Case study

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.