Guest Article: Can an Employee-Owned Business be Sold?

Insights by Debra Martin, Partner – Geldards LLP.

The purists would say that once a business transitions to being employee owned it must stay being employee owned. An alternative view is that an employee ownership model is not always in the interest of the long-term prosperity of the business and a different ownership model could open up development opportunities which would not otherwise be available.

Geldards has advised three employee-owned trusts (EOTs) on the sale of their trading companies to both trade and private equity backed acquirers. The Firm anticipates there will be more transactions, if the circumstances are right. Some of those circumstances would include:

1. A certain period has elapsed since the transition to an employee-owned structure. This is because any sale within this period would be a disqualifying event under the employee-owned trust legislation. The consequence of this would be that capital gains tax (CGT) would become payable by the sellers on the value of the original transaction. The sellers would normally have a veto right on any sale in this period.
     
2. The deferred consideration owing to the sellers has been paid or is being serviced by the business easily. The amount of the deferred consideration which is outstanding may impact the valuation for the business for this next transaction. If there has not been any growth in value between the date of the original transition and the next transaction, the economics for the deal may not work. This is because the EOT will be liable for capital gains tax which will crystalise on the sale. The purchase price on the sale will need to be at least sufficient to cover the tax and the outstanding deferred and associated costs of the sale.
     
3. The next transaction has a positive impact on the long-term growth prospects for the business. This is an important feature for the directors who sit on the board of the EOT. They must believe the decision to sell is in the best interests of the employees, the long-term prosperity of the business, and its ability to keep the employees employed.
     
4. The presence of a share incentive scheme for the senior management team. The introduction of share incentive schemes after the transition to an employee-owned structure is quite common now. It enables the business to attract and retain senior talent going forwards which, in turn, will be attractive to a prospective buyer of the business.
     
5. A business is in a market which is going through change. A founders appetite for risk can be far greater than a management team who have not risked everything to build the business. Securing third party funding to shore up the defenses of the business may not be possible without directors being willing to give personal guarantees. That is a big ask in the context of an employee-owned structure. A different ownership structure may give the business better access to development funding.
     

These circumstances are not exhaustive. The reasons why it would make sense for an employee owned business to be sold are numerous.

The legal aspects of selling an employee owned business are similar to a sale of a privately owned business but there are some differences. How the proceeds of sale are to be allocated and how the Trustee (which is essentially the directors of the Trustee Board) discharges its duties to the beneficiaries of the Trust, are just two of them which need to be considered.

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ABOUT: Debra Martin