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klaas woldring
26 Posts |
 Posted - 02 Apr 2005 : 17:58:23
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BUSINESS SUCCESSION, OWNERSHIP TRANSITION AND REGIONAL COMMUNITIES
The ageing workforce is not the only problem Australia is presented with at the moment. There is also a problem with the ageing profile of its private business owners, a significant proportion of whom live in regional areas. This represents a challenge for business succession planning as well as for the employees and communities in those locations which would be affected by business closures or failed business successions. Both overseas and in Australia, communities are taking steps to support the takeover of threatened businesses through either an employee buyout or a community buyout. Several recent examples have been documented in Victoria. To support the development of an assistance program for owners, employees and community groups in regions in eastern Australia facing the dilemmas of business succession, a group is being set up to provide information, assistance and support wherever there might be an opportunity to help the employees or a community to buyout a business which is an important asset to a country town. This group is presently in the process of formation. Information on the project, its program and contacts can be accessed in the attachment.
Alan Greig (for the "Employee and Community Buyouts Group).
Attachment
Research in Australia is showing that the typical family business owner is 57 years old, that 40% of business owners plan to leave their business within the next five years and that 66% of them are depending on their business to fund their retirement. Only 38% of SME owners have succession plans.
Retirement of business owners will be the main reason for business transfers over the next decade. A growing number of business transfers will take place outside of the family. At present, only 25% of owners plan to pass on their business to family members. Planned business succession to other parties will therefore be critical to the takeover and ongoing success of the business. One third of business owners presently believe that they will have major problems in selling their business.
Much of this research has been undertaken by CPA Australia (see their press release on the topic: "Future Bleak for Small Business Owners Set to Retire" (see post below for full text of this press release).
As is indicated in the press release, without a solution here, the problem could affect many communities through loss of retirement "nest eggs", loss of jobs, falling asset values and declining wealth.
Successful business succession for retiring owners has become a major "public policy" issue in other parts of the world, especially Europe and North America. In response, in many countries, programs have been set up to assist owners to sell their businesses to either their employees or - in the case of vital community assets in rural towns - to local community groups. (Assistance for the latter approach is currently provided in Victoria, where there have been several successful successions to community co-operatives, the most recent being the petrol/service station in the township of Kaniva on the Victorian/SA Border). Presently, as a result of such programs, 18% of all SME business sales in the US are now made into "all employee" structures (NCEO, 2004).
Several organisations in Australia are now becoming aware that this is a priority issue in rural and regional Australia where the "succession" problem is now quite apparent. It has also identified that there is an imbalance in business assistance resources, with most such resources being targeted at start-ups and growing business, rather than ensuring that businesses survive.
In response to this issue, a group of 18 people representing a range of organisations (including CPA Australia) is currently meeting with the aim of setting up a support organisation which will have as its objective assisting retiring owners to pass their operation on to their employees (or to community groups) instead of winding up or selling for less than market value. This initiative is being undertaken in recognition that assisting those owners/employees/communities facing a business succession problem gives them the best chance of ensuring smooth succession to the benefit of all parties. The program being considered parallels a similar service in the UK.
Details of this new initiative can now be seen on the NSW Government's "communitybuilders" web-site at:
http://www.communitybuilders.nsw.gov.au/building_stronger/enterprise/eob.html
(If you are interested in the full UK Program "Growing Rural Businesses through Collaborative Solutions", you can see this also on the web-site mentioned above at:
http://www.communitybuilders.nsw.gov.au/rural_regional/resources/grow.html).
An excellent Guidebook called "Delivering Employee and Community Buyouts: A Guide to the Succession Process - A Technical Guide for Development Workers and Business Advisors" produced by the above UK program explains the technical aspects of the whole process and this can be accessed at the following web-page:
http://www.cooperatives-uk.coop/live/cme145.htm .
This communication is to let you know - as a regional development or local/community economic assistance provider - of the actions commenced and the activities currently being undertaken. If you wish to be kept informed of progress, or if you wish to participate in the workshops being planned, please let me know at the email address below.
Please also let me know if you wish access to the considerable further resources on these kinds of developments in Australia and overseas (mainly web-sites of assistance agencies and buyout funds, plus press articles on successful examples). I can pass these onto you if you require them.
If you know of any successful transitions of businesses to employee or community ownership in your regions, we would be very keen to know about them. We are trying to build up a body of local "case studies" to highlight success and encourage further activity in this direction.
I hope you find this information of value. If you need further information, please do not hesitate to contact me at the address below.
Regards
Alan Greig
for the "Employee and Community buyouts Network"
ahgreig@bigpond.com
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Alan
87 Posts |
Posted - 14 Dec 2005 : 22:06:15
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The Australian Government has just announced a new program to help ageing business owners who are wanting to retire.
One of the options/eligible projects that can be considered in this program for assisting a small business "succession" through an ownership transition process (while maximising its value for the owners) is the employee buyout.
Backgound on this option can be seen in the Program Guidelines on page 17 at the following link: http://www.ausindustry.gov.au/library/SBEP_Customer_Guidelines20051214043035.pdf ).
The following press release was made by the Government on 30th November, 2005 announcing the new program.
Govt To Help Small Businesses Who Want To Retire
Media Release
30 November 2005
The Australian Government is offering specialist succession planning and retirement advice for the more than half a million small business owners who are aged over 50.
The Building Entrepreneurship in Small Business program is now offering grants ranging from about $50,000 to $300,000 to expert service providers who can provide business skills training and succession planning.
The Minister for Small Business and Tourism, Fran Bailey, today said small business owners are ageing and it was time to begin addressing this issue.
"Many of Australia’s small businesses will need new owners in the next 10 years or so and succession and retirement planning become critical issues for owners in their late 50s and early 60s," Fran Bailey said.
Recent research shows more than 60 per cent of owners want their businesses to remain an ongoing concern yet only 38 per cent have a succession plan.
The Succession Planning category of the Building Entrepreneurship in Small Business program will fund applicants to provide training and advice to maintain business continuity for small business operators looking to exit their business.
"This program will help small business owners maximise the saleability of their businesses and provide for their retirement funding," Fran Bailey said.
"Business owners spend years growing their small business so it is important they receive every assistance to sell or transition their business. In doing so, we can also position young entrepreneurs to take over and grow a small business."
Further information on Building Entrepreneurship in Small Business can be found at www.ausindustry.gov.au or call the AusIndustry Hotline 13 28 46.
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Alan
87 Posts |
Posted - 06 Jan 2006 : 23:04:57
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Succession London in the UK is a new, specialised consultancy service for owner managers who wish to retire or move onto something else but have not yet designated a successor.
Succession London offers the business owner a realistic exit route from the company by facilitating a sale to employees or the next generation.
The web-site has several case studies where ESOPs have been used to facilitate employees buying a company (some quite large scale) from retiring owners.
This web-site can be seen at
http://www.successionlondon.co.uk/
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Alan
87 Posts |
Posted - 08 Feb 2006 : 07:07:53
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Several enquiries have been received about just where the figure of "18%" in the first post above came from. It was used in relation to the proportion (18%) of all US SME business sales now being made to employees of the business.
The figure was one of the pieces of evidence presented at the first EBO Workshop in 2005 which suggested that there was a need for business succession planning in Australia to pay more attention to employee ownership. The figure came from a small report in the November/December 2004 edition of the US National Center for Employee Ownership's "Employee Ownership Report" (page 12), which stated as follows:
"Will Baby Boomers Bring an ESOP Revolution?
According to the National Family Opinion panel survey, a record number of businesses will be sold in the next several years. The number of "affluent" owners (about half the business owners are so defined) planning to sell is seven times that of 2001. Although weak economic conditions affected that number, NFO says the driving force is baby boomer demographics. One third of those surveyed said they planned to sell to family members, one third to outsiders and 18% to employees in one way or another.
The development could be very good news for ESOPs. Not only will an unusual number of businesses be for sale, but a significant portion of baby boomers came of age in the 1960s and retain some of these social values. Boomer families are also smaller than previous generations, so there are fewer chances that at least one family member will want to take over. Perhaps more important, the glut of businesses for sale will make it harder to sell to outside buyers. "
Alan Greig
AEOA
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Alan
87 Posts |
Posted - 09 Apr 2006 : 06:06:44
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The 2004 press release by the accountants' association CPA Australia entitled "Future Bleak for small business owners set to retire" which is mentioned in the first post above is no longer available on the CPA web-site at the link indicated. I have reproduced it in full below, for your interest.
Alan Greig
AEOA
Media Release
27 April, 2004
Future bleak for small business owners set to retire
Half of small business owners are depending on their business to fund their retirement but a third believe they will have difficulty selling, signalling a bleak future for some looking forward to a comfortable retirement.
These findings are from CPA Australia’s latest national small business survey. The survey on succession and exit planning was conducted with 600 small businesses (independent and employing fewer than 20 staff) and 105 CPA accountants in March 2004.
The CPA accountants believe that the number of owners planning to use their business as their primary source of retirement income is even higher, at 66 per cent. CPA Australia’s Business Policy Adviser Judy Hartcher said the figures showed cause for concern. “With almost 40 per cent of owners planning to leave within the next five years, we may see an increase in small business owners not being able to sell their business to fund their retirement.
“Currently, 7.5 per cent of small businesses exit the sector each year, but these are offset by new entrants. A significant increase in the number of exits could have major economic consequences if strategies are not in place to ensure a growing pool of viable, efficient businesses,” cautioned Hartcher.
“With Australia’s ageing population, the number of business owners reaching retirement age will dramatically increase in the next few decades,” said Hartcher. According to Australian Bureau of Statistics, the proportion of people aged 65 and over, is projected to double in 50 years, from 12.4 per cent in 2001 to 24.2 per cent in 2051.
“Small business owners need to get smart, plan and prepare for their business succession or exit, years in advance of their retirement, for the best results. Even if they are closing their business, planning will make a big difference to the amount they walk away with. Leaving their exit planning to the last minute is not a good strategy,” advised Hartcher.
According to CPA Australia’s survey, only 38 per cent of small business owners interviewed have succession plans. Age is the most common motivating factor for the majority of this group (21 per cent). The survey also revealed that four in ten of those with succession plans did not seek professional advice and of those who did, the majority (35 per cent) engaged accountants.
“It is a concern that many small businesses are not maximising their business value by planning their exit in advance or seeking professional help when they have no experience or skills in selling a business. If you sell your house, you would get professional help to renovate it and negotiate the best price on the market. The same rationale should apply to selling a business,” said Hartcher.
The survey shows that less than 40 per cent of small businesses would be prepared to take major steps to maximise their business. For example, fewer than four in ten claim they would restructure their business (38 per cent); spend three to five years preparing for a sale (36 per cent); or hire more staff (26 per cent). This finding was supported by 45 per cent of CPAs who said that their small business clients are “not too keen” to invest in their business to maximise its sales potential.
Hartcher said, “Many small business could improve their outcomes with planning and professional advice. For example, 26 per cent said they would advertise the business for sale without identifying a buyer, as their most likely exit strategy. In the past, this hasn’t always brought the best result for small business owners who may be well advised to look for a buyer amongst customers, suppliers or the industry.
CPA Australia has developed a guide to business exit planning, providing small business with useful information. This guide is available on the website at www.cpaaustralia.com.au. Further information on CPA Australia’s survey results on business succession and exit planning is also available at www.cpaaustralia.com.au.
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Alan
87 Posts |
Posted - 10 Apr 2006 : 15:28:21
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The accountants' association CPA Australia has published in the April, 2006 edition of its magazine INTHEBLACK an interesting article entitled "Next in Line" on the topic of the role employee buyouts can play in business succession.
The article is a useful addition to the education program the AEOA has underway to get financial advisers more informed on the additional options - such as employees purchasing the business using an ESOP - they should be providing in their business succession planning services to their clients.
You can see the CPA Australia article "Next in Line" at:
https://www.cpaaustralia.com.au/cps/rde/xchg/SID-3F57FECA-0235C2CC/cpa/hs.xsl/2372_17887_ENA_HTML.htm .
Alan.
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Alan
87 Posts |
Posted - 01 May 2006 : 06:15:16
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Transferring Ownership Through Employee Buyouts
For an excellent description of the process for implementing the leveraged ESOP structure as a structure to deliver a gradual buyout of a retiring business owner by the employees, see the web-pages “Ownership Succession”, “Employee Buyouts”, “Finance” and “Trusts” on the web-site of The Employee Ownership Association UK at: http://www.employeeownership.co.uk/
For example, the brief sequence for an “employee buyout” is detailed as follows:
”Employee buy-outs are simply the standard mechanism for transferring ownership of a company from the previous owner to employees.
Achieving employee ownership requires staff collectively to be able to finance the purchase of all or at least a controlling stake in the business from the previous owner.
A typical employee buy-out sequence happens like this:
•Shares are bought by an employees' trust.
•The trust is financed by contributions from the company itself, or from a loan which is repaid from company contributions.
•If the trust is financed by the company over time, it may take some time before the trust has received sufficient funds to finance the purchase of all or even a majority of the issued shares in the company.
•If the trust is financed by a loan, this may enable it to acquire a majority shareholding or even all the issued shares in one go.
•The trust may retain some or all of the shares it has acquired on a long term basis, or it may distribute shares to employees over time. The intention may be for the company to remain wholly or partly owned by employees and/or the trust indefinitely
•The intention may be for the company to remain wholly or partly owned by employees and/or the trust indefinitely. “
Further information is provided on the pages on "Finance" and "Trusts".
Similar ESOP structures are now being implemented in Australia.
Alan Greig
AEOA
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Alan
87 Posts |
Posted - 11 May 2006 : 11:38:30
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One of the best web-sites available with information on all the aspects - technical, financial etc - of business succession through employee ownership (including case studies) is that of the Delivering Employee Ownership group in the UK.
Delivering Employee Ownership is a network of expert organizations and businesses in the UK committed to employee ownership through business succession and other means.
Their web-site can be seen at :
http://www.business-succession.coop/index.html
This is a very useful resource.
Alan Greig
AEOA
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Alan
87 Posts |
Posted - 02 Jun 2006 : 15:03:07
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Another excellent web-site on the topic of business succession and employee ownership is that of Employee Ownership Options in the UK, which can be seen at: http://www.employee-ownership.org.uk/ .
This web-site has some excellent case studies of businesses that have been purchased by their employees through a succesion plan.
To quote from this web-site:
" It is estimated that 30,000 companies in the EU close each year through bungled succession threatening some 300,000 jobs. Many of these companies are not uncompetitive or failures in the market place, but fall victim to the lack of knowledge of their owner-managers and advisors as to options available. Succession has been identified as one of the major problems facing business owners. Many owner-managers on retirement see no way of liquidating the assets bound up in their business without either simply selling up the tangible assets, which may only be a fraction of the value of the business, or selling to a competitor (which may then asset strip or close the business down). A profitable business and jobs are lost. "
In Australia over the next decade, planned business succession will be critical to the ongoing success of many businesses. The ‘market convergence’ problem of too many sellers and not enough buyers will begin to impact in that time.
A UK survey from 2001 has indicated that approx 30% of closures could be regarded as succession failures where otherwise viable businesses close for lack of a suitable successor to the owner. The survey concluded that support systems for business transfer are only partially developed in that country. A similar situation exists in Australia at this moment.
Meanwhile, in Canada, private small to medium enterprises that are sold to employees succeed 80% of the time versus only 30% to 50% when sold to family and/or 3rd parties.
Alan Greig
AEOA.
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Gary Fitton
11 Posts |
Posted - 09 Jun 2006 : 06:30:18
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Remuneration Strategies Group (RSG) have developed an Australian version of the Geared ESOP.
The benefits of this arrangement are outlined in an article prepared by Gary Fitton, Director of RSG.
To read more about this Australian ESOP - which is being used in business succession projects - see the article "Geared ESOPs" at http://www.remstrategy.com/info/articles.asp
Gary Fitton
Director, Remuneration Strategies Group
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Edited by - Gary Fitton on 10 Jun 2006 06:19:41 |
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admin
631 Posts |
Posted - 28 Jul 2006 : 06:29:53
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Leveraged ESOPs create a market for business succession
The advantages and disavantages of using a Leveraged ESOP to assist an exiting business owner in the SME Employee Buyout/Business Succession market can be described as the following:
Advantages
1. Employees share in the profits of the company, which may improve their motivation, productivity and work attitudes.
2. ESOPs can be a cost-effective way of making contributions to a "retirement plan" for the business owner, while adding to the savings of the employees.
3. The ESOP Trust provides a market for the shares in a "closely held" private company or unlisted public company.
4. A leveraged ESOP can provide a low cost (given adequate scale) alternative for raising capital.
5. The sponsoring company can pay off the ESOP loan with pre-tax dollars.
6. There maybe other tax advantages in the capital gains tax area for the owner.
Disadvantages
1. If the company does not prosper, the employee shares might be at risk.
2. Equity dilution may occur for existing shareholders.
3. For closely held companies, there maybe a significant "repurchase liability" to buy back shares from the participants when they wish to leave the company.
4. The costs of establishing and operating an ESOP need to be considered.
5. The debt from the loan to the ESOP Trust maybe recorded on the balance sheet as a liability and may cause a reduction in earnings per share.
The disadvantages are mostly well manageable and do not outweigh the considerable advantages of the ESOP structure. There are also many success stories that indicate that the advantages can be quite real (particularly for the first one).
For an excellent "showcasing" of a successful leveraged ESOP example in Australia, see the "2006 News" page on this web-site - under "July" you will see an article on the EBO at Box Built Pty Ltd in Brisbane.
Alan.
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Alan
87 Posts |
Posted - 14 Sep 2006 : 09:57:29
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The UK Government has recently established the web-site "How to achieve an Employee Buyout", as part of its "BusinessLink" service, to assist retiring small business owners with business succession and exit.
You can see this web-site - and the very comprehensive advice it provides - at:
http://www.businesslink.gov.uk/bdotg/action/layer?topicId=1077622221
The front page of the web-site is as follows:
Practical advice for business: How to achieve an employee buyout
Introduction
If you own a business, you need to decide what will happen when you want to retire or sell the business. And it's worth thinking about sooner rather than later, so that you have as much time as possible to plan.
An employee buyout is an increasingly popular succession option. In effect, you sell the business to its employees. The employees become the new owners - though often most existing business and management structures stay in place.
An employee buyout like this can be a good way of ensuring the future of the business, with a highly motivated workforce. At the same time, it can also be an effective way of realising a good price for the value you have created.
This guide explains the advantages of an employee buyout and the key issues you need to consider.
Subjects covered in this guide:
Introduction
Why consider an employee buyout?
Alternatives to an employee buyout
Planning for an employee buyout
Forms of employee ownership
Key stages in an employee buyout
Financing an employee buyout
Running the business after an employee buyout
Help and advice for employee buyouts
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Alan
87 Posts |
Posted - 18 Nov 2006 : 04:47:19
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From the South Australian magazine "The Adelaide Review":
Business struggles to keep it in the family
South Australia is poised to experience a rapid acceleration in the number of family business transfers and closures over the next 10 years as the baby boom generation of family business owners approach retirement. While many family businesses owners will make successful transitions, a significant number will face the prospect of closure.
Australia’s population is ageing and this is reflected in the increasing average age of small business owners. According to the bureau of statistics, 33 per cent of small business owners are over 50 years of age. This group is increasing each year at an annual rate of 3.7 per cent. Strategies for succession will be required as the owners of nearly half a million enterprises nationally are over 50 years of age, and their ranks are growing by 10 per cent annually.
A study at RMIT University in 2002 found that 54.1 per cent of the first, 68.7 per cent of the second, and 55.6 per cent of third to fifth generation owners planned to sell their business in the next 10 years. Significantly, around 76 per cent of owners in the 2002 survey indicated that they would consider selling their business if approached. The value of the wealth transfer associated with this wave of sales would be around $1.6 trillion in assets over the 10 years to 2012. According to the productivity commission, the economic impact of business exits represents around three or four per cent of GDP and around 10 per cent of total annual job losses. These impacts are currently offset by business startups and growth, with the business entry rate being two thirds higher than the exit rate.
Losses from closures
A study of SA family businesses by the Australian Institute for Social Research, and initiated by Family Business Australia and the Small Business Development Council, found that the failure of family businesses to survive generational change can result in direct and indirect economic and other losses to families, the economy and the community.
Demographic change and ageing presents challenges for the family business sector in Australia and South Australia in particular. They also present a major task for the sector and policymakers seeking to minimise the impact of family business closures on the economy and the labour market. It is possible over coming decades that the rate of family business exits will significantly outnumber the rate of family business startups, as the full impact of the retirement of the baby boom generation is felt.
Successfully managing these challenges will require a greater awareness of the wider significance and contribution of the family business sector to our economic and social prosperity. It will also require policy interventions designed to support successful generational transitions for family businesses.
John Spoehr undertook a study of family business closures in South Australia, funded by the Department of Industry and Trade.
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admin
631 Posts |
Posted - 09 Dec 2006 : 03:37:49
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Family-owned businesses 'on the decline'
The likelihood of the children of successful business owners taking over the family enterprise is decreasing, according to a survey.
Conducted by RMIT University for accounting firm MGI Australasia, the study concluded succession planning is not a priority for family-run businesses, with owners much more willing to sell to outside interests.
"While there are still many first generation firms, the proportion owned by second to fifth generations of the same family has declined," said co-author of the report Professor Kosmas Smyrnios.
He was quick to point out that failure to continue as a family business does not mean it has failed.
"Most likely it simply means the owners have chosen another exit option," Professor Smyrnios said.
The survey found the value of family-owned businesses continue to grow, estimated at $4.3 trillion in 2006 compared to $3.6 trillion estimated in a similar study in 2003.
The study found the average age of firms had reduced from 34 to 28 years and the percentage of business owners over 65 had decreased from 20 per cent to 14 per cent.
According to MGI, family enterprises generate more than half of Australia's employment growth and account for 40 per cent of private sector output.
The survey randomly sampled 5,000 businesses across Australia to compile the findings.
©AAP 2006
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admin
631 Posts |
Posted - 09 Dec 2006 : 10:26:37
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Given the low levels of awareness by business and financial advisers for assisting retiring business owners with employee buyout options, Alan Greig of The Mercury Centre (a member of the AEOA) delivered a workshop on this important issue at the 2006 National Small Business Development Conference in Adelaide in late October, 2006.
His topic was "Business Succession and Buyout Solutions to Rejuvenate Communities" and was delivered under the "Business Enterprise Centres Australia" (BECA) stream at the Conference. BECA is the peak organisation for the 130+ community-based business enterprise centres and business advisory services operating across Australia.
You can see the presentation with the above topic name on the following web-page:
http://www.sbdc.org.au/Text/1164018216390-1461/2006-Papers
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admin
631 Posts |
Posted - 07 Jan 2007 : 07:16:33
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Case Studies on ESOPs and Ownership Transition
The UK ESOP Consultant “Equity Incentives Ltd” provides advice on ESOPs and business succession to a wide variety of companies and organisations in the UK and beyond.
It has two case studies on its web-site which deal with the issue of succession in family owned companies where an employee share ownership trust is being used to enable ownership transition.
The two case studies are (i) “Family Owned Company Limited” which looks at the issues of long term management and ownership succession in a family owned company following the setting up of an ESOP and (ii)"Wilkin & Sons" where a successful solution for a family owned company is supplied via an ESOP.
You can see these case studies at:
http://www.equityincentives.co.uk/cases/
For another excellent story on an employee buyout from a retiring owner (EOM Electrical Contractors in Wales, UK) which first appeared in the Financial Times in 2004, see “Employee Buyouts can offer a welcome exit route for owners” at:
http://www.andrewbibby.com/socialenterprise/succession
Another excellent case study of an employee buyout from two retiring owners can be seen in the "February 2005" news item on the AEOA "2005 News" page (accessed via homepage) under the following heading:
Employee Buy Outs (EBOs) gain favour in the UK!
This Sunday Times case study (December, 2004) offers a fascinating insight into an EBO done well.
EBOs are increasing as a succession option for retiring owners who wish to see their business go to their loyal staff. The model still preserves a commercial return for the retiring owners.
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Peterg
1 Posts |
Posted - 19 Jan 2007 : 03:45:39
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The Australian Government, through Aus Industry, is providing funding to assist in the education and training of Business Owners on the practical implications of transition planning and business succession. ROCG has been successful in obtaining funding for programs in Victoria and Western Australia and has been running workshops for over six months. ROCG has also applied for additional funding in the second round of grants to be announced in February.
ROCG is a specialist provider of Transition Planning programs for Small Business Owners throughout Australia, UK, Ireland and the United States.
For further information on the Aus Industry programs please go to
www.transitionplanning.com.au |
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admin
631 Posts |
Posted - 27 Jan 2007 : 06:46:08
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ROCG (see post above) has supplied an interesting article on this matter - “Boomer Business Owners Head for the Exit – Bleak Future for the Unprepared Owner”, dated 25th January, 2007, which you can see at:
http://www.rocg.com/Articles/ArticleDetail.aspx?p=357&id=164
From the AEOA perspective, the four key points to note on the "ageing owner" issue by those organisations involved in “transition planning” – whether funded by AusIndustry or not - are:
1. The typical SME owner is now 57 years old, with 40% planning to retire in the next five years (CPA Australia, 2004).
2. The number of business owners who intend to sell their firm on the open market as an exit strategy climbed to 38% in 2005/06 from 16% in 2004/05 (KPMG Family Business Survey, 2006)
3. Business assets worth $1.6 trillion will be subject to ownership transfer in the next ten years in Australia (RMIT Australian Family and Private Business Survey, 2003)
4. Only one business in four currently going to sale in Queensland is being sold within twelve months - the rest are being withdrawn from sale and facing possible liquidation (RESI business broker, in conversation with a business consultant member of the Employee and Community Buyouts Network, 2006).
One UK Study (Passing the Baton, 2004) is indicating that 30% of business closures now arise from "succession failure".
This situation is starting to ensure that ESOPs will be instituted primarily as an ownership succession strategy in future rather than as being simply added to a company as an employee benefit. The ROCG article is one of the first in Australia to suggest that will be the case.
Alan Greig
AEOA Management Committee
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admin
631 Posts |
Posted - 27 Jan 2007 : 06:48:11
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A novel plan to pass on your business
It's great having a profitable business but what do you do when you want to retire?
by Morris Kaplan
Daily Telegraph October 12, 2004
IN 1980 Glenn and Harry went into business together and are the owners of a thriving concrete-formwork construction business.
Both aged 56, they're thinking about retiring.
"We'd like to ease out of the business within five years," says Harry. But potential buyers are scarce.
A point highlighted by Byron Bay builder Richard who simply downed his tools earlier this year and bought a newsagency.
"The game's too tough today. I've had enough. Sometimes it's easier to just close the doors and move on," he said.
Glenn and Harry have a different view: they want a big payout - an uncertain proposition in a market that has enjoyed some good years but which is getting tougher by the day.
Many business owners are likely will find themselves in the same spot.
The problem is many entrepreneurs have as much as 90 per cent of their net worth tied up in their companies.
The trick is turning that equity into cash on which to retire. Enter ESOP, or the Employee Stock Ownership Plan.
Interest in ESOPs has been growing over the past few years, and it's easy to see why.
The plans allow owners to sell their businesses directly to their employees in transactions financed by the business itself.
Interest is so significant that the federal government has established a special task force charged with the job of making such schemes more accessible to business owners and their employees by offering 'template' solutions.
It's an appealing exit strategy but ESOPs can be expensive to set up, requiring independent valuations and agreements, trust deeds and documents that need to be legally drafted.
Moreover, in order for an ESOP to work cost effectively, a business needs to be profitable, with at least $1 million or so in total valuation.
Say a business owner decides to sell his shares in his business valued at $1 million, to his employees.
To transfer ownership, the company creates an ESOP – a kind of trust account – and takes out a loan from its bank for $1 million, 100 per cent of the business value.
The business then loans the $1 million to the ESOP, which uses the funds to purchase the owner's shares.
Then, the business repays the loan by making annual payments through the ESOP, treating the payments as they would any other employee-benefit expense.
After each payment, a proportionate number of shares are transferred into individual employee ESOP accounts.
Finally, after five years, when the $1 million loan is repaid, the employees will own 100 per cent of the company through the ESOP.
This can be achieved through a series of deals spread out over a few years, during which time the owner gradually transfers ownership and day-to-day management of the business.
ESOPs work best when there is a good relationship and good communication with employees.
It's important to communicate what they are getting – shares in the business worth a certain sum – and what they're not getting.
The latter typically includes a voice in management or seats on the board and voting rights; instead, the ESOP's shares generally are voted by the independent trustee who administers the plan.
Under the plan, when employees retire or die, the ESOP is obliged to buy back their stock at the current value.
Business owners who embark on this process need to realise that it will culminate in their retirement.
Glenn and Harry are preparing for this and have handpicked the new leadership team.
"We knew that employee ownership was an option as we already have a profit sharing plan in place and we wanted employment continuity for our staff," says Glenn, whose business has a turnover "in the millions" and a staff of 30.
The two partners opted to sell 100 per cent of their holdings to employees, and together, will walk away with roughly $1 million each for their shares.
• Morris Kaplan, is an author (Financial Freedom for Your Business (Hardie Grant Books)) and business consultant.
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admin
631 Posts |
Posted - 29 Jan 2007 : 11:49:06
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The Delivering Employee Ownership Group (operating with the support of CooperativesUK) is a successful lobby group and network now operating in the UK. Its web-site can be found at:
http://www.business-succession.coop/index.html
Many business owners in the UK have found a successful solution to business succession by selling the business to the employees. It offers a way to secure the business and jobs in the community, while retaining its independence and rewarding employees. Employee Ownership is one way to plan for a smooth succession.
The DEO Group's policy paper produced for Government consideration on the issue of employee ownership involvement in business successions (produced in conjunction with Job Ownership Ltd) is well worth a read. It can be found at:
http://www.jol.org.uk/html/2543.html
The press release made at the time of the publication of the above report is re-produced below for the interest of the AEOA.
Press Release: Government urged to back employee buy-outs as business transfer solution
Job Ownership Limited and Co-operativesUK have called on the DTI’s Small Business Service (SBS) to pursue employee ownership as a solution to the UK’s poor record on business transfers – the process where owners sell their company when they move on or retire.
Following the publication of the SBS’s review of business transfer, ‘Passing the Baton’, which was commissioned by the Chancellor in the 2004 Budget, a Steering Group has been established to look at ways of implementing its proposals. The report showed business transfers frequently fail, harming jobs and local economies.
The Delivering Employee Ownership Network – a national group of organisations which specialise in and advise on employee ownership –submitted written and oral evidence to the SBS review and was subsequently invited to join the Steering Group.
The Network has two representatives on the Group, Patrick Burns of Job Ownership Limited and Gareth Nash, a director of Co-operativesUK. On behalf of the Network, they are urging the SBS to look at additional ways of improving business transfer and spreading awareness of the employee buyout option.
Speaking after the inaugural meeting of the Steering Group, Gareth Nash said, “The SBS acknowledges the valuable role that employee-buyouts can play in business succession and is supportive of our proposals to promote this option. We are working now to ensure that a framework is put in place to facilitate employee buyouts and that the SBS commits to spreading awareness of this tried and tested solution.”
The Delivering Employee Ownership Network’s policy paper proposition is that employee-buyouts are an increasingly attractive and popular business transfer outcome. But it warns that the take up of employee-buyouts by company owners is being hampered by barriers such as lack of awareness, advice and guidance and appropriate finance. The DEO paper claims that the SBS can help remove or reduce those barriers, which in turn will help to diminish the UK’s high business transfer failure rate.
The Network is calling for the DTI to help provide far more information and guidance for company owners about employee buy-outs, awareness raising amongst business advisers and others who support them, along with detailed research into the employee-owned sector and a review of the tax regime and new funding arrangements.
According to Patrick Burns of Job Ownership, the opportunity for a dramatic rise in the number of employee buyouts is greater than it has ever been.
“Government, the DTI and the Small Business Service have confirmed that employee buyouts are a vital route for business transfer. In many other countries employee ownership is widespread and its benefits are generally recognised.
“In the UK almost a third of business closures are judged to result from the lack of a suitable successor. Selling to the employees offers many business owners a successful, sustainable transfer solution.”
Additional co-operative interest in the Steering Group is provided by the Welsh Assembly’s representative, Norman Watson, of the Wales Co-operative Centre, one of the UK’s leading experts on employee-buyouts. Norman has successfully helped to establish 20 businesses with a combined turnover of £45 million into employee ownership over the last ten years or so, safeguarding over 1000 jobs. The Wales Co-op Centre’s most notable success was Tower Colliery, which recently celebrated its 10th Anniversary as a worker-owned co-operative and now employs 350 people with a turnover of £350 million.
12th April 2005
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admin
631 Posts |
Posted - 30 Jan 2007 : 07:44:00
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It is of interest that the Employee Share Ownership Development Unit in the Department of Employment and Workplace Relations (DEWR) has picked up on the role that EBOs can play in business succession.
You can see the following on their "Frequently Asked Questions" page at:
http://www.workplace.gov.au/workplace/Programmes/ESO/FrequentlyaskedESOquestionsbyemployers.htm
"What are employee buyouts? How and when can they occur?
An employee buyout is where the ownership of a business is transferred to its employees, in part or in whole, through a buyout structure, that might include an ESOP aimed at facilitating the transfer in exchange for lower salary, greater productivity and/or continuing service. Advantages of an employee buyout may include:
• retention and continuity of staff ;
• preservation of skills and knowledge; and
• prevention of the business being on the market for an extended period of time, which may cause a decline in the value of the business, as well as fear and confusion among employees uncertain of their future. This may also lead to a reduction in morale.
Although often not considered by many employers, an employee buyout is an alternative in the sale of a business.
Employee buyouts can be implemented to increase the cash flows of successful companies and to motivate employees to outperform their competition. They can also be used when only a portion of the business is being sold (for example, a subsidiary in a particular location).
Can I use employee share ownership plans (ESOPs) as a way of passing my business on when I retire?
An ESOP could possibly be used to transfer or sell the ownership of your business to your employees at any time during the life of the business. Corporations Act, taxation considerations and other regulatory and practical impediments need to be carefully considered before embarking on this strategy.
Further information should be obtained from a suitably qualified tax or legal professional.
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Business succession of ageing Baby Boomers
