The double edged succession sword

The 68-strong team at Union Industries, which will take collective ownership of the company, protecting its UK manufacturing base for the long term.

It seems to be inevitable, at least in Britain. However strong the individual commitment to a company or industry, at some point an owner will retire, exit or sell – but who will take the reins?

Manufacturing in the United Kingdom is sitting on a ticking time bomb.

There have been few mergers and acquisitions over the past few years, as the economic climate has deterred owners from selling.  But the motivations and needs to sell remain; at some point owners will want to exit – whether for financial reward or through the necessity of age. For the baby boomer demographic the motivation will likely be both. There is a peak of entrepreneurs now reaching an age where they are seeking to release the value in their businesses and enjoy the hard earned rewards.

This demand for business exit is an issue that transcends the interests of the business and its owner. There are far reaching consequences for the economy. Who will buy these businesses as they come on to the market?

In many cases, the best offers will come from overseas.  And although inward investment to the UK is increasing – in 2012 it was up 2.7% on the previous year, defying an overall decline across Europe, this can mean that the companies – and the jobs and skills – leave the UK and are unlikely to return.

For many entrepreneurs and family businesses, particularly those in the engineering or manufacturing tradition, this is not a palatable option.

Such firms often have a loyal workforce in which the employer has invested heavily for skills development. There will be loyalty, too, in the supplier and customer relationships. Independent companies are often an important feature not just to their employees but also to their local economies and communities.

Overcoming exit concerns – for good

It is in the face of this business exit conundrum, that many businesses are turning to a new option for succession planning. Rather than sell to competition or other external parties, they sell to their employees.

Employee ownership of UK businesses is increasing at a rate of around 10% per year according to the Employee Ownership Association. Some of the perceived benefits driving this are as follows:

  • The vendors get a fair price for their business and the company remains where it is
  • The vendor can choose how much involvement they continue to have, and how long they continue to have it
  • The uncertainty of future sell-off is removed and everyone can focus on what they do best – enhancing productivity and profitability

One company who chose this route is Clansman Dynamics, an East Kilbride based engineering firm.  The business exports 95% of its output, and as the owner, Dick Philbrick, neared retirement age, there was no shortage of lucrative offers to acquire the business.

However, Dick is committed to Britain’s engineering heritage, and felt a trade sale would likely result in relocation to Europe or the Far East.  The same concern caused him to reject an offer for a management buy-out.

“A management buy-out only defers the issue of succession; at some point the management team will look to exit and the issue arises again,” he said.  “This rolling uncertainty is a distraction and isn’t good for business.”

The transition to employee ownership has worked well for the business.  In the past three years, sales per employee have increased by 26% and turnover risen by 60%.  Customers, especially in the US, approve of the company’s employee-owned status.

Leeds-based Union Industries is looking to follow suit.

The company is a world leader in the design and manufacture of, among other products, bespoke industrial high speed roller doors and freezer doors, which are used in warehouses, distribution centres, factories, storage facilities and cold stores across the UK, Europe, the Far and Middle East. Customers include Tesco, ASDA and 3663.

Paul and Isobel Schofield, founders of Union Industries

With 68 employees, and a strong tradition of recruiting and training from within, Union Industries is an important player in the local business arena and the founders, Isobel and Paul Schofield, are keen that any transfer of ownership does not mean relocation.

The business has a good reputation for innovation and quality, and the owners want to ensure that this is protected. Selling to employees appears to be the ideal solution and Union Industries is currently working towards becoming an employee owned business, with completion of the transaction expected in 2014.

“Putting the company in the hands of its staff will secure the future of the business and ensure that its history is honoured and built upon,” explained Mr Schofield.

“In the hands of the employees the business will continue to grow and deliver the best possible service to its customers.”

He continued to say, “The passion that Isobel and I have for this business is only matched by our staff and we are confident they will enhance the legacy we have created.”

Ownership’s not everything

However, ownership is just one dimension of the succession coin.  With the succession resolved through employee ownership, the issue of leadership remains – potentially with added complications?

Both Clansman Dynamics and Union Industries are currently tackling this challenge with the help of specialist advisory services of Baxi Partnership.

Baxi has supported many companies in the transition to employee ownership and Ewan Hall, legal director at the firm observes: “A move to employee ownership is not simply a technical business transfer process.  We invest a lot of time in ensuring that employees understand what the change in ownership means, and how being an employee owner will impact on them.  Key to the success is having leaders in place who understand this and involve employees in the business.”

Filling the shoes of a successful entrepreneur is never an easy task.  The Schofields and Dick Philbrick started their businesses. They shaped them in terms of strategy and culture and made them what they are today. In many minds, they are their firms.

The right successor will have the skill to preserve what is best about the firm, the vision to move the company forward, and the inspiration to engage the people in that vision.

Both Clansman Dynamics and Union Industries are involving their people in the process of selecting and shaping future leadership under employee ownership. The staff has been asked to put forward their thoughts on what is important in a leader, and will be involved in the selection process.

Leading an employee-owned company is not for every aspiring chief executive according to Baxi Partners. There is a different dynamic when you are accountable to the people who work for you, rather than to external shareholders. After all, employees can see how busy the workforce is, and being closer to customers, will have direct insight into market intelligence and no amount of corporate branding will hide bad news from those on the inside.

Worth it

Many leaders of employee owned firms testify however, that the rewards from managing people who have a stake in the business, who understand the link between effort and result, are unequalled.

Furthermore, as employee owned businesses increase in volume, so does a mounting bed of evidence that the structure tends to enhance myriad business metrics, from productivity to profitability and from employee engagement to customer satisfaction. Again according to the Employee Ownership Association, over the last 15 years, shares in employee owned businesses have considerably outperformed those in the FTSE All- Share Index.

As more business owners seek to exit, it’s easy to see why selling to employees is an increasingly popular option.