Business

Employee skin in the family business game

How does a family business keep skin in the game when no members of the younger generations are able or willing to take it on? If there is reluctance to sell to a “stranger” who might regard the purchase simply as a mere tradable, even flippable, asset, what might the exit alternatives be? And, how do founders ensure that the care they’ve taken to build something is maintained, along with a definite ethos, in ownership of which they approve? 

One answer could be employee ownership. There’s an obvious and additional more subtle reason for this. Firstly, few companies are given away to employees. It will be handed over for a price. Secondly, the imprint of a business’s founder can be maintained in employee ownership. There is a far lower risk of embarrassing reputational damage for a family than if their business is sold to private equity that could then go on to shut the factory of the town’s largest employer down and move the business elsewhere.  

You can leave your business a hero. It’s the next best thing to handing it on to your heirs and will preserve your legacy

Daniel Goldstein has deep experience of both family enterprises and employee-owned enterprises. He has run both. Currently based in Cedar Rapids, Iowa and President of CEO of Folience, he was for 16 years based in Trento in North-East Italy where he ran a substantial family business and family office. 

From 2016 when he took over Folience, a family-owned, family-controlled media business founded in 1884, he transformed it to become a diversified holding company with ambulance manufacturing, high-end trailer manufacturing, and media businesses. It now has 520 owners from local newspaper journalists to ambulance chassis welders. 

Goldstein says that a “silver tsunami” of retiring Baby Boomer business founders makes this a challenge especially pressing in 2022. He points out that by 2029, every Boomer will be 65 years old or older.  In the US it is estimated that over 2.5 million businesses owned by this generation will face the need to transition ownership and in a tightly compressed time frame as that generation of owners ages beyond retirement.

“You can leave your business a hero,” says Goldstein. “It’s the next best thing to handing it on to your heirs and will preserve your legacy.” As far as employees are concerned he says that it introduces a whole new mindset to their jobs: “you’re an owner. What would an owner do?” Each Folience business card has “License to Act” emblazoned across it. 

Being a part master of your own destiny and sharing in the rewards of your labour are obvious attractions. The research suggests, says Goldstein, that employee-owned enterprises are more competitive and can go some way towards addressing wealth and income inequality, as the equity owned by long-serving employees will pay for their retirement. It’s their nest egg. “You accrue the wealth but not directly through your pay cheque,” he says. 

Established by legislation in the 1970s an ESOP (Employee Stock Option Plan) establishes an Employee Ownership Trust through which the company buys the business from the family for adequate consideration or fair market value. This provides eligible employees the possibility to earn equity in the business over the time that they work for the  ESOP-owned business. Company stock accrues as a contribution to the employees’ qualified retirement plans.

A classic example of this enduring legacy imprint is the engineering consultancy Arup. Founded by the “philosophical” engineer Ove Arup just after World War Two, Arup was given to its employees and now has global revenues of £1.8 billion. 

Each new employee is encouraged to learn Ove’s “Key Speech” from 1970 almost by heart. It’s Arup’s Ten Commandments.  

“Fifty years later,” says the firm, “We continue to treasure these aims, looking to them for guidance as we face new challenges. We are inspired by the speech’s honest search for answers to the question of what work is for, what work we should pursue, and how we should best work together.”

Although they don’t have a key speech, the people of Riverford Organic do have a founder who exerts a strong influence on the business. In the world of British organic farming Guy Singh Watson, 61, Riverford’s founder is a trailblazer.  As he said in his founder’s wishes document – “Much rests on our success; by demonstrating that a human and ethically driven business can be commercially viable, we will avoid being written off as hopelessly idealistic, demonstrate the possibility of a different future, and create an alternative path for other businesses to follow. Values are never an excuse; our offer must be credible without reference to them.” They may operate from near Totnes in Devon, which is renowned for its alternative lifestyle, but the Riverford army is no hippy-dippy collective. 

Singh Watson’s Riverford organic business which he established in Devon in his 20s delivers boxes of veg weekly direct to customers across the land and received a huge fillip when Covid hit. He has strong views about most things not least business ownership and has said: “We had offers for the business as it grew more successful – but to sell Riverford as a tradable chattel, whose purpose would be to maximise short-term returns for external investors, felt to me a bit like selling one of my children into prostitution.” He’s acknowledged that his children may wish to return to Devon and the business eventually but not quite yet.  

Singh Watson could probably have walked away with £22 million with a trade or private equity sale but instead took £3 million. However, with the great success of the business, his quarter share is worth considerably more than it was when he turned Riverford employee-owned 4 years ago. 

Probably the best known employee-owned business in the UK is a retailer whose primary purpose – written down in its Constitution – is not to make money but to make its members happy. The John Lewis partnership, comprising both the eponymous department stores and the grocer Waitrose was set up by Spedan Lewis  (1885-1963) who was the architect of one of the UK’s most remarkable experiments in “industrial democracy” when in the 1920s he gave the retail chain to its staff. 

Although he continued to work six-day weeks for John Lewis until 1955, after this extraordinary donation he received no further dividend, fee or salary. But he knew why he wanted to do it:  “the days when a lot of shareholders could stay at home doing nothing and take a very large proportion of the earnings of a business are over.” 

In good times JLP’s lack of impatient shareholders demanding immediate returns on their capital meant it could afford to take the long view of its business. £100 million was pumped into a tortured redevelopment of the listed Peter Jones in London’s Sloane Square which has made it one of the classiest department stores in Europe.

It has a culture that prides itself on openness and vigorous self-criticism. It’s typical of the Partnership that in the official histories of the Founder you get a truly warts ‘n all portrait. The official memoir hardback published in 1985 to mark the centenary of his birth includes the following, “we ought to be able to admit that he was vain and cantankerous, and it would not be hard to demonstrate that he was intolerant and sometimes cruel in the intellectual arrogance with which he treated individuals who were his mental inferiors. In some ways he was a humbug and he certainly sacrificed his family to his dream of partnership.” Ouch. 

Spedan certainly would not be very pleased with the current performance of JLP. It has struggled in fiercely competitive markets in recent years and its partners did not receive their annual profit share bonus in 2012 – the first time they received nothing since 1953.   

It’s a telling reminder that, whoever owns the equity in an enterprise, there is no substitute for skilled leadership and wise strategic decision making to keep the business afloat. Armies still require professional commanders willing to make difficult and sometimes unpopular decisions to ensure survival and continuing success.

Subscribe

You will need a Premium Plus Subscription to access this database.

Exclusive news, analysis and research on global family enterprise and private investment offices.

Access to the most comprehensive fully interactive database on global family offices, principal investment offices, and family enterprises.

Check Deal Data, Senior Staff, and New Analysis on more than 1000 family/principal investment and holding groups

Already have an account? Login

Subscribe

You need at least a Premium Subscription to read this article.

The most comprehensive information service on the global family enterprise world, featuring exclusive news, analysis, research and data on global family enterprises, family offices, and private investment offices.

Premium

£299

per year

  • Exclusive reports, analysis and commentary
  • Exclusive access to family/private investment office deal information
  • Exclusive interviews with principals and senior management of family/investment offices
SUBSCRIBE NOW

Premium+

£399

per year

  • Access to All of Premium
  • Access to all of FamilyCapital Analytics, our interactive database with more than 1000 detailed profiles of family investment groups

More Info

SUBSCRIBE NOW

Already have an account? Login

You've reached the end.

Continue reading free articles by registering as a Member.
Or choose a Premium Plan.

Membership

Free

  • Exclusive reports, analysis and commentary
REGISTER NOW

Premium

£299

per year

  • Exclusive reports, analysis and commentary
  • Exclusive access to family/private investment office deal information
  • Exclusive interviews with principals and senior management of family/investment offices
SUBSCRIBE NOW

Premium+

£399

per year

  • Access to All of Premium
  • Access to all of FamilyCapital Analytics, our interactive database with more than 500 detailed profiles of family investment groups

More Info

SUBSCRIBE NOW

Already have an account? Login

Leave a Reply