Why management buyouts are a good exit for families

A few years ago Albany Pumps found itself in a familiar position. The firm had been in the owner’s family since his father bought it in 1928 and had, in total, been owned by families for 120 years. But it had no third-generation family member who wanted to take it over and it had to make a hard decision about what to do. 

It probably would have been easy to find a buyer for the business, which was turning over about £5 million, but the owner and his wife didn’t want to do that. “The company is based in Lydney in the Forest of Dean with a branch in Bradford, and I think they thought that the chances if they sold the business the chances of it remaining in these two locations was small,” says Malcolm Lynch, a lawyer at Leeds law firm Wrigleys who advised the owners. The 70-strong workforce has for a long time had a low turnover, and the family felt loyalty towards them.

The solution? An employee buyout. Thanks to changes to the UK’s Finance Act in 2014, management buyouts have now become a far more attractive proposition, as they give families a reduction on their capital gains tax bill if they transfer 50% or more of the business to an employee ownership trust.

The family behind Albany “might have got more in a trade sale,” says Lynch, but the tax relief is attractive and the family now owns the premises and the business leases it off them, so they are still connected with – and profiting from – the company. That indirectly helps the business, as customers can see that the family are still involved.

It is not a perfect solution, as the law only applies to employee buyouts – that is, where all staff are involved – and in many cases a management buyout is preferable. But such deals are becoming more popular in the UK, especially as private equity is starting to look at smaller businesses. Joanne Gallagher, a Partner in the Corporate and Commercial team at law firm Thomson Snell & Passmore in Kent, says that buyout firms are now looking for deals in the £1-15 million deal range.

“There is a misconception that private equity is as much more about larger London deals, but we are seeing a lot of activity in the regions,” she says. “During the recession people stopped trying to sell their businesses, and have now gone well past their retirement date. Now the multiples have improved and there is pent-up demand.”

This model could be a great solution for one of the big problems facing family firms, which often get sold to foreign buyers when there is no heir willing to take over. Perhaps the most famous was the giant German engineering firm Putzmeister, which went to Chinese buyers in 2012 for €360 million, but there have been many cases especially across the troubled economies of southern Europe.

Governments should move to protect their countries’ family businesses. If they made it easier for families to find a profitable way to stay involved, and employees to take a stake, then private equity might well be very tempted to stump up cash. That way the benefits of family ownership – stability, loyalty to their employees, long-termism – might be allied with a fresh injection of money and a desire to ramp up the business’s operations. Lawmakers are often encouraged to leave the market alone. In this case, intervention would be the best course.