The majority of the brewery’s sales are direct to individualpubs in Cumbria and the North East. The furthest afield isHaydon Bridge. They also do some sales throughBeercellar based in Sunderland.

The members are cautious as to how to expand thebusiness. They believe that once it reaches a certain size itwill require a significant change in the culture of thebusiness, in particular more sales through distributors asopposed to direct sales. Current strategy is for steadygrowth. This was being achieved prior to Foot and MouthDisease and is now back on track.

The beer is sold on reputation, not price, although thebrewery’s production level made it eligible for the dutyreductions introduced in the 2001 budget (which hassaved the brewery £11,000 per year). There are numeroussmall breweries in Cumbria, whose geography is conduciveto their development, and Hesket Newmarket perceives nomajor threats.

The brewery is gradually investing to upgrade its plant andimprove beer quality. The appointment of a new headbrewer, Michael Parker previously employed by Bass, hashelped in this. Investment is being met from newshareholders and a Rural Recovery Fund grant. Thebrewery is now in production four days a week.

The co-operative is considering diversification as a meansof growth:

• Increasing the numbers of brewery tours anddeveloping a visitors’ centre

• Running short brewing courses

• Developing a new bottle conditioned beer.

However, for the moment, concentration is on recoveringfrom the effects of the Foot and Mouth Disease crisis.

Member benefits

The members are highly committed to the co-operativeeither as local people or as supporters with a strong tie tothe village. There is a level of informal memberinvolvement which is often possible in a small communityco-operative. While the researcher was on site, twomembers from the village came into the brewery.

It is clear that there is a strong sense of ownership of theco-operative in the village, although anecdotal evidencesuggests that this sense of ‘ownership’ extends beyondmembers who own shares in the brewery.

If the co-operative makes a profit members receive adividend on their shareholding. In 2000 this amounted to£25 (or the equivalent amount in beer). In 2001 theeffects of Foot and Mouth Disease meant that there wasno dividend.

Members of the co-operative (whether local villagers orsupporters who use the village as a base for walking)benefit from the continued existence of the brewery linkedto the Old Crown. It was the desire to see this continuethat made people willing to invest in the project.


Community Buyout

Key features

• In 1999 the Shilbottle Village Forum saw that whatwas then the only village shop was in difficulty andapproached the owner to explore a rescue

• The Shilbottle Village Co-operative was formed with amanagement committee of eight, none of whom hadany substantial experience of running a shop

• Over half the village became shareholder members ofthe co-operative, raising about £3,000; this moneyprovided a fund to cover the initial development costs

• The 'asking price' for the business was £150,000 plusstock; the business plan called for this money to beraised from a number of private and public fundingsources and assumed that grant funding would be inplace by March 2000 – but in fact funding turned outto be a bureaucratic minefield

• In the end the buyout was only successful because abenefactor was persuaded to buy the shop buildingand lease it to the co-operative

• There have also been a number of 'people problems'and perhaps a structural weakness in that the shopneeds a multi-skilled business manager but can onlypay about £15,000 for this position – at present thecommittee members do a lot of 'hands-on'management and other work voluntarily

• The shop now takes over £6,000 a week and employsfive people (two full time, two for 30 hours and onefor 10 hours a week) – all local people.

History

Since the committee formed to look at the shop rescue inAugust 1999 had little experience of running a shop, andno funds, the first task was to raise money for planningand development work. This was done by an initial shareissue to villagers, which raised about £3,000.

The 'asking price' for the shop was £150,000 plus stock,which the business plan envisaged being raised from anumber of private and public funding sources. However,funding the buyout turned out to be a bureaucraticminefield and disappointment followed disappointment.The committee received 'nods and winks' that funds wereavailable, that approval was a formality, and was given'expert' assistance to fill in application forms, but aftermonths of waiting half the promised funds evaporated.

Meanwhile the trading position of the shop continued todeteriorate. To prevent it from closing the committeedecided to temporarily lease the premises from the oldowner. With a lot of voluntary effort they decorated andrestocked the shop, and in the first months of tradingweekly takings doubled from £3,000 to to £6,000.

At this stage the business was run by the committee, withthree part time paid staff, and the following funds hadbeen agreed:

• Over £25,000 from the Northern Rock Foundation(£15,250 for a manager's salary and £10,000 forbuilding refurbishment)

• £6,000 from the Rural Development Programme forbuilding refurbishment

SHILBOTTLE VILLAGE CO-OPERATIVE

Fact file

Name of enterprise: Shilbottle Village Co-operative

Location: Small village just off the A1 in mid-Northumberland

Legal structure: Co-operative Society. Over half the village population are shareholder members, subscribing about£3,000 altogether. However, although originally a bona-fide co-operative with members allowed adividend, as a result of funding requirements the constitution has had to be changed so that noindividual can profit.

Type of activity: Village general store, mainly food, with alcohol licence, newspapers and National Lottery tickets

Date established: Community buyout of existing shop in autumn 2000

Type of members: Community members


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Community Buyout

• Another £6,000 or so in grants from other sources,mainly for refurbishment and disabled access

• Soft loans – £5,000 from the Duke of Northumberlandand £3,000 from Alnwick District Council.

Funding was in place to employ an experienced shopmanager. However, in spite of careful recruitment thisappointment didn't work out – indeed it only lasted fourweeks. Meanwhile, raising enough money to purchase thebuilding (and draw down agreed refurbishment grants) wasproving impossible – until the committee approached theDuke of Northumberland. The Duke's company,Northumberland Estates, completed purchase of the shopbuilding and leased it to the co-operative. Finally therefurbishment of the shop could go ahead – and thisbecame more of a priority as a result of an environmentalhealth inspection. The necessary refurbishments wereextensive, costing over £25,000 altogether.


Consultation and participation involving the whole villagehave been hallmarks of this venture. When the possibilityof 'rescuing' the shop arose, the village forum carried out asurvey – interviewing people at the Post Office – whichreached over half of the 650 households in the parish, andwas overwhelmingly positive. The forum then held anopen meeting which endorsed the project and elected thecommittee to organise and run it. When the co-operativewas constituted and the shares issued – again involvingover half the village as shareholders – the committeeresigned en-bloc to be formally re-elected by the newshareholder members.

A shop manager is needed by the committee to take overthe day to day running of the shop and the financial andstaff management. However, after the appointment of thefirst manager didn't work out it has proven impossible tofind a manager with the full range of skills required on thepay scale affordable. The committee members thereforefind they are still very much hands-on – it is estimatedthat they give a total of 70 staff-hours per week. Theyfear this reliance on volunteers may not be sustainable.


Shilbottle now has a modern village store, with a floor areaof about 80 square metres, supplying a wide range ofgoods at competitive prices. Following the refurbishmentstrade has increased to a weekly average of £6,300. Thetrading policy is to keep prices as low a level as possibleconsistent with maintaining a satisfactory cashflow and asmall emergency fund.

The present trading pattern indicates that the business is

sustainable but the committee continues to make effortsto reduce costs. An example of this is accountancy whichpresently costs £146 per month – some managementcommittee members are now engaged in an accountancycourse with a view to reducing this cost.

The real problems concerned start-up funding and staffing.Without the intervention of the Duke of Northumberlandthe buyout would have collapsed – though in fact it hasproved an excellent investment for the Duke, because thegrant-aided shop refurbishments and increases in propertyvalues have probably doubled the building's value.

Another unforeseen problem (probably related to thefunding delays) is that during the buyout period anothershop actually started up in the village, and the competitiveelement does not always sit easily with the democraticopenness of the co-operative.

On the staff side, it is seen as essential that a manager isemployed who has business acumen, financial and peoplemanagement skills, but small shops simply cannot affordsomeone with expertise in all these areas, so a continuingreliance on volunteer effort is likely.

Among the key success factors have been people who arewilling to drive the project forward, who do not give upbecause something hurtful is said about them, and whoare willing to 'get their hands dirty'. They needdetermination, energy, and the imagination to look for newways forward. Most of all they need to be goodcommunicators; to make others feel involved and includedso that they keep up momentum. Although there aretensions at times within the committee – some give theimpression that 'hands on' work is beneath them, andsome feel that strong personalities tend to take over orcannot delegate – they work through such problems andrecognise their own and others' strengths and weaknesses.

Member benefits

Members benefit from their shareholding status; althoughmember dividends had to be dropped they still enjoy asense of ownership and a say in what happens to theirvillage shop. The shop refurbishment, external hardlandscaping and so on has improved both the shoppingfacilities and the physical environment of the village.

The shop has also enabled many people to make newcontacts and nurture a sense of community. The localvicar, for instance, is actively involved in the co-operativeand feels it is consistent with his role to help bring thecommunity together – and it has brought him into contactwith people he would not otherwise have met. Manymembers have also learnt a lot – although the learningcurve has been a bit too steep at times!


Employee Buyout

UBH INTERNATIONAL LTD

Fact file

Name of enterprise UBH International Limited

Location: Burscough, Lancashire


Type of activity: Liquid and gas tank container manufacturer

Date established: August 1999

Type of members: Employee owned

Number of members: 120 employees

Latest annual turnover: £8million

Key features

• World class company put into receivership in February1998 putting 300 people out of work

• Strong support from the trade unions for a buyout –GMB and AEEU combined with a steering committeemade up from different divisions of the business

• 90 employees agreed to invest £5,000 in the newventure (either their own money or borrowed). A free-phone number at the Co-operative Bank was set up toenable employees to obtain the funds

• Advice team from Lancashire CDA, Malcolm Lynch(Wrigleys) solicitor, Casson Beckman corporate finance

• Determination of the steering committee to fight onin the face of fierce competition from other bidders,antagonism from the receiver and a long periodbetween ceasing to and recommencing trade.

History

The old Universal Bulk Handling (UBH) was a companywhich had built a world class reputation for manufacturinglightweight tank containers. Although there were largerproducers, UBH had gained a reputation for design andengineering quality. It was put into receivership inFebruary 1999 and 300 people lost their jobs in an area ofLancashire that could ill afford it. Burscough is a smalltown located in a mainly agricultural area.

The two key trade unions involved (GMB and AEEU) werekeen not to see potential competitors strip the assets andleave no employment in the area. Following an initialfeasibility study supported by Lancashire CDA and Mooreand Smalley (Accountants), a bid of £1.1million was put to

the receiver. A significantly larger bid from an Irishcompetitor was accepted by the receiver in March 1999.

The employee-led steering group was not convinced aboutthe seriousness or the viability of the opposition andcontinued to prepare. In mid-April, the competitionwithdrew and the management/employees soughtexclusivity. This was not granted. Regular mass meetingswith the potential workforce were held to feedbackinformation and gain commitment for actions taken by thesteering group.

Corporate financiers (Casson Beckman) and MalcolmLynch, solicitor, were engaged to advise the employees inthe submission of the revised bid, the raising of the financepackage, commercial and constitutional aspects of thebuyout. Although funds were sourced from the Countyand District Councils and LAWTEC for the initial work,most of the corporate finance and legal work wasundertaken at risk.

The buyout was completed on 26 July 1999 some fivemonths after the company had gone into receivership.


The new company is managed by a board comprisingexecutive and non-executive directors the majority ofwhom were involved in the buyout process. Threeemployees also sit as directors.

The fact that 90 former employees were willing to invest£5,000 each in the company proved to be a very strongfactor in attracting external investment. It was thought atone point that venture capital would be required (therebydiluting the employee shareholding) but the rewardrequired was felt to be too great. In the end sufficient

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Employee Buyout

debt capital was raised to effect the buyout. Over£2million was raised through:

• Employee equity

• ING (Dutch leasing company) – asset finance

• Riggs (American bank)– working capital finance

• Regional Selective Assistance – grant

A remuneration committee has been established to set theterms and conditions of employment in negotiation withthe trade unions. It also sets company policy on benefits.The employee directors have a seat on this committee.

An employee benefit trust (EBT) has been established:

• To create an internal market for the purpose of buyingand selling shares in the company and

• To provide a mechanism for consultation betweenemployees and the directors of the company.

Provisions regarding this have been inserted in the Articlesof Association of the company and also in the trust deedgoverning the employee benefit trust. The trustees of theEBT are representatives of the trade unions active in UBHI,an employee representing administrative staff and anemployee who is part of the management structure.


The original company was a manufacturer of specialistroad tankers and began to diversify from the early 1970sonwards using the skills of its engineers and workforce todevelop a range of inter-modal tank containers for thecarriage of bulk liquids. The old UBH became one of theworld’s leading suppliers of tank containers (in 1998 it had15% of the world market).

Following the management and employee buyout inAugust 1999, UBHI began to refocus its activities movingaway from standard tank containers to concentrate onbuilding the more specialised custom-built unitsincreasingly demanded by end users.

Despite an unprecedented slump in the world market fortank containers, UBHI has re-invented itself, carving out anew position in this fiercely competitive internationalmarketplace. Soon after the relaunch of the companyUBHI manufactured the world’s lightest full-frame tank, a31,000 litre swap tank for a German tank containeroperator weighing in at 3,250 kg (against a target weightof 3,400 kg). UBHI’s swap tanks permit the carriage of upto 35,000 litres while ISO tanks are used in deep seas.Products carried range from orange juice to Scotch whiskyfor the food and beverage industries, and from latex tosulphuric acid in the sphere of bulk chemicals.

The slump and strong competition have affected UBHIparticularly in cashflow. A substantial refinancing wascompleted by UBHI in September this year representing aninvestment of over £1 million together with furtherfunding facilities which were made available to theCompany by Baxi Partnership Limited Trust established in1983 and confirmed by Act of Parliament in 2000 with thespecific purpose of promoting business success inemployee ownership and professional management withina partnership culture. Baxi has acquired a 50%shareholding in UBHI enabling the employees of UBHI tobecome beneficiaries of Baxi itself thereby adding furtherbenefit and protection.

Member benefits

The 95 founder members were able to save and maintaintheir own jobs. Since then 25 new jobs have been created.The manufacture of tanks is highly skilled engineering workand there are few other employers offering comparablework in the area.

The business is 100% employee owned. The employeeselect three members of the Board and mechanisms havebeen set up to ensure genuine employee involvement andsharing of information. There is therefore a sense ofownership by the employees of their place of work. UBHis committed to providing training to its employees.

The employees, as the owners of the business, are entitledto a share of any profits made by the business.


Employee Buyout

NORTH EAST DIRECT ACCESS

Fact file

Name of enterprise: North East Direct Access

Location: Just off the A167 between Chester le Street and Durham

Legal structure: Worker co-operative company limited by guarantee

Type of activity: A hostel providing bed and board for 'gentlemen of the road'. The complex is composed ofbungalows that have single rooms with communal living and bathroom areas, and new flats(with more planned)

Date established: Employee takeover of existing hostel in February 1992



Key features

• North East Direct Access provides accommodation,meals and other services for men who wouldotherwise be 'lost on the streets' – men with mentalhealth, alcohol or drug problems, or who just have nohome or family.

• It provides a dry 'safe haven' with a 'family'atmosphere, where people are helped to start afresh,form friendships, and move on to independent living(or for a small group who will not leave, to be asindependent as possible). It is always oversubscribed.

• Staff put their redundancy payments into the £70,000required to buyout the complex.

• The men look after their own rooms and are happy tohelp out with work that needs doing. There are woodworkshops, gardens etc. There are cleaners for thecommunal areas and cooks who provide a choice ofmeals in a spotless kitchen.

• The residents are firm friends of the staff – “how'sAunty Barbara today then?” – and when there aretrips out organised for the residents they ask the staffto join them too.

• They are also readily accepted by local people, and forinstance have a regular quiz team at the local pub.

• The staff actually listen to what the residents want.For example they are building single units for thosewho wish or need to be on their own for variousreasons.

History

20 years ago the centre was run as a DSS* ReceptionCentre for 'men of the road'. The complex was actuallybuilt for the Bevan Boys (conscripted mine workers) andthe police then used it as a training centre before the DSStook it over. An old photograph shows how it was then:rows of dilapidated structures that housed the men, acentral storehouse and kitchen, workshops and allotmentgardens to the rear where the residents worked each day(for their bed in the evening). Residents were forced towork for their food; their clothes were taken away tomake sure they did not leave the premises after theirevening meal, and if they did the police were called toarrest and return the 'absconder(s)'. It was run like aprison camp with an 'us and them' relationship betweenthe residents and the staff (who 'felt like screws'). Therewas vandalism and violence.

In 1991 the DSS decided to close the centre. Staff had tostart turning people away – “it was really awful becauseyou didn't know where they would end up or if they'd endup somewhere really bad”. The staff formed a workinggroup and lobbied the local press and MPs. A sit-in wasstaged by 35 residents and staff. There were articles inthe newspapers and on three television programmes atprime time. Durham Co-operative DevelopmentAssociation got involved and proposed a staff buyout –this had not been considered but once mooted the staffknew they had the skills and knew it was a viableproposition – despite the unhelpful comments of a seniorcabinet minister at the time who said they would nothave the ability to run it. Of the 20-odd staff members at

*The Department of Social Security, now called the Benefits Agency

Co-operativesUK52

the time over half of them felt strongly enough to puttheir redundancy payments into the £70,000 buyoutprice.


The complex is run by a management committee – calleda 'general council' – of five employee-directors with awide range of skills – care, carpentry, building, accounting,plumbing etc. The directors work to make the best oftheir skills and take an active interest in what ishappening.

Initially 10 of them tried to run the company but it wasfelt there were too many to be effective, and it causedtoo much conflict as agreement is more difficult the morepeople you have. They have a personnel sub-committeeconsisting of four of them to iron out the day-to-dayconflicts and problems, leaving the general council to dealwith the wider picture. This has been successful and hasreduced the conflict and bad feelings initially experienced.

There are now eight full time workers (five of whom aredirectors) and seven part time workers, all locallyrecruited.


Residents are referred by doctors, police, probation serviceand other agencies – or people arrive just because theyknow it's there. They have people from Scotland,Southampton, Ireland and England. They keep a balanceof ages because too many young ones tend to form gangs– a mix is deliberately kept to keep conflicting behaviourto a minimum. Residents are initially taken to the doctorwho assesses any health needs and may providemedication or refer a community psychiatric nurse fromthe social services for them. Then the person is taken totheir bungalow and settled in. They have meals in thecentral kitchen which is also a meeting place. In theirshared bungalows they have kettles to make their owndrinks, a shared bathroom and their own bedroom. Theresidents’ stay is not time limited and some have beenthere for many years.

The directors plan to extend the range of accommodationavailable by building flats to allow more residents to havea little privacy

Member benefits

The employee-members’ benefits included keeping theirjob (although some were offered redeployment) and theknowledge that they had kept many men from being sentto 'DSS places' – “there are some grotty B&Bs out there”.

Employee Buyout


Key features

• The enterprise started out as a project of a housingassociation, but has been externalised as a successfulsocial enterprise.

• The ongoing commitment and support of HomeHousing has been critical to the project’s success.

• The enterprise is owned and governed by a multi-stakeholder group bringing together a range ofdifferent interests in the Cleator Moor area.

• The nature of the enterprise – providing services forvulnerable groups and providing employment/trainingfor people trying to find a way into the labour market– means it cannot be commercially self-sufficient.However, there is a clear desire to generate tradingincome and to identify new markets to increase this.

• The philosophy of intermediate labour market (ILM)projects is less easily employed in rural than urbanareas because the labour markets for particular skillsare much smaller.

History

Originally the enterprise was started in 1998 as a projectof Home Housing Association as a means of providinglocal services to some of its more vulnerable tenants andproviding local employment and training opportunities. Itconcentrated on providing gardening and painting anddecorating services for tenants of Home Housing. Theaim was to operate as an ILM, providing employment andtraining which would enable to move into the mainstreamlabour market.

In 2000, Home Housing decided that the enterpriseshould become a free standing social enterprise. A multi-

stakeholder Board was brought together, including thecommunity, the employees and key supporter agenciesincluding Home Housing and Cumbria County Council.The Board worked to develop a business and operationalplan to create an independent enterprise which waslaunched in April 2001. The project received specialistadvice and training from Cumbria County Council andLancashire CDA.

Funding was sought from a variety of sources, includingERDF, SRB, Home Housing and Cumbria County Council. Itwas also expected that the enterprise would generateincome from trading activities.

In its first 18 months of trading, Home To Work has grownto employ 16 full time staff, as well as 3 County Councilplaced trainees, 4 trainees from the British Trust forConservation Volunteers and 4 year 11 pupils on aprogramme called ‘Bridge To Employment’. 16 peopleemployed/trained by Home To Work have moved intomainstream employment.


Home To Work is a company limited by guarantee with amulti-stakeholder Board comprising four communitydirectors, four employee directors and four directors fromsupporting organisations (currently Home Housing,Cumbria County Council, Copeland Borough Council andthe Employment Service). There are currently twovacancies for employee directors, but efforts are beingmade to recruit these.

There is a lot of community support for the project, butso far no community representatives involved except forthe four directors. Home To Work is planning to advertiseto recruit more active people from the community.

Multi-Stakeholder Buyoutfrom an ExternalisationHOME TO WORK

Fact file

Name of enterprise: Home To Work Limited

Location: Cleator Moor, Cumbria

Legal structure: Company Limited by Guarantee

Type of activity: Horticulture, painting and decorating

Date established: April 2001


Co-operativesUK54

The Board meets monthly and works well together. Dayto day management responsibility falls on Bill Robson, theBusiness Development Manager, who is not a member ofthe Board.


The main areas of business are providing horticulture andpainting and decorating services for individuals in thecommunity who are unable or cannot afford to do suchwork themselves, but the enterprise has been moving intoproviding services for social organisations and schools.They try not to compete directly with the sort of workdone by local trades people as their aim is to increaselocal employment.

The volume of work is higher than they can handle – forexample they are dealing with 500 gardens a quarter.They serve a wider area than Cleator Moor, as far away asWhitehaven and Egremont.

Many of the trainees/employees are New Dealplacements.

The enterprise is only semi-commercial with 80% ofincome coming from grant and 20% from trading income.However, the volume of trading income is expected toincrease this year. With the exception of the grant fromHome Housing (paid for by a trust established by thehousing association) all the other sources of income areretrospective which has caused cashflow difficulties.However, these are now planned into the business. At themoment there are a number of outstanding grantapplications which is causing financial uncertainty. BillRobson believes the enterprise could survive, in a muchreduced state, without grant aid.

Home To Work is seeking to develop new markets inrecycling e.g. plastics, green waste and computers. This isfor two reasons: firstly, they believe this to be a significantcommercial opportunity; secondly, they realise that theycan’t just keep turning out trained gardeners and paintersand decorators because there isn’t enough demand forthem. They are already finding that they are having tokeep people on longer than they would hope becausethere aren’t always jobs for them to move into.

Member benefits

The area of Cumbria around Cleator Moor is an area ofhigh unemployment. Most of the agencies involved aretherefore concerned to increase access to employment.Home Housing Association also benefits from services tosome of its most vulnerable tenants.

For the employees and trainees there is an opportunity to

gain real skills in a realistic work environment increasingtheir chances of employment in the mainstreameconomy.

For the community representatives there is a desire bothto see services for vulnerable members of the communityplus social organisations and to improve employmentprospects in the area.

Home To Work also has a ‘buy local’ policy to help supportthe local economy. Bill Robson estimates that orders havebeen placed with more than 100 local businesses in HomeTo Work’s 18 months of operation.

Multi-Stakeholder Buyoutfrom an Externalisation


Key features

• Gas Services Northern came out of the old British Gasindustrial and commercial servicing arm – but in factwas prevented from carrying over many contracts orother advantages from the previous service

• In many ways, therefore, it was effectively a new startor 'phoenix' – now, however, it has a record ofproviding a good service by people who know whatthey're doing.

• They are customer driven and will work around theircustomers’ needs; work is delegated to membersrather like sub-contracting – the responsibility formanaging each job is in the hands of the delegatedmember without supervision.

• However, proper training and tools are provided to thestaff so everything is to hand and working.

• They all really enjoy their work – and work welltogether.

History

Following privatisation British Gas began to divest orcontract-out many aspects of its operations. An employeebuyout of the industrial and commercial servicing armwas proposed – in fact taken through to the offer stage insummer 1995 – but nationally a management-led buyoutwas favoured. In the north there was a firmercommitment to a more employee-owned model, and thisled to much political manoeuvring at the time. Althoughthe workforce was split a small group of employees didsucceed in taking over a small part of the former servicein the north and setting up a democratic employee-owned company. Durham CDA, with behind-the-scenestechnical support from Economic Partnerships, had

advised the proposed national buyout, and now providedtraining on how to set up Gas Services Northern, designedthe legal structure, and helped access funding etc.

British Gas promised help and work, and the northernengineers took over the old depot and set up thecompany on that promise. In the event British Gasprovided neither help nor work, and the now redundantengineers found they had no work and no money. Withmore help from Durham CDA, however, they set aboutmarketing their new business and work started to comein.


There are four directors, two other engineers and twotrainees based in Darlington, plus two contract engineersin Carlisle. The four directors and the two Darlington-based engineers all attend regular monthly meetings,where decisions are made by consensus. Everyone is keptinformed as they have found poor communications causeproblems – and in the past led to one staff memberleaving.

Work has to be shared and each member is paid not aregular salary but according to the work they do (althoughthe trainees are paid a standard wage). Each member isexpected to carry on work on a job until they are finished(not regular hours) – and they can go home if they finisha job early. Timesheets are not kept – everything is basedon trust, and this has generally worked well to date –although they did have problems in the past withinequitable sharing out of work, but these centred aroundone member who has since left.


The main aim is to continue to build a good reputation

Divestment from a LargerBusinessGAS SERVICES NORTHERN

Fact file

Name of enterprise: Gas Services Northern Limited

Location: Darlington (but serving a wide urban and rural area)

Legal structure: Employee-owned share company

Type of activity: A wide range of gas installation and repair work (fixing gas meters for large companies, commissionwork for offices and schools, commercial and industrial work, air conditioning, heating etc

Date established: Buyout of part of British Gas Industrial & Commercial Servicing in January 1996


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and extend their work base in current areas; in particularto become more and more customer-led and focus moreon their customers’ needs.

The current premises are rented, and they are planning tobuy the building. This is one example of a broad strategyto find ways to cut costs and increase the company'svalue while remaining solidly in current work areas.

Member benefits

The members see the main benefit as having kept work inan area in which they are comfortable and skilled. Theycan work together and enjoy that. The current managingdirector, Chris, has been able to train his son Mark tomake his living in the trade and they have been able togive training and employment to other young men tocontinue the work. They are a focused company, workwell together and make a living. They are very happy thatthe financial rewards are linked directly to the amount ofwork done.

Divestment from a LargerBusiness


Key features

• Enquiry generated from the national EmployeeOwnership Options website(www.employee-ownership.co.uk)

• Participatory management style and commitment toshared ownership

• Realisation that knowledge of the whole workforcewas key to the success of the business and that thisgave them significant bargaining power

• The idea and impetus for an employee buyout camefrom the employees and management, not theowners

• Advice provided from team at Lancashire CDA andMalcolm Lynch (Wrigley’s Solicitors).

History

The Savant Group have been established for over 20 yearsin the small town of Carnforth (North Lancashire). SavantEnterprises was the consultancy and development armand specialised in systems analysis and the design andbuild of life critical systems.

Savant has been writing blood product control softwaresince 1982 when a contract was awarded by theBrentwood Blood Centre for the development of a bloodlaboratory testing system. In 1985, the same system wasimplemented at the Tooting Blood Centre, the largest inEurope.

In 1996 Savant was awarded a contract for the whole ofthe English blood service – over the next two years all 14English blood centres were converted to PULSE. PULSE isa life critical national system which went fully operationalon time and within budget.

The family owners decided that they wished to retire in1999 and seriously considered a trade sale. This wouldhave meant moving the business and staff to anotherlocation. The management was unwilling to move andmade this fact clear to the owners. Following a websearch under ‘employee ownership’ contact was madewith Lancashire CDA and management began to progressthe concept of an employee buyout with employees andthe owners.

The management and staff knew that they had the skillsand expertise to run the company themselves and theemployee-owned option offered a real solution to bothparties. Wrigley’s solicitors designed an employee benefittrust to assist the employees with the transfer. On 4 July2001, the controlling interest in the Savant Group wastransferred to Savant EBT Ltd and the company becameemployee owned.


There are two companies involved in the group, theoperating company (Savant Group Limited) and anemployee benefit trust (Savant Group [EBT] Limited).Savant Group Limited has a board of three executivedirectors and one director appointed by the EBT. The EBThas a board of two elected employee directors and oneappointed by Savant Group Limited.

Savant Group (EBT) Limited has 75% of the votes atgeneral meetings of Savant Group Limited and hasprovisions in its own rules for matters on which it mustballot the employees before casting its vote. Therefore nofundamental changes can be made to Savant GroupLimited without the consent of the employees.

In addition to the Board of directors, there is amanagement group of eight in the operating company,

Retirement of an Owner

SAVANT ENTERPRISES

Fact file

Name of enterprise: Savant Enterprises Limited

Location: Carnforth, Lancashire


Type of activity: Information technology development and consultancy

Date established: July 2001



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Savant Group Limited, including the two executivedirectors.

The structure of the sale distinguishes this particularproject where the owners receive a proportion of the netproceeds of invoices to existing customers of thecompany for a period of three years following the owners’retirement.


Savant is building on a reputation established over 25years– delivering successful mission critical applicationswithin often time critical requirements. The company isresponsible for building one of the world’s largest bloodtransfusion systems on behalf of the National BloodAuthority (NBA).

Savant’s main areas of expertise include:

• Systems analysis design and build of mission criticalsystems

• Development of systems to support executiveinformation, business intelligence and corporatecommunications

• Consultancy for IT and business users in areas such asbusiness process definition and improvement

• Expert advice on information systems strategy,business processes and data management.

Savant continues to develop fast, accurate andsophisticated database applications for national clientsand SMEs. Where possible, it builds applications from acollection of reusable software components. Thecompany’s approach to software development includesproject definition, requirements definition, design, build,test and implement.

Savant has developed consultancy approaches to helporganisations to deal with the problem of too much dataand too little information. Business intelligence isconcerned with synthesising a diverse range of data oftenheld in different formats into useful information for anorganisation’s management. Consultancy services includeinformation strategy planning, business process and datamodelling, process improvement within informationsystem development teams and departmental andenterprise wide information systems.

Savant has developed training as a complementaryactivity to its consultancy. It undertakes application andgeneral training. The company’s approach to training isgenerally to train the trainers but it also has full-timetraining staff capable of running training courses in thescope and usage of an application.

Member benefits

There had been considerable uncertainty over the futureof the company during the later years of the owner’stenure. The employee buyout has provided security forthe employees. It has also secured the location of thebusiness in the small town of Carnforth in NorthLancashire.

The transfer to employee ownership has reinforced andformalised the participatory management style of thebusiness. It has also given the employees real ownershipof the business with a right to a share of any profits thebusiness generates.



Key features

• In 1997 Brian Todd and Dave Slowey were long-standing employees of Ashington Autospares, whichwas technically a partnership but largely run by theowner-manager. Brian had worked there since 1971and Dave since 1989.

• The old owner-manager had often expressed his wishthat the employees would take over the business onhis retirement. Unfortunately, in the event, he gavethem only six weeks’ notice.

• This came at a time of uncertainty because a big areaof work – parts supply to the local council vehiclefleet – had just been lost.

• Brian and Dave could not meet the six-week deadline.In fact it took them nearly a year to get together thenecessary business plan and finance to form acompany and buy out the old partners. They reallyfelt the pressure over this period as the idea of sellingto a ready buyer was mooted.

• Brian and Dave are local and know their customerspersonally. They have a laugh and 'a bit of banter'with them – and their word is obviously trusted –'they may not always be the cheapest but you get agood job there'.

• The company now employs Brian and Dave, anotherfull-timer and two part-timers, including Brian's wifewho is company secretary and does the accounts.

History

Although very successful at first, in later years the oldowner-manager had lost interest and the business andproperty had become a bit run down. Brian and Dave hadbeen promised that they would run the business one day,but in the event the old owner gave them only six weeks’notice of retirement and instructed them not to tellanyone about it. This was clearly impossible – and onlyafter much anxiety did Brian and Dave find advisersEconomic Partnerships (EP) who assisted in the hardnegotiation to extend the deadline and also bring in othersupporters, including suppliers (with whom thecontinuation of credit was vital).

The biggest problem was raising enough money to buyout the business at all. They were turned away by severalbanks, and met with frustrating procedures by otherfunders, including the County Council, which kept askingfor more and more information even for a small grant.One bank said it would help, only to ring the followingday to retract their offer. In the end, support came fromthe Royal Bank of Scotland which provided a mortgage tobuy the building, ICOF, a social lender interested in theemployee ownership aspect of the business, and the localdistrict council. Brian and Dave say it is vital to find aprogressive funder who can see the possibilities of whatyou aim to do – but finding them is not easy!

Until they contacted EP, they also had difficulty findinganyone to listen to what they really wanted – otheradvisers wrote in the business plans what they thoughtthe men ought to do. EP sat and listened to exactly whatthey wanted and wrote up a business plan whichunlocked the money.

“You need someone to believe you can do it”


ASHINGTON AUTOSPARES

Fact file

Name of enterprise: Ashington Autospares

Location: Ashington is a small town in south-east-Northumberland, sometimes called 'the biggest miningvillage in the world', although most of the coal mines in the area have now closed leaving a highlevel of unemployment

Legal structure: Employee-owned share company

Type of activity: Trade and retail motor factory, including paint mixing

Date of establishment: Employee buyout of existing shop in January 1998



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Structure and governance:

Brian and Dave are still the company directors and sharemost management jobs. Over the time they havemanaged the business they have discovered theirstrengths and weaknesses, which are openlyacknowledged and discussed.

Brian tends to look after the technical aspects (eg thecomputer) and Dave is more experienced on the paintside (for which they are well known – they can matchalmost any colour and finish on the market) – so theyspecialise to some degree but are still flexible whenrequired. They work an average of 60 hours per week andboth supervise the other staff who serve retail customers,order and deliver stock. Everyone works hard but there isa give and take attitude that engenders respect. Theyhave regular meetings to discuss the business and anypotential problems. Brian and Dave agree that beinghonest and talking things through were and are key totheir success. They knew each other well before taking onthe business together and they feel this was a big bonus –even though they don't get much time to socialisetogether now. They can and do disagree, but without badfeelings, and they retain their respect for each other.


Key success factors have been

• Self-belief

• Sense of humour

• Hard work for long hours

• Persevering when things are rough

• Working as a team

• Being honest and talking problems through

• Going out of your way for customers. “We are toosoft and some things take too long – but ourcustomers come back”

Brian and Dave don't have a formal written business plannow –“A business plan is something you take to the bankmanager, who doesn't seem to take much note of it, thenputs it away in a drawer”.

However, they obviously do have plans. They haveploughed back profits into the business – especiallyimproving the property and its image. They want todiversify their stock further (although they pointed outthat, unlike in other types of business, the stock is alwayschanging with new models of cars etc, so it does notmake sense to fill space with stock that may be obsoletein six months). They concentrate on getting business and

servicing the customer and it is this aspect that they wishto drive forward. They rely on the Yellow Pages and wordof mouth – but this supplies enough customers.

Member benefits

They have had the opportunity to run their own businessand have a job that pays above the minimum wage. Todate they have ploughed most of the money back intothe business but can see that a few years hence there willbe benefits to be reaped.

They can run the business as they see fit, which issatisfying after being in the position of employeesknowing what needed to be done but not being allowedto do it. They entirely refitted and carpeted the shopfront and office, and a new delivery van was purchased,along with computers, so that stock-taking and ordering(while slower at first) was much improved. All in all, thewhole business has been slowly upgraded and broughtinto the 21st century.



PUBLICATIONSEmployee Ownership Options – information packcovering legal structures, employee benefit trusts,divestment, externalisation and a number of case studies.Outcome of a European ADAPT project compiled bypartners. Download from www.employee-ownership.org.uk

Externalisation and the Democratic Enterprise – atraining materials guide. Mick Taylor (Gowland TaylorAssociates) and Sipi Hameenaho. Available fromCo-operativesUK, Holyoake House, Hanover Street,Manchester M60 0AS, tel 0161 246 2959

Employee Share Ownership – an executive briefing.Bacon and Woodrow (Chartered Institute of Personnel andDevelopment) ISBN 0852929021.

SME Ownership Succession – Business Support andPolicy Implications (SBS Research and Evaluation,Sheffield). Chris Martin, Dr Lynne Martin and AlanMabbett, Knowledge Management centre, BusinessSchool, University of Central England. Available todownload from www.sbs.gov.uk under Research/KeyPublished Research.

Company Succession – Introducing Employee Buyouts.Industrial Common Ownership Finance Limited, 227C, CityRoad, London, EC1V 1JT, tel 020 7251 6181,www.icof.co.uk

Employee Buyouts and Employee Involvement: a casestudy investigation of employee attitudes. Lisa Trewhitt,Industrial Relations Journal published by BlackwellsPublishing. ISSN 0019-8692. See:www.blackwellpublishing.com/journal.asp?ref=0019-8692

Turnarounds – a development worker’s guide todemocratic conversions and buyouts. Geof Cox. ISBN8700018 13 3. Available from Co-operativesUK, HolyoakeHouse, Hanover Street, Manchester M60 0AS, tel 0161246 2959(Limited availability)

Jobs and Fairness: the logic and experience ofEmployee Ownership. Robert Oakeshott. Published byJob Ownership Ltd, tel 020 7821 9298. Seewww.jobownership.co.uk

The ICSA Employee Share Schemes Handbook. DavidCraddock. ISBN 1860720978

The Real World of Employee Ownership. John Logue,Cornell University Press, ISBN 0801433495

WEBSITESwww.cooperatives-uk.coop Co-operativesUK is the apexorganisation for all forms of co-operative enterprise. Itspurpose is to develop and extend the co-operative sector.

www.co-operativebank.co.uk In addition to over threemillion customer accounts, the Co-operative Bank isbanker to local authorities, many businesses andparticularly the retail co-operative movement.Tel: 0800 783 4745.

www.cms.coop An employee-owned business providingspecialist consultancy to co-operatives and socialenterprises in the North West of England.

www.co-active.org.uk Founded over 15 years ago,Co-active has a long and successful record developingsocial enterprises (co-ops, community businesses etc) inthe South West of England. A not-for-profit organisation,it is working to develop economic opportunities forindividuals and communities.

www.economicpartnerships.com A team of specialistadvisors on social enterprise development based in theNorth East with wide-ranging experience in the field.

www.enterprisingcommunities.org.uk EnterprisingCommunities has been set up by Voluntary ActionCumbria in collaboration with the Cumbria LocalEnterprise Agency Network to provide a range of businessadvice and developmental support specifically for socialenterprise in rural Cumbria.

www.plunkett.co.uk An educational charity whichsupports the development of rural group enterpriseworldwide with 80 years’ practical experience of workingwith public and private sector partners to promote andimplement economic self-help solutions to rural problems.

www.efesonline.org The European Federation ofEmployee Share Ownership

www.inlandrevenue.gov.uk From the home page, clickon “businesses” and page down to Employee ShareSchemes under features. This area contains informationand guidance on all approved and non-approved shareschemes (including the tax and National InsuranceContributions advantages/disadvantages of each)

www.fsa.gov.uk Website of the Financial ServicesAuthority

www.o2.org.uk Resource to enable housing andregeneration organisations to become more effectiveinvestors in the community

Co-operativesUK62

Further Reading andResources

www.jrf.org.uk

The Joseph Rowntree Foundation – a social policyresearch and development charity which commissionsresearch to better understand the causes of socialproblems and to develop more effective ways ofovercoming them.

www.centre.public.org.uk The Centre for Public Serviceswhich works with Local Authorities, health and publicbodies, trade unions and community organisations onresearch, strategy, planning and training.

www.baxipartnership.co.uk Its purpose is to invest incompanies to help them develop successfully in employeeownership

www.employee-ownership.org.uk Provides informationon how employee ownership can bring benefits toemployees, business owners and trade unions. It raisesawareness of the business options available whenbusinesses are threatened with closure due to successionproblems or divestment.

www.sbs.gov.uk The purpose of this government agencyis to build an enterprise society where all small businessesthrive and achieve their potential.

www.jobownership.co.uk Job Ownership Ltd has beenresearching, lobbying and advising on employee ownershipfor over twenty years both in the UK and around theworld. It is an independent, not-for-profit organisationsupported financially by the leading employee-ownedcompanies in the UK.

www.icof.co.uk Has been providing loan finance forco-operatives, employee owned businesses and socialenterprises for 30 years. It raises the money to do soprimarily by public share issue.


Further Reading andResources

Holyoake HouseHanover StreetManchester M60 0AStel 0161 246 2921www.cooperatives-uk.coop

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