Context & Dilemma
The business owners had built up a successful, £8m turnover manufacturing business over 25 years, built with a great leadership team and with a culture that really lived ethical values in the way decisions were taken and business done. However, the owners wanted to develop a strategy to exit the business and move on to other ventures. The dilemma they faced was how to realise the value for their business while preserving the special legacy for current and future employees?
Vfdnet project management
Before VFD was involved the business’ owners had been approached by a competitor wishing to acquire the business, but they had major reservations about the risk of losing their values-led culture and potential re-location and/or redundancies. Our VFD prepared a comparison paper of the various options available including Employee Ownership and, after lengthy discussions the owners decided to go down this route.
Following a visit to the Employee Association Conference, and also a meeting with a specialist Employee Ownership lawyer, the business owners decided in principle to move ahead with the Employee Ownership exit route. Our VFD clarified with the owners that the deal was not to ‘give’ the business to the employees but to sell the business, albeit on deferred payment terms.
However, the company results were falling well short of Budget, so that the owners decided to postpone the business sale for a year, as the business was not in the right condition for the new owners. During this year, the Leadership team was reorganised, the managers refocused on the right key performance indicators, a new values team set up, and a new £0.75m investment strategy agreed. As a result, the financial results turned round, so that ‘normal profitability’ was restored, and the strategic investment project commenced.
The business owners and our VFD then commenced to assemble two teams, one for the deal with specialist advisers, and the other a team to become the Board of Trustees. The owners took advice on whether to go for the direct ownership (employees buying shares) or the indirect ownership where the shares are held by an Employee Ownership Trust, or even a hybrid of the 2 ownership types; indirect ownership via an EOT was agreed. In addition, many key points were discussed and agreed in principle, including our VFD providing an estimated valuation.
The next stage was planned with the help of an employee Engagement professional with extensive John Lewis experience. Firstly, the Leadership were briefed and fully engaged into the project, then a couple of months later the Managers were engaged, a week before the all employee communication meeting. Many questions were asked but the news was very well received.
Our deal experienced VFD continued to project manage the deal, allowing the owner MD to continue to lead the business. From a VFD perspective the strange aspect of the deal was that, as the Trustees were not officially appointed until Completion day, it was therefore an ‘anticipated negotiation’, with our VFD trying to anticipate the likely negotiating stance of the ‘to be Trustees’ on all key deal aspects. This meant estimating the accountant’s valuation, proposing the structure of deferred payments and drafting the disclosure letter in response to sale and purchase warranties. The response to the ‘to be Trustees’ was also crucial in keeping the communication channels open and effective throughout the deal progress.
Following negotiation of Trustee packages, the business valuation was agreed, the Trust deed, sale and purchase agreement and shareholders agreement all negotiated. The 11th hour hitch concerned one of the Trustees nervous about the Trust being provided with funds to settle deferred consideration. The Board of Trustees had been carefully selected for the best interests of the employees, however that meant that they were certainly no pushover on this negotiation!
At the Completion meeting our VFD outlined different profit and cash outcomes over 5 years, and this combined with a few legal modifications enabled the deal to cross the line. Fortunately, the deal announcement was only 30 minutes late as the 70 employees were all assembled awaiting the celebration! It is very pleasing to note that the trading performance is going from strength to strength and more importantly employee happiness indicators are all strongly rising, even on previously good survey results.
“For a deal as significant as the sale of our own company, having the right advice and knowing we could trust that advice was fundamental to ensuring a successful transition from private to employee ownership. VFD were there every step of the way, and we couldn’t be happier with the outcome.” Val – MD and former Business Owner