Planning and training are key if you want your advisers to buy your business when the time comes to stand back
The past few years have seen an increase in the number of advice firm owners who, when the time comes, want to consider a sale to their employees as an option in addition to third party acquirers.
There has also been emerging interest in the use of employee ownership trusts. The EOT is a structure that was created by the government in 2014 to encourage company owners to sell a controlling stake to its employees.
Provided certain rules are met, the transfer of a controlling stake in a business to an EOT provides vendors relief from capital gains tax that might otherwise be paid. An EOT can also be used to pay income tax-free bonuses to staff.
That said, in most instances, a sale to advisers, senior staff or via an EOT does not happen for a variety of reasons. These include: a lack of management experience and skills, a lack of funds, a lack of communication with staff to test their interest and, above all, a lack of planning.
The following list, which is not exhaustive and will vary from firm to firm, provides a starting point for any owner wanting to begin the process.
1. Plan: Planning is key. It takes a lot of time to organise a successful handover. First, it is fundamental to gauge interest and motivate the employees to want to take over the business. Then you will want to work with them to build and enhance their skills beyond being advisers, paraplanners or support staff. This can take up to 10 years.
2. Refine: Any plans made will need to be taxed and regulatory changes can and often do have an impact, so need to be factored in accordingly.
3. Reassess: Those employees will also need to be reassessed at regular intervals. Over time, not all of those initially selected to take over will still be in place to do so, nor will all demonstrate their capability. Changes will need to be made.
4. Execute: When the time comes, the plans will need to be executed. That will not happen without the right level of advice – be that legal, tax or accountancy.
5. Resource: Resource is also key. There may be a need to introduce additional skills into the business such as project management.
6. Skill up: Those who might want to take over may not have the appropriate management skills. They need to be taught over a period of time to ensure there is an orderly transfer of responsibilities when the time comes.
7. Fund: The transfer of your business will not happen without the appropriate level of funding being available at the right time. You may well need to facilitate this.
8. Communicate: Do not assume that those you want to take over your business know that, and think carefully about the impact on other staff who need to be kept on board.
Money isn’t everything
There is one further reason why the sale of a firm does not take place to employees. In most instances, the amount paid is likely to be less than a sale on the open market. With this in mind, any owner seeking to maximise the price paid for the business may choose to think again.
That said, for some owners, what matters more is the continuation and preservation of the business as it is. If so then, while there are still risks, the sale to existing advisers may be the preferable option.
Roderic Rennison is director of Rennison Consulting