The workers, united in a cause

These are challenging times for businesses in the ‘new law’ sector. Share prices have fallen, a number of ABSs have quietly folded and one large entity [Parabis] has recently gone into receivership after its private equity funders wrote down a sizeable chunk of cash and decided to bail out. This, ironically, caused the original owners to make a rescue bid.

Those of us of a certain age can recall similar situations arising in the 1980s, when high-street surveyors sold out to financial institutions and then ended up buying many of the businesses back.

This is probably a good time, then, to highlight another strand of the ABS ‘revolution’ that has been less in the limelight but which has been quietly growing at the same time. This is the employee-owned (EO) sector.

It is a truism that internal capital was facilitated by the Legal Services Act along with much-vaunted external capital. The same provisions that freed law firms to take in outside investors have permitted some businesses in the sector to join the rapidly growing ranks of employee-owned businesses, enticed by their track record of improved productivity, employee engagement, retention and recruitment.

In the business that I am familiar with, one observes a fundamental change in ethos, with an end to the ‘them and us’ attitudes that characterised so many limited liability partnerships.

Everyone now has a stake in the progress of the business and we have a ‘common currency’ in the shape of our regularly publicised share value. This is quite revolutionary, because it reflects the intrinsic value of the business as reflected in the balance sheet rather than the profit-and-loss account. At a stroke, it banishes the curse of the professional LLP, namely short-termism – whether in maximising profits for the dreaded profit per equity partner comparisons or in the approach to capital expenditure and its impact on one year’s profits.  

The coalition in particular encouraged tax advantages for EO businesses and this has given a real financial incentive to employees to invest in shares in ‘their’ company. Not only can they see a financial advantage to doing so as they build up what is hopefully a decent ‘nest egg’ for the future, but, even more importantly, they can see that in this way they can ensure real longevity for the business.

As has been demonstrated in all sectors, the downside of funding by outside investors (or for that matter, by a small non-employee group of family investors) is that those investors may lose heart upon a downturn in the business, or just find a better place for their money. They may then be prepared to sell out to the highest bidder, often to the detriment of the workforce.

Employee ownership does not make a sale impossible, but it goes a long way to diminishing its likelihood.

From the point of view of the senior shareholders (typically, those who would have been the senior equity partners in an LLP), a transformation into an employee-owned company has a radical effect on the perennial problem of succession. Instead of having to look for a merger partner (always a leap in the dark) or, failing that, nurse the fond hope that the junior partners will have the inclination and the cash to take up the reins, the more senior shareholders in a corporate professional business can be confident of having a ready market for their shares. This enables them to make stage disposals to either new individuals coming into the business or, more significantly, to the trust that is charged with holding shares on behalf of the employees as a body and which, by definition, is always going to look to acquire more shares in the company.

So there it is – a straightforward solution to the problems of funding, retention, recruitment and succession. Why aren’t more businesses in the professional sector embracing this?

David Simon is chairman of Triton Global, an employee-owned, multidisciplinary business providing services to the insurance sector.