How to avoid selling up to your rivals
It is often a real dilemma. What do entrepreneurs who are wanting to exit their enterprise or family firms with no successor ready to take over do with their business?
For many business owners, the most obvious option is a trade sale to a competitor in the same field. That certainly can realise the value of the investment for the years of hard work and building value but it may leave a bad taste in the mouth.
David Erdal, the man behind the Baxi Partnership, has another alternative that is being taken up by an increasing number of businesses with impressive results: employee ownership.
Erdal says: "For a lot of people who want to exit their business the obvious thing to do may be to sell it on to a competitor. When you do that there is no guarantee that they will keep the plant open or the employees on.
"It is not an attractive option for people who continue to live in an area. It means that they meet people at the golf club every Saturday whose jobs have been lost as a result of a deal that has made the seller a bit of money."
But Erdal says that employee ownership under the Baxi model gives the business long-term sustainable future which benefits all the stakeholders, the employees, local suppliers and the local community.
"Our model keeps the business intact and it gives your employees a future rather than really screwing them."
Baxi was set up as a (pounds) 20 million fund 20 months ago after Erdal completed a study of existing employee ownership models around the world and particularly in Italy.
Erdal's own background is in the family which owned Tullis Russell, the papermaker, and which sold the business on to its employees. Funding for the partnership comes from Philip Baxendale whose family owned the Baxi Boiler company, now another employee-owned business.
Baxi Partnership has already backed five employee buyouts and is looking at two other prospects, one in Glasgow and one in the east end of London, which are keen to pursue employee buyouts. So it appears there is no shortage of demand for the Baxi model.
As Erdal puts it: "There is absolutely no doubt now that many entrepreneurs will leap at the chance to sell their companies to their employees rather than to their competitors. The problem is that neither business people nor their advisors realise that it is a really robust way forward.
"They can pocket their millions with a clear conscience, knowing they have done everyone a good turn."
The Baxi partnership gives a particular form to an idea whose time is coming. Attempts to give employees a bigger stake in the businesses they work for include those made by Chancellor Gordon Brown to encourage employee share ownership.
Setting out this principle in 1999 Brown said: "I want, through targeted reform, to reward long-term commitment by employees. I want to encourage the new enterprise culture of team work in which everyone contributes and everyone benefits from successes."
Critics of Brown's approach have said that the measures he has introduced to facilitate this, while broadly welcomed, have added greatly to the complexities of life facing business owners,
The advantage of the Baxi business model is that it is relatively straightforward.
Under the model, the business is sold to to a trust - originally this was to the main Baxi trust - but now there is a separate employee benefit trust set up for each business.
The ownership of the business then passes gradually from the trust to individual employees via a share incentive plan which distributes free shares each year to employees who have been with the business for a certain amount of time. This, Erdal says, allows for a smooth transition and little disruption to the business.
Under the investment model 50% of each company's shares are held in the employee benefits trust permanently on behalf of all the employees. Erdal says this allows the trust to provide a stable base to keep the company independent and helps maintain an internal market for the company's shares over the long -term.
The idea is that over time the remaining 50% of the shares will be held by employees individually.
Unlike other investment models the Baxi one foresees no exit - the idea is that the arrangement stays in place in perpetuity. The only people that can hold shares are employees of the company and when they leave or retire the shares are sold back to the employee trust to be redistributed to other employees.
For the Baxi model to work the business has to be profitable with good prospects for a continuing and growing enterprise. It is also key, Erdal says, that the existing management team is staying with the business or that there is a good succession management in place who understand the firm and can take it forward.
Erdal says that the results at the companies they have invested in to date are impressive.
One of the Baxi companies is Learning IT, Scotland's largest IT training company with 57 people now being employee-owners following a £ 2m investment by Baxi completed in May 2003.
The business has three office locations with specialist training facilities at its head office in Glasgow and at Stirling and Inverness. It has grown to a turnover of £ 4m in six years. But the business has taken on a new lease of life since the employee deal went through with a greater commitment and passion to the company.
Under the employee deal two directors were elected by the employees to represent them on the board.
Carole Leslie, one of the employee directors, admits that the idea was hard for the employees to get their head round to begin with. "To be honest, when we heard about it we thought it was too good to be true and we were looking for the catch - but there really isn't one."
Erdal says: "I will bet that these companies outlast their competitors and see a lot more growth and are happier places to work as well."
Article written by Ken Symon
Published by the Scottish Sunday Herald on February 1, 2004.