Viability of a Specialist Employee Buy-Out Fund

Descriptions

In February 2011, the Centre began to deliver a new Business Succession and Consortia Project. Funded by the EU and WG this project includes two strands of specialist support. The project provides a specialist, tailored service to business owners and employees to enable the transfer of businesses into employee ownership, and provides advice and support to businesses interested in establishing co-operative consortia in order to sustain and grow their business and to maximise opportunity to tender for larger contracts.There has been unprecedented focus in the last 18 months on the potential for employee ownership to grow the UK economy. The Employee Ownership Association expects the employee ownership sector to grow from 3% of GDP to 10% by 2020. On April 6th 2014 the UK Government introduced a capital gains tax relief to owners who sell a majority stake in a business to its employees via an employee owned trust. This is a significant step in encouraging owners to consider employee ownership as part of their succession planning.However businesses seeking to move into employee ownership often need capital in order to move shares into the hands of employees, either directly or indirectly. Yet financing buy-out transactions is an increasingly challenging area.There is acknowledged market failure of mainstream finance in supporting employee ownership. Mainstream financial support via banks can be difficult to secure due to a lack of understanding about the multi-owner business model and because it is harder to provide the personal guarantees that banks would typically seek. To add to this, these types of business often lack assets in the business on which to secure lending as many business owners retain business property within their pension fund. Many of the mainstream funding products also have incompatible lending terms for a buy-out scenario. Tight repayment period terms can be difficult to manage, particularly if the business under employee ownership also has repayment obligations of owner deferred consideration built into the deal, and interest rates tend to be high relating to the risk associated with the ownership model. Exit using mainstream equity finance is also at odds with employee ownership objectives as most will target a sale of the businesses to recoup investment. There exists some specialist co-operative funds to support buy-outs, but these funds are not suitable for phased ownership transfer deals as they require 51% employee ownership at the point of investment.The Centre believes there is evidenced market failure in this area and is keen to develop a specialist fund for employee ownership that can respond to this gap in provision. The Centre would like to submit a bid to WEFO for EU funding to support such an initiative.The objective of a specialist fund for employee ownership in Wales would be to increase the number of employee owned businesses in Wales. Target clients would be out-right employee buy-outs and businesses moving towards being employee owned via a phased buy-out. The fund would not be used for conventional management buy-outs.The Wales Co-operative Centre would like to commission a consultant to explore the viability of running a specialist fund to support employee ownership in Wales.More specifically, the Centre would like a consultant to examine the following areas relating to the running of such a fund:What should a fund offer and who should it be targeted at?How many deals per annum would be required to make a fund sustainable?What should the minimum deal size be to ensure the fund is run efficiently?What rate of return should the fund aim to achieve?What evidence is there to demonstrate market failure of mainstream finance providers servicing this market?What would be the referral routes into the fund? How could we guarantee deal flow?What would be the most appropriate management structure for such a fund?What are key skills and expertise required to manage a fund effectively?What would be the costs in delivering such a fund?If the Centre were to position itself as Fund Holder, what process would the Centre need to go through to secure this status?What would the resource implications be on the Centre being a Fund Holder?What other risks would be associated with the Centre being a Fund Holder?What would be deemed an appropriate governance relationship between the Centre as the Fund Holder and the Fund Management vehicle?Who would be best placed to provide the due diligence required for approving loan funding and what are the costs associated with this?Given that the Centre would be looking to WEFO for funding to support the development of the product, how would the fund link to the key ERDF programme areas identified for 2014 – 2020?What are the State Aid implications of running such a fund?NOTE: To register your interest in this notice and obtain any additional information please visit the Sell2Wales Web Site at http://www.sell2wales.gov.uk/Search/Search_Switch.aspx?ID=10154.