Bigger Thinking Series Part 3 – Planning for success; planning for succession

It sounds incredible that successful UK companies, responsible for employing hundreds if not thousands of people may have business shelf lives that are wholly reliant upon either the existing directors living forever, or the business being sold, uprooted or asset stripped.

Shockingly, this is the case for many businesses today. Without a strategy for succession of ownership, the jobs, profits and products of these companies will potentially simply cease to exist, or disappear

According to Imperial College Business School, only 20 percent of UK family-owned businesses make it to the third generation. This is more alarming when considering that two-thirds of UK businesses are family-owned, generating over a quarter of the value of goods and services produced by the UK economy and, according to the Institute of Family Business, employing around 9.5m people.

Those who run family-owned businesses will know that this structure can often bring with it family tensions, making the task of handing over the keys to the next generation, anything but a straightforward one. Maybe that’s one of the reasons why only one in two (49 per cent) of UK small businesses have a succession plan, according to Barclays Bank and why one recent estimate suggests that a third of all business closures are a failure of effective succession planning.

The domestic impact of a lack of succession planning is significant as the UK’s national and regional economies heavily rely on a cohort of SME businesses. However, in both devolved governments of Wales and Scotland, there is recognition of this and in both, projects and activities are now in place to help mitigate against and manage the risk.

The 2017 Welsh Government/Social Business Wales report, ‘Rooted and Resilient’ notes that as many as three-quarters of SMEs in Wales have not planned for the future transfer of their business. Welsh Government’s Economic Renewal Plan also notes that the ‘Welsh economy faces a problem of a comparatively high proportion of the workforce nearing retirement’. These business facts emphasise the need of tackling business succession strategically, not when time has run out and has led to the development of a programme of work that is delivered throughout Wales via the Wales Cooperative Centre, which directly supports SMEs to identify an appropriate succession plan.

The challenge of business succession is also high profile in Scotland where SMEs account for 99.3% of all private sector enterprises, and 63% of SMEs are family businesses. With this in mind, and as part of a strategic plan for ‘inclusive growth’, Scottish government, via Scottish Enterprise, offers businesses free access to a one-to-one succession planning review with experts to advise owners of all the succession options for their companies.

The traditional solutions

To address business succession, owners will often seek advice from their accountants, lawyers or bankers, where the most likely to suggest a traditional ‘trade sale’ or maybe a management buyout (MBO). However, for many businesses, neither of these solutions are ideal; a trade sale is not always possible and even if it is, may not be on the terms that the owner(s) wants, and an MBO can simply mean delaying the succession problem for another generation to deal with.

Specifically, the obstacles of a trade sale or an MBO for many owners are:

  • Not wanting to sell to the highest bidder
  • Wanting to maintain the legacy of the business, its brand and its history
  • Protecting local jobs
  • Rewarding staff for their hard work
  • Not wanting to give up entire ownership immediately (or ever)

A lack of strategic business succession can have detrimental effects on both the workforce and the surrounding community. However, it would be simplistic to blame this problem solely on a lack of planning; it’s hard to put a plan into action if there’s a distinct lack of options to choose from. That said, if business succession planning does not become an economic priority, the UK risks losing the core of its SME business base.

Employee ownership – the alternative solution

As referenced in Aditya Chackraborrty’s piece in the Guardian, employee ownership is a true alternative to a sale or management buy-out.

Employee ownership offers a viable and achievable alternative to the ‘traditional’ succession routes – although increasingly, employee ownership is becoming the norm, not the exception. The sector has seen phenomenal growth of 60% over the past 7 years, primarily driven by owner/founders using employee ownership as a solution to business succession.

Employee ownership is found in all sizes, regions and sectors of the UK.

– 50% of employee owned companies are in the professional services sector

– Architect practices are the largest growth area with 15% of the ‘AJ 100’ (Architects Journal 100) being employee owned

– 20% of employee owned businesses are in manufacturing

– Health and retail/distribution are the next two largest sectors

The attractiveness of making the move to employee ownership is obvious; it secures the jobs in the locality; it provides confidence to customers and suppliers of the business’ longevity; and it unleashes the added discretional effort of the employees as they become owners of the business in which they work. This leads to increased performance, profitability and success.

Add to this that it allows the owner/founder/family to manage their exit on their terms, even retaining some ownership over the longer term, whilst at the same time enabling them to achieve maximum value for the business. Finally, a decision to become employee owned is a decision to safeguard not only the long-term future of the business’ ownership, but also its values and culture – something that most founder owners are incredibly proud of.

The above benefits are complemented by the potential to benefit from an exemption from capital gains tax on the entire proceeds AND the opportunity to offer employees tax free bonuses, since the introduction of the new Employee Ownership Trust (EOT) model…. so the question should really be why wouldn’t an owner consider employee ownership as the ONLY alternative?

Planning for ownership succession does not have to mean the end of a business’ brand, name, legacy or culture. Employee ownership is proven to deliver long-term sustainability by transferring ownership to a new generation of owners without the associated risks of a trade sale, whilst engaging support from every employee, something that most management buy-outs rarely achieve.