Friday, 13 January 2017
In 2017, there is a perfectly viable alternative to a sale of any business, unfortunately, too many brokers are distracted by the enticing concepts of villa and golf course that they fail to consider it early enough.
The alternative is employee ownership (EO).
In the olden days’ people used to call this a Management Buy Out (MBO), but it rarely happened in the broking world. This is because the younger ‘Management’ of the provincial broker could seldom raise the money from local high street banks to buy-out the owner(s), who may well have preferred this outcome to any other, but believed mountain of succession too steep to climb.
Thank goodness this was the situation, otherwise TEn might never have invented or prospered, as the younger ‘Management’ sort to become a new broker start-up, in place of a failed MBO attempt some time before. In many cases, as fair amount of trouble would have been saved if the MBO - or as we would now term it - the EO proposition, had succeeded.
EO is so much more viable than an MBO because of the different treatment in terms of Capital Gains Tax (CGT). It’s better because, done correctly, there isn’t any.
There are, essentially, two EO options; an Employee Ownership Trust (EOT) and a Shareholder Investment Plan (SIP). There is a third, which is a combination of the two. TEn is, in fact, one of the latter ‘hybrid’ type.
If more than 50% of shares are transferred - in one go - from the original owners into an EOT, then for those shares ‘sold’ in that tranche, no CGT is payable. A saving of either 10% or 18% depending upon each individual’s value of shares.
An EOT is like the John Lewis model, whereby shares are held in trust on behalf of all members of staff and nobody owns any individually. A SIP is a means by which all staff members can purchase individual shareholdings, before PAYE and NI and then sell later without CGT. Obviously, the ‘hybrid’ method is a bit of both, although, sensibly, at least 50% EOT.
So, where does the money come from and what are the benefits? The EOT buys its shares from company profits and/or small loans. The individuals within a SIP use their own money, from salary, but before the government has taken its slice. For higher rate tax payers, then 50p in every £1 is effectively subsidised by HMRC.
Ideally, the longer one allows for the transfer of ownership to occur, the better. 5-10 years of pre-planning and preparation would be a good guideline, because the cash can take a while to generate and the next generation require training and development. Nevertheless, there are plenty of upsides to this, not least of which is the avoidance of one-sided and unfair earn-out agreements, which can cost the seller 20% of the headline value of the sale.
All of this means that the seller(s) can afford to dispose of shares at a discount - in our case about 40% - and not be much more than 5% worse off compared to an outright sale. The differences are: the business is continued in perpetuity by people with much the same ethos as the founder(s) and the staff upon who’s labour the founder(s) wealth has been built, continue to have a future.
Insurance Age have covered a wide range of articles on ‘Succession Planning and Alternatives to Sale.’