Case Study
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
(ESOP). 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 ESOP 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 ESOP
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 (their
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.
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