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Case Studies
These
case studies represent a range of businesses which have moved into employee
ownership. The examples have been drawn from a variety of Co-operative
Development Agencies across the UK and Employee Ownership
Scotland.
ARW Transformers
Ltd
Background
The
owner-directors of the company attended a seminar in 1997 organised by
Employee Ownership Scotland focusing on succession options for retiring
owners and, in particular, promoting the option of selling to the employees
through an Employee Share Ownership Plan. The company is now jointly owned by
the employees and the management and the Employee Benefit Trust (EBT) which
through time will distribute shares to the workforce through a Profit Sharing
Trust (PST).
The options
For
the retiring owners there were three clear options for an exit and a
realisation of the value of their shareholding and these were. A trade sale,
a management buy-in, or a sale to the existing management and employees.
Employee Ownership Scotland was able to persuade the owners that a sale to
the existing management and employees was the most viable and easily
achievable option.
The process
Initially
the process was driven by the retiring owners as it was they who approached
Employee Ownership Scotland through a seminar. As with all potential
successions the EOS method is to take a hard look at the feasibility of
employee ownership focusing on future profitability, management potential,
the marketplace, and the potential to raise the capital for a buy-out.
Following this EOS proposed a corporate finance strategy which would buy-out
the retiring owners, put fresh capital into the business through the EBT
shareholding, and making use of discrete invoice discounting to ease
cashflow.
The
owners then had to be persuaded that this was a good deal for them, the
employees had to be informed of the benefits of ownership, and the management
had to be informed of the benefits of staying on in the new business. All
this was accomplished at a series of meetings and presentations.
Raising of the finance
The
first stage of finance raising was to determine the amount required and
obviously the agreed selling price would have a major impact on the capital
requirement. The agreed price was settled on negotiation at around net asset
value. The means of raising the finance was as follows:
Subject
to audit of the 1997 accounts ARW will have a net book value of around
£400,000. Two current directors were looking to exit but were not looking to
realise full value as above. . The third current director will remain in the
business but it is proposed to reduce his holding.
Four
of the current management team accepted 500 shares (on the basis of the above
valuation). With the existing director, this would give the new 5 person
management team 55% of the equity.
- Employee Share Ownership Plan
An
integral part of the SIP mechanism is the Employee Benefit Trust. It was
proposed that the two exiting directors and the remaining director sell their
holdings to the EBT at par and receive the balance of their discounted
valuation in the form of pension contributions.
The
new equity structure sees the 5 new directors with 55% and the EBT with 45%
of the equity. As the company continues to generate profit the SIP mechanism
will use pre- tax profit to distribute the shares held in the trust to all
employees. The shares still have to be held in trust for 3 years to avoid
being treated as a benefit in kind.
This
requires cash to be readily available (there is sufficient retained profit on
the balance sheet) and it is intended to factor the company's debtors to this
end. This reduces the Net Worth of the company but greatly reduces the
borrowing requirement of the buyout.
The full process
The
company continues to trade and use its profits to fund the purchase of the
shares held by the EBT. Given that these shares were bought at par from the
exiting owners, the EBT would show a substantial profit on sale to the
PST/employees at current valuation. This would strengthen the balance sheet
on re-investment and enable further distributions to the employees.
The conversion
The
company is now employee owned and looks forward to profitable trading.
BUSINESS COMPUTER TECHNOLOGY
Glasgow
Business Details
35 Employees
Computer software and services
Background
Following
a direct marketing campaign by Employee Ownership Scotland (EOS) the
owner-directors of BCT invited Employee Ownership Scotland to examine the
options for making a phased exit from the business. After examining various
options the owners decided to offer a stake to the management and employees
through an Employee Share Ownership Plan (SIP). The Profit Sharing Trust
(PST) and Employee Benefit Trust (EBT) are now in place with the PST having
made the first acquisition from one of the owners.
Options available to exiting owners
The
owners were faced with three clear options and postponement of a decision
being a possible fourth. A trade sale, one of the three options, was rejected
as this could lead to the closing of the company in Glasgow. This left a
management buy-in and a sale to the existing management and employees for
further consideration.
A
sale to the management and employees through an SIP was preferred for the
following reasons:-
- It provided a means to retain and
incentivise key employees in this intellectual property based company.
- It will provide a phased exit for the
owners.
- It will, in time, create a company
owned and controlled by those who represent the intellectual capital of
the business and is therefore unlikely to be sold to a third party for
the customer base only.
The process
Initially
the process was driven by the owners, whom Employee Ownership Scotland had
initially approached, as they would be playing a part in the business for
some years to come.
As
with all potential successions the EOS method was to take a hard look at the
feasibility of employee ownership focusing on future profitability,
management potential, the marketplace, and the potential to raise capital or
use future profits for the buy-out. Following this EOS proposed a corporate
finance strategy which would use a loan from reserves to the PST to purchase
an initial number of shares this loan being paid off using pre-tax profits
channelled through the PST.
In
future years the company would lend money to the EBT which would be repaid by
channelling pre-tax profits into the PST. This strategy involved no external
finance and was very tax efficient.
The
owners soon realised that this was an acceptable deal for them. The employees
then had to be persuaded of the benefits of ownership and the management had
to be sold the potential benefits of committing themselves to the long-term
future of the business. All this was accomplished at a series of meetings and
presentations with the share price being determined by an independent valuation.
The EOS Role
- Honest broker between buyer and
seller.
- Identify potential for management /
employees to acquire the business.
- Held meeting with the employees to
convince them of the opportunities and benefits of employee ownership.
- Produced a funding plan showing how
the deal could be transacted.
- Liaison with lawyers and accountants.
- Assisted in the development of
communication and representation structures.
Caledonian Book Manufacturing Co Ltd
Background
Caledonian
Book Manufacturing Company Ltd was formally the HarperCollins book
manufacturing plant and was the subject of a buy-in in 1996. Since the buy-in
there have been a number of work practice and technology changes to increase
efficiency with the result that the company has the most modern computer to
plate technology in the UK.
The
print industry has an unfortunate history of strife between management and
workforce and to make Caledonian into an efficient and productive company on
a world basis a partnership between management and employees was required. In
addition the company required to strengthen the balance sheet and reduce the
fixed cost base.
The options
For
the owners there were two clear options. Firstly, further equity could be
injected through venture capital which, however, would require a subsequent
trade sale or listing. The second option was to both expand the capital base
and reduce fixed costs while creating a partnership with the workforce
through an SIP.
The process
As
with all projects the EOS method is to take a hard look at the feasibility of
employee ownership. Following this EOS proposed a corporate finance strategy
which would bring fresh capital into the business through the EBT
shareholding, and having the employees purchase shares through wage
deductions thereby reducing fixed costs in real terms.
The
banks then had to be persuaded that this was a good way of injecting fresh
capital, the employees had to be informed of the benefits of ownership, and
the trade unions also had to be persuaded to back the project. All this was
accomplished at a series of meetings and presentations. In addition to an
offer from the company's current bankers serious discussions have been
entered into with other providers of capital including a European specialist
funder of SIPs.
Raising of the finance
The
first stage of finance raising was to determine the amount required and,
obviously, the agreed selling price would have a major impact on the capital
requirement. The agreed price was settled on negotiation. The means of
raising the finance was as follows:
- Employee Share Ownership Plan
An
integral part of the SIP mechanism is the Employee Benefit Trust. Under the
agreement the EBT will own approximately 30% of the shares which through time
will be passed to the workforce.
As
the company continues to generate profit the SIP mechanism will use pre-tax
profit to distribute the shares held in the trust to all employees. The
shares still have to be held in trust for 2 years to avoid being treated as a
benefit in kind.
After the conversion
The
company continues to trade and use its profits to fund the purchase of the
shares held by the EBT. The company now has a framework to extend employee ownership
and/or act as the conduit for the exit of other equity participants. As time
passes the workforce will be more fully informed and committed to the success
of the business.
EOM Electrical Contractors Ltd
Background
This
privately owned company had been trading for over 20 years in Mid-Wales
installing domestic and industrial electrical systems. The company had
encountered trading difficulties because of the recession and had been placed
in voluntary liquidation by the owner. He had contacted the local enterprise
centre who then advised him to contact the Wales Co-operative Development and
Training Centre for specialist advice. The Co-operative Centre was then
invited by the owner to meet the workforce to see whether they would be
interested in buying the company from the Receiver.
The options
The
workforce had been reduced to nine employees who were concerned at losing
their jobs in a rural area of high unemployment. Their main concern at the
initial meeting was in receiving redundancy payments from the receiver and
there seemed little enthusiasm in buying the company.
The
Co-operative Centre promised to investigate the redundancy situation and to
report back after further discussions with the owner and the Receiver.
Meetings
were held every week with the whole workforce.
The process
The
existing owner was willing to provide detailed management accounts and this
enabled the Co-operative Centre to prepare detailed cash flow forecasts for
the new company. These figures were then presented to the workforce for
comment. It became clear over a number of meetings that any new company could
be profitable provided that a reasonable deal could be negotiated with the
Receiver. The workforce began to be more interested in investing in the new
company, provided they could collectively own it. The existing Contracts
Manager, who knew the customers very well, was also enthusiastic and began to
provide leadership to the others.
The raising of the finance
The
Co-operative Centre led the workforce in making a successful offer for the
stock, vehicles and equipment and contracts. This was financed by each member
investing £3,000, a loan from the Midland Bank together with an overdraft
facility and a grant of £3,000 from the local development Board. The
workforce were told that because they had bought the company and had begun
trading without a two week break they might not receive redundancy payments
from the state. They still took the risk and, six months later, did receive
their state redundancy payments.
After the conversion
Three
years later they have now expanded to a company with 20 members and, through
the Co-operative Centre, have installed a Profit Sharing Trust so that the
employees can receive free shares in the company.
Ever Ready Tools and Plastics
Background
Every
Ready is an established tool making company with a 48 year trading history.
It started life in 1950 as Manor Engineering, and moved to Romford in 1952.
The company became a wholly owned subsidiary of a multi-national corporation,
McKecknie, in 1980. For sixteen years Every Ready served the needs of the
larger group prioritising provision of tooling for other companies within the
group and for preferred customers of the group. This has meant that there was
no marketing of Every Ready in its own right.
Ever
Ready make injection mould tools that are used in the manufacture of plastic
products. It is very difficult to stand anywhere, look around, and not be
able to count dozens of items made of moulded plastic.
Every
Ready provide:
- the designs for the tools which will
be required from the drawings of the component which the customer wishes
to manufacture,
- manufacture the tools as per the
design,
- assistance to the customer with
setting up and using the new tools, and after-care, trouble shooting,
modification and replacement as required.
Ever
Ready specialise in very high quality of tooling for manufacturers who are
interested in durability and longevity. Some of the tools that Ever Ready
have supplied have been in use for very long periods of time, for instance,
Rawlplug have used Ever Ready tools for 25 years and literally billions of
pressings - a phenomenal length for a production component. They are one of
the few suppliers who can work to this exacting standard.
Changes
in the global strategy of the larger group left Ever Ready with a less
significant role and the central management decided that they no longer
required their own facility but could rely upon out-sourcing. The owners decided
to withdraw completely and thus redundancy notices were issued to all the
Ever Ready employees in Autumn 1996.
The process
The
employees sought advice about their potential redundancy and through this
came the idea of taking over the business. A small group of 2 or 3 employees
took the lead.
The
key players were two or three of the employees, with support and advice from:
- Co-operative Assistance Network,
Colchester
- Tower Hamlets Co-operative
Development Agency
- Sam Slade, Leggatt Bell Chartered Accountants.
The
advisers gave the employees the confidence they needed to decide to take over
the business and practical support was given on:
- writing a business plan
- writing financial projections
- gaining support from their current
customers and suppliers
- obtaining funding
- negotiating with the landlords
- negotiating with the owners
- and overall confidence building.
The
idea came from the employees in discussion with the Co-operative Assistance
Network.
Raising of the finance
The
conversion was financed by:
- employees redundancy income
- deferred payment to the owners,
McKecknie
- income from sales
negotiated prior to taking over the business
After the conversion
The
business is now relatively strong and it is owned in full by the workers.
However, having no financial backing, other than a £20,000 overdraft
facility, means there is a constant battle to keep the cashflow positive.
Now, in Spring 1998, there appears to be a minor recession looming in the
engineering sector and this is a major anxiety to the business.
Greenwich Playcare Limited
Background
The
London Borough of Greenwich in-house crèche service, set up in 1985 and
co-ordinated by the London Borough of Greenwich Women's Unit, initially
provided sessional crèche workers free of charge across all the Council
departments. From 1989, a pricing policy was introduced whereby departments
were charged a proportion (50%) of the worker time.
In
November 1992, the Council Crèche scheme, came under a Central Services
Review which set income targets for the service.
From
April 1993, the charges were increased to cover the full rate of the workers,
and the on-costs including a post in the Women's Unit, which had
responsibility for the co-ordination of the crèche service (only a proportion
of the workers time was spent on the crèche service, majority of time on
other project work). This raised the charge to 13.50 (on-costs comprising 58%
of this).
By
the end of December 1993, the project provided only 35% of the hours required
to break-even, and in January 1993, the Women's Committee concluded that the
project was no longer viable.
The options
The
existing members of the project expressed an interest in maintaining the jobs
and services as part of an independent structure, with the Council continuing
to be the main purchaser. On the advice of Greenwich Co-operative Development
Agency, it was agreed that the group would adopt a Co-operative Company
structure (ICOM Blue Rules), registering in 1994. Greenwich Playcare was able
to commence trading in April 1994, with a seamless transition in service
delivery.
The process
Continuing
the project outside of the council was an employee-led decision. Crèche
workers knew that there was existing demand at a reasonable rate of pay and
they already had good contacts with many local organisations form previous
work.
The
lead in taking the concept forward was taken jointly by the crèche workers,
Greenwich CDA, and the London Borough of Greenwich Women's' Unit worker.
The
advisors facilitated negotiations between the crèche workers group and the
council; advised and assisted in the development of a business plan; advised
upon the legal structure for the co-operative; assisted with the registration
process; provided marketing advice; provided management and marketing
training.
All
members of the co-operative subscribed as directors of the company, from
which there was an elected Chair, Vice-Chair, Secretary and Treasurer, plus
two others, forming the Management Committee, meeting quarterly. General
meetings of the co-operative involving all members are also held on a
quarterly basis. From the beginning, a member of the co-operative has acted
as co-ordinator, being the point of contact for the public, allocation of
work on a rota and availability basis, calculating and paying wages,
maintaining books of account, providing financial reports to the management
committee, and producing final accounts for the AGM. For this, the worker is
paid a fixed monthly sum. By having one person responsible for co-ordination,
it has enabled each member to devote their time to generating revenue.
The raising of the finance
A
small grant was awarded from the Women's Committee to cover registration and
other setting up costs. Used equipment was donated to the co-operative.
The
co-operative had to take responsibility for calculating PAYE, and preparing
year-end returns to the Inland Revenue. As all the members were part-time,
there were initial problems with applying the correct tax codes.
The
co-operative was liable for corporation tax on its first-year profit
(accumulated reserve) which only came to light after the accounts for the
first year had been prepared. Since then, Greenwich Playcare has been able to
take steps to minimise its corporation tax liability.
After the conversion
Greenwich
Playcare is now in its fourth year of trading. Although the turnover at the
end of the third year is significantly down from the first year, the
co-operative has undergone a period of consolidation. The number of workers
has reduced, mainly due to members finding full-time employment (all members
of Greenwich Playcare work part-time, having other part-time employment).
Greenwich
Playcare have become effective in managing overhead costs, with 94% of
turnover going towards paying wages, (compared with 84% and 72% in previous
years).
In
the current year, Greenwich Playcare are expecting turnover to increase again
due to crèche bookings for training courses, further improving the standard
of living of its members.
The
employees found the process easier than they expected it to be, with much
less paperwork than anticipated. The use of model rules was a great help, and
the support from Greenwich CDA made the process easier. In hindsight, the
co-operative would have liked more help towards planning for the end of the
first year.
Any
new project should be prepared to enter into tougher negotiations with the
local authority, including political lobbying to ensure that there would be a
minimum contracting commitment, and free promotion of the service in council
publications.
Greenwich Leisure Limited
Background
In
July 1993 Greenwich Council faced rate capping for the ninth consecutive
year. As a result, cuts totalling £5,000,000 were proposed and leisure, as a
discretionary service, was earmarked for annual expenditure reduction of
£400,000. The result of this would have been the closure of 2.5 centres (out
of seven) and the resulting job losses.
In
order to avoid cuts to the leisure centre services, on the initial
instigation of the Chair of Leisure Committee, the staff of Greenwich DSO
(Greenwich Leisure Management) worked with the Greenwich Co-operative
Development Agency to find an alternative solution.
The process
The
Chair of Leisure Committee's political commitment to the continuation of the
service was crucial as was the Leisure Directorate's recognition of the
opportunity to maintain the service level through externalisation.
The
main features of the process were:
- Committee agreement to investigate
option
- Feasibility study
- Initial staff consultation
- Trade Union consultation
- Committee agreement in principle
- Detailed Proposal including Business
Plan
- Staff and management skills analysis
- Comprehensive staff consultation
- Indicative balloting of staff
- Agreement with Trade Unions
- Detailed Committee agreement to go
ahead
- Secret ballot of all staff
- Staff and management training
programmes
- Legal structure in place
- Contractual arrangements in place
- Management of seamless transfer
- The staff were persuaded of the
viability of the proposal through:
- consultations with Trade Unions,
- a staff education and training
programme (provided by Greenwich CDA)
- working parties at the leisure
centres to ensure the all staff were consulted
- newsletters and team meetings.
The
new company was legally constituted as a not-for-profit Industrial and
Provident Society, Society for the benefit if the community, (with charitable
aims). The Industrial and Provident Society solution also attracted
discretionary rate relief of £400,000 annually. The result was that all the
centres remained open and all staff retained their jobs.
The
Society is managed by an annually elected Board comprising of 11 elected
employees, two elected customers, three Councillors (co-opted) and a Trade
Union representative. The managing director is ex officio and is charged with
carrying out policy decisions made by the Board.
The
whole process had to be completed in six months due to funding restrictions
(January to June 1993).
The raising of the finance
A
share issue of one share per employee at £25 per share was used to raise the
money needed for the legal registration of Greenwich Leisure. The local
authority leased the leisure centres to the company for a peppercorn rent for
a period of 7 years. The discretionary rate relief of £400,000 and additional
efficiency savings resulted in Greenwich Leisure Limited being able to meet
the local authority budget cuts requirements.
After the conversion
Greenwich
Leisure Limited has become a successful leisure service delivery and management
organisation. It has, for the fifth year running, reduced the cost of the
service to the Council while increasing income and concessionary access.
Two
additional centres have been added to the management portfolio.
Greenwich
Leisure Limited are working in partnership with local sporting organisations
and the local authority to develop a multi-agency network for sports
excellence, participation and education. This is part of a £980,000 project
funded through the Single Regeneration Budget.
There
are now six local authorities across the country using this successful
employee ownership model for the delivery of their leisure centre services.
Industrial Doors Company
Background
The
owner of Industrial Doors Company was approaching retirement when he attended
a seminar run by Nottinghamshire Co-operative Development Agency. He had no
obvious successor for his company and could not place the company on the open
market without alerting customers and thereby losing their confidence.
The options
At
first sight there did not appear to be any options open to the owner - his
relations with a highly skilled management team were distant, although they
were long serving and he had no idea how to broach the subject of the future.
Similarly the employees, who had observed for themselves the owner's
deteriorating health, advancing years and lack of a family successor had no
channel of communication. The CDA was able to open up dialogue between the
two parties.
The process
The
CDA spent a lot of time with the owner, explaining the process and
re-assuring him that this was a way forward. Once he was on board and willing
to proceed the CDA had a similar job convincing the employees. It is often
the case that employees have reservations about undertaking a buyout: doubts
about their own abilities, suspicions about the true motivations of the
owners or a lack of trust in their fellow workers can all play a part in
discouraging employees to proceed. Usually the only way to overcome these
doubts is to proceed step by step and prove those doubts wrong, whilst at the
same time building employees confidence in themselves and the business they
are buying. Team building and trust are theories made real once people start
working on a project with a common goal. This was certainly true of
Industrial Doors Company.
The raising of the finance
Three
of the four employees were prepared to invest in the company. Despite
everyone s best efforts, the fourth member of staff would not join the
co-operative. This ultimately affected the legal structure that was adopted -
they registered as a company limited by shares rather than using the more tax
efficient Employee Share Ownership Plan. The remaining buyout price was
raised in the form of loans from the Industrial Common Ownership Finance, Nottinghamshire
CDA's loan fund and the bank.
After the conversion
The
buyout was concluded within six months of the employees meeting the CDA for
the first time and has been trading for just over a year. one of the workers
commented, We have no regrets. Trade is up, profitability is up and equally
importantly staff morale and commitment has never been higher. It has not
been all plain sailing though, with the main difficulties surrounding
employing new people, which was something the previous owner had always
undertaken. However, you certainly learn by doing and at least we can
confirm, whereas I know [the owner] felt very lonely and isolated as the sole
decision maker.
Jigsaw Nursery
Background
Jigsaw
Day Nursery is a children's day nursery and out of school care club. It was
established in 1989, in Coventry Holbrooks, Coventry by a partnership of two
women. In 1991 one of the partners wanted to release her capital from the
business. Jigsaw is now a successful employee owned business. This case study
identifies how it was achieved.
The options
The
owner approached Coventry and Warwickshire CDA to explore the option of an
employee buyout. The owner wanted an exit route for herself and her money,
but also wanted to safeguard the jobs. The solution was to register a
co-operative business to provide a buyout vehicle.
The process
Coventry
and Warwickshire CDA undertook a confidential feasibility study which
revealed that an employee buyout was possible. The CDA was then invited to
make a presentation to the workforce who were enthusiastic about the prospect
of taking over the business. Coventry and Warwickshire CDA negotiated with
the owners on the price and terms of the handover.
The
employees undertook a programme of business skills training from Coventry and
Warwickshire CDA to enable them to fulfil the additional duties of running
limited company.
The raising of the finance
The
CDA were able to secure a grant for the buyout from Coventry City Council's
Urban Programme block grant scheme for workplace and community nurseries. The
grant paid for the assets purchased from the old nursery and enabled some
important refurbishment to take place. Coventry and Warwickshire CDA also
secured loans on favourable terms from West Midlands Co-operative Finance and
Industrial Common Ownership Finance.
After the conversion
In
August 1992 the employees took over Jigsaw Day Nursery. Jigsaw Co-operative
Limited is a company limited by guarantee with all assets held in common.
Since
the buyout the nursery industry in Coventry has gone through a difficult
patch due to the large numbers of redundancies from local factories. Jigsaw s
employee owned structure has helped to hold them together through this
difficult time and encouraged everyone to get involved in marketing activity.
Jigsaw s fortunes have now improved and they have also opened an out of
school activity club with help from the local Training and Enterprise
Council.
North East Music Co-operative Ltd
Background
When
Newcastle City Council found themselves facing huge budget cuts in 1995, the
peripatetic music service looked very vulnerable. Redundancy notices were
issued to all the music teachers employed in this service, to take effect
from Easter, 1996. The Musician s Union approached Economic Partnerships in
the North East for assistance in April 1995, but the outlook seemed bleak.
The options
The
teachers, as employees of a local authority, were all entitled to redundancy
and were on good terms and conditions. A new company formed to take over the
service would have been over-burdened by taking on these obligations.
Accepting the redundancy payments and then re-forming as a group of self
employed musicians to offer the service was the only way forward. A marketing
co-operative, with Mutual Trading Status (MTS) provided a legal structure
which combined the tax advantages of self employment for the teachers and
corporation tax exemption for the company. MTS was negotiated with the
Contributions Agency and the Inland Revenue before the company started
trading.
The process
The
service had previously been provided free at the point of delivery, by the
local authority. The new co-operative would have to charge schools for the service
in future. Detailed research into what other peripatetic music services
around the country charged, together with questionnaires to all the schools
in the Newcastle area formed the basis of the business plan. The local
authority was persuaded to delay the redundancies until September, 1996 to
give more time. Teachers needed to be kept informed and the conversion team
worked closely with their business advisor to conduct the market research and
develop a marketing, finance, personnel and organisational plan. The
timescale for all these activities was five months and included negotiating
with statutory bodies like the Inland Revenue and registering the company.
Training days were also arranged for all the participating teachers on the
operational practice of the Co-operative, its quality standards and customer
care. Basic training for teachers on managing their tax affairs as self
employed people was also arranged.
The raising of the finance
Newcastle
City Council, which had previously funded the service 100%, paid 16% of the
budget to the new Co-operative as a block grant. A grant from Tyneside
Business Start up Support was accessed to fund capital costs and office
equipment. Revenue was raised immediately, by invoicing schools at the start
of each term.
After the conversion
The
newly externalised service has been very successful - 40% more children are
receiving music tuition than under the previous system. All 18 jobs
threatened when the budget cuts were announced have been saved and ten new
music teachers have joined the co-op, in addition to the office
administration posts created, whilst the local authority has made a
significant saving to its annual budget.
North West
Precast
Background
Pilling
Precast, producing pre-cast concrete products for the building trade, was
formed about 40 years ago. It flourished in the Fylde coast village of
Pilling under its founder, went into liquidation under his son and was bought
by Tayban Precast Ltd. It again flourished until the owner died and the
business got into difficulties under his son! The proposed solution in summer
1984 was to relocate to Horwich, near Bolton. This was forty miles away and
the relocation grants specified that local people had to be recruited.
Against an uncertain future and likely redundancy, the works estimator and
coster, Jim Stamper, proposed the Pilling workforce form a worker
co-operative.
The options
Pilling
is a relatively isolated village on the northern Fylde coast. Tayban Precast was
the largest private sector employer in the area. There were few other local
employment options. Tayban proposed keeping the site open with a skeleton
workforce until the Horwich site came up to speed. After that there was the
possibility (but no more) of some specialist work being done at Pilling.
The Process
Initially
the workforce was suspicious of Jim Stamper's solution. However, the owner
was willing to talk - perhaps he felt bad about leaving loyal employees in
the lurch, perhaps he was interested in continued rental income from a highly
unlettable site. Contact was made with the newly formed Lancashire
Co-operative Development Agency, who made a presentation to the workforce.
They decided to press ahead - it was the only game in town.
With
thirteen founder members, work began on a business plan. This was
surprisingly robust, but cut little ice with banks in conservative rural
Lancashire (even the local Parish Council was initially aghast at the
emergence of a workers co-operative in their community). It took some time to
find a bank willing to support the co-operative - once they had cleared it
with their head office.
The
co-operative was registered as an Industrial and Provident Society in
November 1984 and started trading as North West Precast Ltd in January 1985
with the site having been closed for just one week.
The raising of the finance
Worker
co-operatives were then a new and radical idea in Britain, let alone rural
Lancashire. Even though the founder members were willing to put in £17,500, the
banks were reluctant to get involved. There was little security (as Tayban
owned the site) and there was no 'proper' management. Eventually a bank
agreed to match the £17,500 and £25,000 was secured from Lancashire
Enterprises Limited, an investment company created by Lancashire County
Council.
After The Conversion
North
West Precast rapidly proved that it was as good a business as its business
plan had said. In its first year it turned over £400,000, grew to 24 employees
and made a pre-bonus profit of £90,000. Meanwhile Tayban, who as a 'properly'
managed business had little difficulty raising finance, again hit problems.
By Easter 1995 it was again in liquidation. Tayban's collapse presented North
West Precast with problems and opportunities. They were still associated in
the trade with Tayban and some customers assumed that North West Precast had
also gone into liquidation - turnover stagnated in 1985-6. However, there was
also a chance to buy their site which they did for £120,000.
In
1987 the co-operative employed 37 people and had a turnover of £650,000. The
future looked healthy, but Jim Stamper was in his sixties and two other key
office staff were approaching retirement age. The co-operative was facing its
own succession problem. Jim Stamper retired in 1990. Bob Danson, the foreman
joiner and a founder member, took over as Managing Director. He had many
years of experience in the business, but Lancashire CDA provided him with
additional training in business and management skills. The co-operative has
come through some difficult years during the recession in the early 1990s and
now employs 40 people, with a turnover of £800 000. It is still the largest
local employer in the small community of Pilling on the Fylde peninsula.
Major new investment of £110,000 was undertaken in June 1996 with the
introduction of a new computerised batching plant.
PS Refrigeration
Background
In
1994 a conference on employee ownership caught the eye of Pat Sullivan, an
owner of a small business in Nottingham. Mr Sullivan had started the business
25 years earlier. His health was not good and his son had carved a career for
himself, independent of the family firm.
The options
Mr
Sullivan had spent time and money in advertising the business as a going
concern. 18 months before Nottinghamshire CDA became involved he believed he
had secured a sale, only to see the deal fall through at the last moment. He
then offered the business to the manager, but he was unable to raise the
necessary finance alone. The only other option known to him - to voluntarily
liquidate the business and sell the assets - would not have given the
financial return Mr Sullivan was seeking or safeguard the jobs.
The process
Before
meeting with the employees, Nottinghamshire CDA checked out the history of
the company and made a brief assessment of its value and researched the
market the company was in. The employees were then invited to a presentation
on the implications of an employee buyout. They decided amongst themselves
that they wanted to pursue the option further and a buyout team was formed to
produce a business plan, arrange the finance, adopt the appropriate legal
structure, develop their business management skills and finalise negotiations
with the owner.
The raising of the finance
The
employees raised 10% of the total purchase price amongst themselves. Two
loans, one from the Industrial Common Ownership Finance Limited (ICOF) and
one from Nat West Bank (who had been the bankers to the old company and were
keen to retain the account) were arranged. An element of the total buyout
price was deferred by the owner, until one of the loans was cleared. This
assisted the companyÕs cash flow in the first few years.
After the conversion
The
employees took the business over in April 1995. Since then turnover has
increased dramatically and employees are beginning to see the rewards -
better wages and a good non-contributory pension scheme have been introduced.
Some staff found it hard to adapt to a new way of working and some left.
The
whole buy-out experience has given them all confidence to tackle difficult
issues. Jan Barlow, who was previously the office 'girl' and now undertakes
the role of Company Secretary, said, 'I used to know so much about the
business but was kept in the dark about various crucial parts. It was very
frustrating - especially if decisions were being made that I thought were
wrong. The buyout gave us all the opportunity to see the business as a whole.
Everyone has to be completely transparent about what they do. Not everyone
likes that and in our case someone went. It was a worrying time, but we
pulled together and saw the thing through. I think we can cope with most
things now.'
Qualglass Rework
Ltd
Background
In
autumn 1996, the workforce in the repack, resort and cullet section of United
Glass, St Helens faced redundancy when the company decided to contract out
the service from April 1997. They decided to try to form a co-operative in
order to save their own jobs. They contacted their union,
the GMB, nationally. The GMB put them in touch with Malcolm Lynch Solicitors
(MLS) in Leeds, who in turn contacted Lancashire Co-operative Development
Agency (LCDA).
The options
United
Glass were determined to contract out the repack, resort and cullet services.
None of the potential bidders for this contract were local to St Helens. The
bulk of the workers involved were men in late middle age and as St Helens is
an area of high unemployment, they feared they might never work again.
Against that they would each receive a redundancy payments and were members
of a well-established company pension scheme.
The process
On
10 January MLS and LCDA made a presentation to 23 United Glass staff about
what would be involved in forming a co-op and the services we could offer.
The meeting agreed to proceed with investigating the potential for a
co-operative and appointed a Steering Group of five people to work with MLS
and LCDA.
The
Steering Group, MLS and LCDA then met with the Personnel Manager of United
Glass. The company were willing to be co-operative, because they wanted 16
voluntary redundancies. They were willing to offer a time-limited contract,
but said that in the medium-term they intended to phase out need for service
through improved quality management. (The workforce did not believe this to
be technically possible).
LCDA
began working with the Steering Group on a feasibility study and outline
business plan. Also a visit was arranged to a well established manufacturing
worker co-operative, North West Precast Ltd. MLS worked on the contract
between the new co-operative and United Glass. MLS and LCDA agreed on the
appropriate legal structure for new co-operative - an Industrial and
Provident Society with variable shareholding.
LCDA
and MLS made a further presentation to 15 United Glass staff on 30 January
1997 - setting out a proposed business strategy and the state of negotiations
with management. Following that meeting it was clear that there were
sufficient committed people to proceed with the buyout.
The
Steering Group, with one additional person, became the Board of the new
co-operative. LCDA delivered training to the Board members on the duties of
Directors, democratic management structures, business planning, industrial
marketing and financial management and control.
MLS
were able to negotiate a longer contract with United Glass and the business
plan was finalised. The new co-operative, Qualglass Rework Ltd., started to
trade with 17 employees on 14 April 1997.
Raising of the finance
LCDA
identified finance through St Helens Training and Enterprise Council for
retraining people involved in large scale redundancies - £750 per person.
Together with £2,400 redundancy money invested by each new member and an
agreement by United Glass to pay the first month's payment up front, this
produced the necessary capital to start the business.
After The Conversion
In
its first year of trading Qualglass has developed an excellent reputation
with United Glass and United Glass's ultimate customers. They have also won
contracts with other United Glass plants in the UK. The co-operative has
expanded rapidly and by the beginning of April employed 39 people.
Scaleways (Leicester) Limited
Background
Scaleways
(Leicester) Limited is a small business located in Leicester. It sells, hires
and services scales and weighing machines. In 1995 the owners were looking at
their options on retirement. Scaleways (Leicester) Limited is now a
successful employee owned business. This case study identifies how this was
achieved.
The options
The
idea of an employee buy out was proposed by the five employees who had become
aware of the owners efforts to sell the business to other companies operating
in their field. The owner, who had read about Leicester and County
Co-operative Development Agency in a business news article, contacted the CDA
who in turn contacted the employees. The employees were also advised by
Malcolm Lynch Solicitors.
The process
The
employees approached the owners of the business and negotiations began.
Although the owner was in favour of an employee buy out, the negotiations
took a long time (in all about eighteen months). The most difficult aspect of
the process was negotiation over the price, and in particular in relation to
the premises which also belonged to the business owners. The employees found
it difficult to be forceful in their negotiations because they were dealing
with their employer, and they were concerned about their job security. The
process was made more complicated by the fact that the employees were buying
a family business - the employees were not only negotiating with the owner
but indirectly with his family as well.
In
hindsight the employees have said that they would have handled it in a
different way. They feel in particular that the negotiations could have been
speeded up if they had been handled by a third party.
The raising of the finance
The
employees were able to buy the business after finance was raised by way of a
number of secured and unsecured loans. ICOF (Industrial Common Ownership
Finance Limited) and Leicester and County CDA agreed to lend the company
money which enabled it to buy back some of its own shares from the current
owners. The employees of the company also lent money to the company. Both
ICOF and the CDA took fixed and floating charges over the assets of the
business as security for their loans. The premises were purchased from the
business owners, and this was paid for by way of a 4 year interest free
mortgage from the owners. Two of the employees gave personal guarantees to
the owners in respect of the mortgage. Start up costs were paid for by way of
a grant from Leicester City Council.
The structure
One
of the considerations when advising the employees of Scaleways (Leicester)
Limited was how to ensure that they could benefit from owning the shares in
the company without making the legal structure over complicated. The
employees were advised that it was easier to leave the existing company in
place and for the employees to purchase shares directly from the retiring
owners. Out of the five employees of the company one indicated that he did
not want to hold shares personally. Accordingly it was agreed that one
employee in addition to his shareholding would hold shares on trust for the
employees generally.
Special legal and tax considerations
The
primary consideration of this buy out was to ensure that the structure
adopted was appropriate for the size of the concern. It became apparent that
the employee ownership structures, which provide the best tax advantages,
such as the Employee Share Ownership Plan were too complex and not
appropriate for the size of the business. The solution provided a much more
straightforward mechanism for purchasing the company. The retiring owners
were able to take advantage of Retirement Relief which reduced their
liability for Capital Gains Tax.
Where are they now?
Scaleways
Leicester has now been operating as an employee owned business for three
years and employs five employees. It does not have any current plans for
expansion.
Tower Colliery
Background
Tower
Colliery, based in the South Wales Coal-field, was closed by the British Coal
Board in 1994, and was then offered for sale to the public as part of the
then UK Government's policy of privatisation of the whole of the British coal
industry.
The
colliery had been in existence since the 19th century and was capable of
producing 900,000 tons of coal a year. The coal is of a very high quality and
has a ready market both in the industrial and domestic sectors.
The
local lodge of the National Union of Mineworkers had led a very public fight
to try to prevent the mine being closed. They felt that the mine was economic
and had good reserves for at least ten year's production. They also knew that
the managers wanted to buy the mine.
The options
The
men were convinced of the viability of the mine and they approached the Wales
Co-operative Development and Training Centre for help in preparing a bid. They
approached the Centre because of its strong Trade Union links, it is also the
only co-operative centre in the UK financed by the TUC.
An
early meeting was held with all the workers to explain the process involved
in mounting a bid and to outline the legal and financial structure of a
co-operative. They were also asked to think seriously about investing their
own money in the venture. The meeting was very enthusiastic and
regular meetings with all the men were held throughout the process.
The process
A
steering committee of eight miners was elected to work with the Centre to
prepare a business plan. This was to include a mining plan, an independent
survey and financial projections.
The
steering committee worked with the Centre for four months preparing this
plan. It was then decided to appoint Price Waterhouse as financial advisers
as the bid would have to be made in open competition with large mining
companies and specialist advice was needed on structuring the bid. They also
helped to negotiate the financial details with Rothschilds, who were acting
for the Government on the sale of all the coal mines.
The raising of the finance
The
finance was raised initially by the 250 miners each investing £8,000, which
raised £2,000,000, and a loan of £1,000,000 from Barclays Bank. Most of the
miners used their redundancy money for this, though 60 of them took out
personal loans to fund their investment. A royalty payment to the Government
for each ton of coal sold over the first five years was negotiated. In effect
the mine was purchased with an initial down payment of £2,000,000 followed by
a system of deferred payments. There is also an Employee Benefit Trust to
provide an internal market for shares (employees must sell their shares back
to the company on leaving).
The
planning started in April 1994, the Government announced that the miners were
the preferred bidders in October 1994, and the deal was completed in December
1994. The mine commenced working under new ownership on 2 January 1995.
After the conversion
The
new company has been successfully trading for over three years and has
recorded a profit for every year. It now employs over 300 people and has
plans for expansion in to other mines. It has established a very popular
visitors' centre and has close links with the local community.
Williams Commercial Bodies
Background
This
company is based in Wrexham, North Wales. It repairs and manufactures
commercial vehicle bodies. The owners had approached the local enterprise
centre for help as they wished to hive off the repair part of the business to
enable them to concentrate on selling new commercial vehicles.
The
local enterprise centre then contacted the Wales Co-operative Development and
Training Centre to provide specialist advice to the workforce. Early meetings
with the workforce indicated that they were willing to purchase the repair
business, subject to an agreed price with the vendors. All of them were
willing to invest £3,000 in the new company, provided it was co-operatively
owned and run.
The process
The
process was greatly assisted by the willingness of the vendors to supply
financial information about the company and be willing to accept payment over
a number of years. The beginning of any buyout process depends upon
willingness to sell, without that no deal can take place. This willingness
can not just be assumed to be present.
Planning
for the new company took place over a six month period during which a
steering committee of the workforce worked with the Co-operative Centre to
prepare a business plan. Negotiations took place at the same time with the
owners in order to structure a deal which would give them a fair price whilst
at the same time allowing the new company sufficient capital to
succeed.
Regular
meetings were also held with the whole workforce.
The raising of the finance
The
workforce were willing to invest £3,000 each (24 employees). This was to be
used mainly for working capital. The Wales Co-operative Centre also provided specialist
legal advice in preparing the Sale and Purchase Agreement and negotiating
with the owners. This is a crucial role in any buy out process where the
adviser acts as an intermediary between the owners and the workforce to
secure a deal that benefits both parties. The workforce were keen to continue
to work in a company they felt would be profitable in the future. The vendors
were keen to hive off a section of the company they were no longer interested
in, but they were willing to provide on-going support, particularly in the
area of customer contact and pricing.
The
whole process took over a year to complete as the negotiations with the
vendor were quite detailed and complex. The final deal involved the workforce
paying a nominal sum for the goodwill, stock and the benefit of the
contracts, but paying a larger amount to the owners for the commercial rent
on the premises and paying for the plant and machinery under a hire purchase
agreement.
This
arrangement meant that the owners were satisfied that they received a good
price for the part of the company they wished to divest, secured by a
leasehold agreement over 5 years, and the workforce took over an existing
business with sufficient working capital and a well established customer
base.
After the conversion
The
company has now been trading for three years, returning an increased profit
each year, and has taken on four new apprentices. They have finished paying
for the plant and machinery and in two year's time will be able to
renegotiate their lease.
The
Wales Co-operative Centre has also helped them to install a Profit Sharing
Trust in the past year which will enable all the employees to benefit from
the increased profitability with free shares in the company.
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