Business owners underprepared for succession

Ownership at Work’s (OAW) report ‘Generation EO: the great succession opportunity’ suggests an alarming number of potential business closures in the coming years unless alternative succession options are considered. Read the full report here.

The research, which surveyed 500 small and medium-sized businesses (SMEs), found that knowledge of employee ownership opportunities was particularly low. A deepening understanding of these options could help provide a much-needed boost to the UK economy.

EO: an untapped opportunity

The employee ownership model is designed to ensure significant and broad employee benefits across corporate governance, management, and employee relations. As well as developing a resilient, skilled, and engaged workforce, this ‘good work’ approach brings wider benefits to society.

The EO Knowledge Programme research carried out earlier this year showed that employee-ownership businesses (EOBs) are more productive than their non-employee-owned counterparts and make an outsized contribution to economic growth in the UK. They also do more than other business types to support a fairer economy, invest in local community causes, and increase sustainability.

This research also identified the three most popular reasons that businesses adopted an employee owned model:

• To ensure the business remains independent
• To protect and promote the livelihoods of current and future employees
• To protect and sustain the core values, culture and ethos of the business

When you compare the benefits offered by an EO model against the most important factors for  retiring owners in succession planning, the level of overlap is compelling. When asked for the top three factors driving their choice of succession plan, respondents said the biggest priorities were retaining the existing workforce and ensuring business continuity, followed by avoiding closure and maintaining a local workforce.

Which factors are most important in succession planning?

The knowledge gap

Although the number of EOBs has grown dramatically since the UK government introduced the Employee Ownership Trust model in 2014, they still represent only 0.1% of the total number of firms in the UK (around 1,650 businesses). This number could be increased if more business owners were aware of the options available to them – and the associated benefits - when they sell or divest their ownership stake. 

OAW’s survey found that while family succession, a sale to a trade buyer, or a management buy-out were the most well-understood, knowledge of all types of employee ownership was relatively low.

The majority (four-fifths) of respondents had some awareness of employee ownership but detailed knowledge of the specifics of each EO option was lacking with just over a quarter saying they had heard of an all-employee buyout or a sale to an Employee Ownership Trust (EOT) and only one in ten aware of both options. 

Only 61% of all business owners surveyed said that they are either ‘very’ or ‘fairly’ knowledgeable about an all/majority employee buy-out and this level of knowledge decreases to 53% for the sale to an EOT or Employee Benefit Trust (EBT). 

Business owners’ knowledge of succession options

Awareness of employee ownership types

Fail to prepare, prepare to fail

Increasing awareness of the specific types of EO and the benefits each may bring is vital for uptake to increase significantly. This knowledge gathering should form an essential part of any successful exit strategy. However, many businesses that responded to the OAW survey said they had yet to form comprehensive plans. 

The majority of SME owners likely to sell or divest within the next ten years said that their organisation is only ‘somewhat prepared’ for when this happens, while just a fifth consider their business ‘very prepared’. 

Unsurprisingly, owners likely to sell within a shorter timeframe are more likely to say their organisation is prepared. However, even for those expecting to sell within the next 12 months, only just over a third say their organisation is fully prepared while 16% of those likely to sell within 2-3 years said their organisation is not prepared. 

A crucial part of preparing for the transition for the majority of companies is securing the necessary funding and yet most do not have the necessary funding in place. Just over two-thirds of owners likely to sell or divest within the next 10 years state that they have funding in place for the processes that need to happen but, of these, the majority admit that this is only partially in place rather than fully.

Is EO funding in place?

The scale of the opportunity

Nearly a third of all SME owners surveyed aged 43 and over say they are likely to sell at least part of their ownership stake within the next five years, while half are likely to do so within the next ten years. 

Based on all UK businesses with 10-249 employees with owners aged 43 and over2, this equates to more than 58,000 businesses with owners likely to sell their financial stake within the next five years and more than 94,000 businesses with owners likely to sell within the next ten years. 

This number rises to nearly 130,000 UK businesses if we include those likely to divest their ownership stake via family succession, liquidation, or other methods. Among these, nearly a fifth said they are likely to divest via business closure or liquidation. This is equivalent to around 32,000 UK SMEs, which could potentially avoid closure if they explore alternative succession plans.

There is a significant opportunity for SME owners, and those who advise them, to explore the benefits of employee ownership as a business succession option. This is particularly true for the several thousands of business owners looking to exit their businesses within the next five to ten years.

As part of our mission to help mid-sized businesses thrive, ThinCats provides funding for multiple purposes, including changes in business ownership. While we have seen increased interest from business owners and their advisers about funding EOT transactions, this report gives us a powerful insight into the number of firms that still need support. 

Learn more about the benefits, eligibility criteria and funding options for employee ownership in our dedicated hub.