Employee ownership hit the headlines recently after Julian Richer, founder of the retail chain Richer Sounds, handed his business over to the workers. Richer’s pledge is far from the first -- so how does it work and what are its benefits?
Julian Richer certainly fits the profile of a maverick. The entrepreneur has been outspoken in his criticism of tax avoidance, zero-hours contracts and capitalism as it exists presently. Indeed, he literally wrote the book on what he calls “ethical capitalism”.
Instead of a Gekko-esque pursuit of profit maximisation, Richer has always insisted on fair treatment for employees. The company has prioritised secure, well-paying employment and Richer has assiduously avoided investment and shareholders.
That last part is what makes his decision to give Richer Sounds to his employees a simple exercise. Richer will sell 60% of his shares to an employee-owned trust for £9.2m, and he will give £3.5m of that amount back to employees in payouts of £1,000 for each year worked in his hi-fi stores.
And employees are inheriting a business that’s in phenomenal shape. Thanks in large part to Richer’s business acumen, the company has avoided expensive leases and business rates, opting instead to buy freeholds on most of their 52 locations.
“Any idiot can sign a lease,” Richer told the Guardian. “I always wanted to be in control of my own destiny by owning the freeholds.” Richer Sounds’ rent and rates bill is just 1.5% of turnover, an extraordinarily low amount, and the company boasted a healthy net profit of £9.7m in 2018.
Richer’s outspoken advocacy and the way the sale has been conducted has drawn praise and attention, but according to the Employee Ownership Association (EOA), employee ownership trusts (EOT) are becoming more commonplace.
According to EOA, there are 350+ employee-owned businesses at present and “a healthy pipeline of about 50 more on the journey” towards employee ownership.
“Since the Finance Act 2014 saw the introduction of the EOT there has been 250 businesses adopt the EOT structure,” the EOA said in a statement. “At last count in 2017 61% of the EOTs who had filled out the survey had a sales turnover of £1m-10m the growth in the number of SMEs.”
An EOT sale isn’t a giveaway, either. For the seller it presents numerous advantages, explained Richard Cowley, a finance director at RM2, a specialist advisory for EOT transactions and employee share schemes.
“The owner doesn’t have to open their books to a competitor. They don’t have to give trade secrets away, the transactions are quicker, and it costs a lot less to do an EOT,” Cowley said. “And you get all your capital gains tax free.”
The pitfall of an EOT transaction is simple: you likely won’t receive the full amount immediately. If you’re selling a moderately sized business at full valuation, the business is unlikely to raise enough debt to pay for the transaction in full.
“The seller will have to lend money to the business via the trust and be paid over a period of time, while the business generates enough cash to pay for itself,” Cowley explained. “The norm is that vendors will be repaid in five years.”
But to Cowley, and other EOT advocates, this is a small price to pay. EOT transactions are a tried-and-tested way to preserve your company’s legacy and protect employees, Cowley said. “If you sell to a third-party, even with the best will in the world, things are going to change. It won’t be the same business you started and by selling to an EOT, you protect your employees and you reward them.”
About Francois Badenhorst
I'm AccountingWEB's business editor. Feel free to get in touch with comments, tips, scoops or irreverent banter.