Can employee-owned businesses be acquisition targets?

As more businesses transition to being employee-owned, companies and private equity funds looking to buy them may think they can’t, because of their ownership structure. This is not always true. 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.

Finding potential acquisition targets to stimulate a company’s growth can be time-consuming. Acquirers often use the age profile of the owners as an indicator that there may be a chance of a deal. The owner’s age, however, is irrelevant in the context of an employee-owned business. There are, however, other features you should be looking out for if you want to include an employee-owned business on your target list, these are:

1.              A period of more than two years 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. Beyond the two year period the CGT charge will be for the EOT;

2.              The deferred consideration owing to the sellers has been paid or is being serviced by the business easily. The amount of the outstanding deferred consideration may impact the business’s valuation 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.;

3.              The next transaction positively impacts 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 forward;

5.              A business in a market that is going through change. A founder’s appetite for risk can be far greater than a management team who has not risked everything to build the business. Securing third-party funding to shore up the business’s defenses 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.

These features are not exhaustive. Every case will be different. As the number of businesses transitioning to employee-owned increases, the need to include them in your target list will increase every year. Transacting with employee-owned businesses is a specialist area and Geldards has that experience.