Challenges for Employee-Owned Businesses and what to consider

Most small and midsize businesses experience difficult trading periods. They are navigating changes in workforce dynamics, global instability and economic uncertainty. Of the 2,470 employee-owned businesses in the UK 65% would be classified as small (less than 50 employees). Small businesses generally find it harder to weather those sorts of challenges and the warning signs that a business is struggling may be:

• a significant reduction year on year in profit
• excess stock relevant to revenues
• creditor stretch
• ·significant HMRC liabilities

to name but a few.

To make it more challenging, employee-owned businesses often don’t have easy access to third-party funding. See the article “Why a bank may fund an EOT business”. Some employee-owned businesses lack the characteristics required to attract a third-party funder.

If one of the main reasons for the pressure on the business is the payment of the deferred consideration that is outstanding to the Founder, then it is always open to the Trust to try to renegotiate a different payment profile with the Founder to give the business some breathing space in which to recover. The Founder doesn’t have to agree to any different terms, but if they can be shown how their support for a credible turnaround plan is more likely to result in them receiving all of the deferred consideration they are owed, then they may well agree to the change. Any variation will have to be formally documented. The Founder may want to help protect their business legacy, which is usually (or should be) one of the main reasons for selling to an EOT in the first place

If the challenges the business is facing are more wide-ranging, then it is critical that the business gets the right type of skills to supplement the trading board. The current Management Team will no doubt have the perfect skills for the current operational delivery but may be lacking in strategic, financial and leadership skills to turn the business around and pivot it in the right direction. These skills don’t have to come at the cost of an expensive full-time addition to the board but can be satisfied by recruiting part-time project-focused experts, such as a fractional CFO. Fractional CFOs come with a wealth of experience and can be tasked with a specific goal such as developing the turnaround plan/producing a higher grade of management information to help articulate the future options for the business. They can be hired on a part-time and temporary basis, but the key is not to leave it too late to seek help as turnaround plans take time to execute.

Alongside getting the required skills to supplement the current trading board, the Trust can also consider other options at the same time. These might be the sale of the business or a merger with another employee-owned business. Nothing should be off the table in terms of what is best for the long-term prosperity of the business.

The Trust may also suggest that the trading board obtains advice from an insolvency expert at an early stage to ensure that the company does not breach any of the insolvency rules, such as wrongful trading or trading while insolvent. The Trust needs to make sure the trading board is not “digging itself into a bigger hole”.

We have supported many employee-owned businesses through their ups and downs. We are always happy to chat with people looking to discuss employee ownership in whatever form, be it a sale to an employee-owned trust, buying one or resolving disputes. For more information, please contact Debra Martin or Andrew Evans.