REINO PROJECT WORKING PAPERS NO. 5(March 2008)

EMPLOYEE-BUY-OUT (EBO) MODEL IN BUSINESS TRANSFERS

Tapani Hirvonen

DO NOT FORGET THE FUTUREwww.reinoproject.eu

ISBN 978-952-5721-14-0 (NID)

ISBN 978-952-5721-15-7 (PDF)

KOSEK, Kokkolanseudun Kehitys Ltd

Ristirannankatu 1

FI-67100 Kokkola, Finland

Mainostoimisto Heinäkuu / Kirjapaino A. Välikangas, Kokkola

Kokkola 2008

PREFACE

According to estimations the companies which are transferred to the emp-loyees achieve are more innovative and the employees are more motiva-ted. Thus, the employees taking over the company seems beneficial also in terms of business sustainability and in increasing the profitability and competitiveness of the company. However, in many cases the entrepre-neurs do not see Employee-Buy-Out (EBO) as a real opportunity as they are too fixed to the traditional company hierarchy. Other issues that are hindering the possibilities to implement EBO are, that this method is qui-te unknown and thus for instance the employees do not know how they should proceed in the matter and/or they are afraid to overtake a new role as an entrepreneur.

In Eastern Finland EBO method has not been tested until now. JOSEK launched the idea of EBO in the region of North Karelia by arranging two workshops on the issue. The target group of these workshops was very wide (local business advisors, consultants, entrepreneurs, employees, auditors, accounting firms, business mentors etc.). There were also nine companies with whom EBO method was concretely tested. Case studies of each of these companies are included in this report.

During this pilot project, an EBO plan was constructed. The idea of EBO PLAN is to tap into the intimate knowledge that the employees have on the company they are buying and to depict the future based on their ex-perience and vision. EBO PLAN aims at to implement a comprehensive action plan for the ownership transfer, where the company’s key person-nel prepares to continue the business operations and to take the entrep-reneurial risk in continuing to run and develop the business.

This report is the fifth working paper of the REINO project (Renewal and Innovation to Business Transfers of Micro Companies). The REINO project aims to create a service with lasting support structures to assist busi-ness transfers of micro companies. During the two-year project, part-ners in Denmark, Finland, Greece, and Italy will map out and test the implementation of support services in different stages of the business transfer process. The REINO project is a transnational venture co-ordi-nated by a Finnish development company KOSEK and is funded by the DG Employment of the European Commission under the European Social Fund, Article 6 - “Innovative Approaches to the Management of Change” programme.

Kokkola, March 2008

Antti Porko Ari PeltoniemiManaging Director Transnational Co-ordinator

EMPLOYEE-BUY-OUT (EBO) MODELIN BUSINESS TRANSFERS

Tapani HirvonenJosek Ltd

SUMMARY . .....................................................................................................1

BUSINESS STRUCTURE IN NORTH KARELIA. ...................................................3

BUSINESS TRANSFER IS A PROCESS!. ............................................................6

WHAT IS EBO?. ...............................................................................................8

WHAT OPPORTUNITIES EMPLOYEES HAVE TO CONTINUE BUSINESS?. .........10

PILOT PROJECT OF JOSEK LTD IN REINO PROJECT. ......................................13

EXPERIENCES FROM PILOT PROJECT COMPANIES. .......................................18

PROBLEMS OF EBOS IN THE PILOT PROJECT COMPANIES ............................35

EBO PLAN. ....................................................................................................37

THE THREE KEY QUESTIONS. ........................................................................37

COMMUNICATION AND PUBLICATION IN EBOS. ...........................................40

SUMMARY

The term “Employee Buy Out” (Employee Buy Out) means an acquisi-tion, where the buyers are the employees of the company. All emplo-yees can be involved, but the actual employees (not management) buy the majority of the company. Usually the ownership and voting rights are evenly distributed between the buyers. One of the most important differences in EBO (Employee Buy Out) in relation to other acquisitions is that it always aims at continuing the operations of the company as such or in a larger or smaller scale.

Employee-run companies tend to be successful and employees moti-vated. EBO-method would seem beneficial also in terms of business sustainability and in increasing the profitability and competitiveness of the company. The objective of the JOSEK pilot project was to launch the concept of EBO in the region of North Karelia. This report aims to promote EBO model into a well known, accepted and recommended method for ensuring the sustainability of the company.

In the pilot project, two workshops were organized for local business advisors, consultants and other parties involved in business transfers (e.g. accounting firms, bookkeepers, auditors, bank employees, busi-ness mentors and employment authorities) to make them familiar with the EBO process and to enable them to advise entrepreneurs as well as interested employees also in this process. Also nine companies were engaged to participate in the project.

During the pilot project a completely new model for making a business plan for EBOs was developed. Consultant starts EBO PLAN process by going through all phases of the EBO process with buyers. Next phase is the start-up analysis, in which the determination of starting point for EBO is made. In this phase the value of the business is negotiated, and analysis of buyers’ possibilities to carry out the acquisition is made. The last step is to decide, whether or not the EBO is carried through.

The basic idea of the EBO PLAN is to tap into the intimate knowledge that the employees have on the company they are buying and to depict the future based on their experience and vision. In this regard, an EBO differs essentially from a ’normal’ acquisition, where the buyer is not familiar with the object of purchase; on the contrary he has to spend much more time on acquainting himself with the object.

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The EBO PLAN aims to prepare a comprehensive action plan for the ownership transfer, where the company’s key personnel is preparing to continue the business operations and to take the entrepreneurial risk in continuing to run and develop the business.

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BUSINESS STRUCTURE IN NORTH KARELIA

There are approximately 6 500 businesses in North Karelia and appro-ximately 20 % of them will face a business transfer within the next five years. This means approximately 1 200 businesses, out of which the majority (over 90 %) is micro companies, employing less than four people. Figure 1 below shows the distribution of businesses in North Karelia according to the line of business. In North Karelia, the propor-tion of businesses in construction, commerce and services is lower and the proportion of businesses in manufacturing is higher than the natio-nal average.

Figure 1. The distribution of companies by the line of business.

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Figure 2 below illustrates the age structure of entrepreneurs in the year 2000. In the 832 businesses, whose owners were 55 to 59 years old the year the study was conducted, the transfer of ownership should already have been carried out and the next group (50-55 years old, altogether 1786 businesses) should start the process soon.

Figure 2. The age structure of entrepreneurs in North Karelia.

Figure 3 shows the problems that entrepreneurs consider as main ob-stacles to business transfer. The figure was published in the autumn 2007 in an economic survey executed by Finnvera plc and Pohjois-Karjalan Yrittäjät (The Regional Organization of Enterprises in North Karelia). The figure indicates that finding a successor is proportionally an even larger problem in North Karelia than in the rest of Finland.

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Figure 3. The anticipated problems related to generation change or ownership transfer.

A group of students at the North Karelia University of Applied Sciences conducted a study on business transfers in spring 2005. The study was carried out by interviewing by telephone all entrepreneurs of over 50 years of age in the North Karelia region. Due to the interview method (by telephone), the response rate was nearly 80. In the study several specifying questions were used in order to discover for instance whether the business had a successor. The purpose was to find out how certain the successor really was. The problem is that the entrepreneur can think/hope that one of the children will take over the company, but the matter has not yet been discussed with them at all.

These specifying questions revealed that only 30 per cent of the retiring entrepreneurs had an almost certain successor lined up!

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BUSINESS TRANSFER IS A PROCESS!

A business transfer is always a long-term process, regardless of the way it is carried out. In Finland, the process is often illustrated with the following chart (Figure 4), where it is divided into four phases.

The first phase is called ‘the awakening phase’. The awakening often ta-kes place either as a result of changes in the transferor’s health or when other entrepreneurs are starting their business transfer processes. At this stage the transferor participates in business transfer events, gat-hers information on the subject and considers what the business trans-fer means for his own finances, business, family and time management. The transferor is very active and gathers together all available informa-tion. The awakening phase as a whole is more about getting acquainted and thinking than about actions. If the transferor can have the support of a competent business adviser or a business mentor at this phase, it will have a great impact on the result. The transferor does not yet need actual expertise help but rather a sparring partner. The support person can also be for example his own bank manager, bookkeeper or auditor.

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The next phase is the preparation phase, which might even take years. During that time the transferor starts to reflect his own business in the light of the received information and to consider concrete issues. He considers realistically options such as can he find a successor within the family or should he sell the business. He also thinks about the adequa-cy of his own retirement plan and how to contribute to it. In relation to business operations the transferor ponders the potential change of the company’s legal form and whether the business is in a proper state for selling/transferring. At this stage the transferor should also consider the possibility of EBO operation. The transferor still needs an external spar-ring partner with whom to discuss what kind of experts they might use in the transfer process. In the preparation phase the problem is that it really can take years and the danger is that the transferor loses interest in the process. Here the sparring partner also has an important role in guiding the transferor along the path.

In should be noted that during the awakening phase the transferor has been the active side while in the preparation phase the successor is also invited to take part in the process, especially when the business trans-fer takes place within the family. Also in the case of EBO the successor could be invited to the process already at this stage.

The third phase of the business transfer process is called the ownership transfer phase. The phase includes the actual work needed to carry out the business transfer. Experts are being used in determining the value of the company or in changing the company’s legal form, for example. If the aim is to sell the business, the transferor starts an active search for a successor by using different sales channels and by conducting a buyer survey. Trade negotiations are conducted with potential buyers and a letter of intent might be reached. In a business transfer within the family the financing of the successor is examined and an advance ruling on the company value might be requested from the tax authori-ties, especially if the sale is a so-called giftlike sale. (selling price over 50 % of the market price) The successor’s skills and training needs are mapped. This phase of the process can also take a long time, especially if the aim is to sell the business.

The last phase is called the takeover phase. It includes the “hard staff” such as signing the deed of sale, paying the selling price etc. Informing the public on the acquisition is usually left until this phase, in other words nothing is told until it is in black and white. The takeover phase

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can also last a long period of time, because one of the terms of the sale could be, for example, that the former entrepreneur has to offer sup-port for the successor for a certain period of time. The training of the successor is also started in this phase according to the plan made in the previous phase.

The takeover phase is also important for the future of the business, be-cause it is the time to launch for example new development programs, update business plan and make other important strategic decisions.

WHAT IS EBO?

The term Employee Buy Out means an acquisition, where the buyers are the employees of the company. All employees can be involved from errand boys to managers, but the actual employees (not management) buy the majority of the company. Usually the ownership and voting rights are evenly distributed between the buyers. In EBO the some-times quite different views between groups of employees have to be taken into account and prejudices have to be dispelled. MBO stands for Management Buy Out, which is an acquisition made by the ma-nagement. The employees can also be involved in MBO, but only as a minority shareholder. One of the most important differences in EBO in relation to other acqui-sitions is that it always aims at continuing the operations of the com-pany as such or in a larger or smaller scale. When comparing potential buyers in an acquisition situation, this aim is most explicit only when the employees are one of the candidates. Studies have also shown that businesses transferred to the employees have been more successful than the average and are growing faster than others.

International experience has shown that there are three main types of suitable situations for carrying out EBO: crisis, business transfer and outsourcing.

When a company is in crisis its operations have already ceased in a bankruptcy. A case where the employees continue the operations is called the Phoenix – the re-emergence of the company. This is the most common way employee-owned companies emerge in Europe. Restarting business is usually easy in terms of the law and technicalities, becau-se the situation is clear-cut. The seller (the official receiver) does not

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have any emotional reservations about the value of the company. The buyers seldom have any other notable employment opportunities and if the process is carried out fast the customers will not disappear. Despite the easy technicalities, Phoenix is a very demanding process. A detailed account has to be made of why the previous company went bankrupt, in order to avoid the same mistakes. It is worth remembering that the employees usually know very well why the business failed! Another case of rescuing a company in crisis is when business opera-tions have not yet ceased and employee-ownership is used to continue the operations. This is called the Rescue EBO.

Rescue EBOs are usually very difficult, because the rescue has to be performed quickly. In these situations the previous owner is often gre-atly involved in the process, which is not entirely an asset, because it can be a hindrance to making necessary changes. Often the employees also have difficulties in accepting that the business is unprofitable and the acquisition is an attempt to continue the operations.

A business transfer usually takes place when an entrepreneur is relin-quishing the business as a result of ageing and a successor is not found within the family. In this case the motive of the employees is clear: they want to keep their jobs by buying the business. However, the starting point is better than in the previous cases, because they buy an active company which might even be highly profitable. In some cases the transfer could also happen partially within the family, because some of the buyers might also be inheritors of the entrepreneur. Employee ow-nership can also be a suitable method in cases where the selling price is so high that the risk has to be distributed among several buyers.

The problem of this method is that because the entrepreneur does not usually perceive the employees as potential buyers, he first tries to sell the business to external buyers in every possible way and EBO is only the last option.

Outsourcing usually means closing down or selling a part of a large company. In close-down situations the problem might be that if the employees continue the business, they are regarded as competitors and therefore the purchase is not encouraged.

On the other hand, if the aim is to sell a profitable part of the business, it can be an excellent opportunity for the employees. The important

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thing is to start the process in time, because if the negotiations to redu-ce personnel have already been started, important key persons might apply for a new job. Another potential problem is that there might not be enough work for everyone if the operations are made more effecti-ve.

Another case of outsourcing is the need to privatize auxiliary activities in a large business or municipal services, for example privatizing the transport service of a large business or municipal day-care centres.

The situation usually gives the employees a head start, because safe-guarding their jobs is also important in order to save the seller’s face. The employees are also most familiar with the service that is being out-sourced, and the conditions set upon it. Similarly they are usually well aware of the pricing of the product.

Contract law has an important role in the privatization of operations and services. It helps to ensure, for example, the extent to which the seller is going to buy the outsourced services in the future. On the other hand, it has to be assured that services and operations can also be sold to a third party. It also has to be ensured by agreement that the seller does not engage in the outsourced operations again.

Privatizing enables the buyers to obtain the outsourced operations at an affordable price for the company they have established and, among other things, the term of payment for the purchase price might be more flexible than in a normal company acquisition.

In the privatization of a municipal service the problem might be that there are many negotiators on the seller’s side of the table: officials, po-liticians and even other employees. Setting the price might be a prob-lem simply because the seller thinks that the buyers will make money by doing the job they were formerly paid for as an entrepreneur!

WHAT OPPORTUNITIES EMPLOYEES HAVE TO CONTINUE BUSINESS?

The largest problem in the business transfers of micro companies is that the business is identified too much with the owner. In other words, the only substance the company has is the know-how in its owner’s head. Therefore it is difficult to find an external buyer for a company, even if it was profitable, if no one from the family wants to take it over.

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However, in many SMEs the employees are closer to the entrepreneur than the members of his own family; after all, in practice he spends more time with his employees than with his family. Often these reliab-le employees have been working at the company even as long as the entrepreneur and therefore they know the company at least as well as he does. In fact, they might know much better than the entrepreneur, especially the matters which need to be changed to improve the flexi-bility of business. The entrepreneur himself has shut his eyes to these matters and does not listen to the employees’ proposals for improve-ments.

In the light of these facts the employees of the company would be the best successors for the company in many cases. However, the entrepreneur’s opinion is without exception, “My employees don’t have what it takes to become entrepreneurs.” Other reasons why the seller is against employee ownership are:

not knowing how to start the process• not wanting the employees to know too much about the econo-• mic conditions of the company (and the entrepreneur)being afraid that the business has to be sold to the employees at • a price lower than the market priceit is difficult for the entrepreneur to regard the employees as • equal negotiators while trying to keep the normal business opera-tions running (the employees own adviser has an important role)the entrepreneur’s family, friends and stakeholders (e.g. accoun-• ting firm) think an EBO method is unusual and they might deve-lop prejudices and start opposing it, which has an influence on the entrepreneur’s activities

The employees can also regard employee ownership as strange; the jump from a worker to an entrepreneur seems a distant thought. In ad-dition, the following reasons prevent the transaction from proceeding:

it is difficult to start asking economic details from a familiar emp-• loyernot knowing what entrepreneurial activity means in practice• being afraid of financial risks• not knowing how to proceed with the matter• being afraid that the entrepreneur will cheat in the transaction• because all employees usually do not want to be buyers, what • will happen to the working atmosphere?the only reason to buy the company is to secure one’s job•

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From a social point of view, the problems in EBOs are still related to the outdated employee-employer role typing. Trade unions do not bring employee ownership up in any of their publications or training; it is still a taboo, which is not talked about. Moreover, trade unions are not able to support their members in these changes, for example by offering le-gal advice and counselling.

Furthermore, Finnish society does not support employee ownership, although as previously stated, the employees can have a closer rela-tionship with the entrepreneur than his direct heirs. For example, the section 55 of the Inheritance and Gift Tax Act, which provides for the capital gain from selling a business to be entirely exempt from taxes in the seller’s taxation if certain conditions are fulfilled, is often used in business transfers within the family, but it does not apply to non-family members.

In addition, business-transfer relief in giftlike sale (payment over 50% of the market price) and gift tax relief (value of the gift 40 % of taxable value) only apply to arrangements within the family.

Usually corporate acquisitions always include mapping potential finan-cing options. However, financial institutions do not offer tailored finan-cing solutions for EBOs, for instance. Furthermore, no funds, common in the USA, have been developed, for example through pension trusts, to support EBOs. For example the well-known ESOP (Employee Share Ownership Plan) functions like a pension trust and can grant a long-term loan to the employees for buying the business. In exchange the ESOP obtains shares from the company that is bought as collateral.

Some of the facts in support of employee ownership are as follows:buyers know the company, also its weaknesses (e.g. investment • requirements)there is no need to deal with the acquisition in public, because • often the aged entrepreneur sees selling the business and the publicity connected to it as a personal defeata public sale of a business might also cause problems such as:•

key persons feel their jobs are insecure and apply for a new -jobkey customers suspect products will no longer be delivered -normally to them and start to look for a new suppliersuppliers sense economic difficulties and tighten their terms of -delivery

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competitors get a look-in and start marketing actively to the -customers of the business or tempt key persons to work for them

ownership transfer can be carried out gradually, at first the object • of purchase might be only part of the shares (an external buyer is seldom interested in buying a minority shareholding)the employees buy the business only to continue its activities, • not to sell it on quickly to seek profitthe employees buy the whole business, i.e. the shares or part-• nership shares, and do not split up the company by buying only the most profitable parts of businessthe company and the jobs remain in the region, the business is • not bought to be relocatedthe tax revenue stays the same, because the business is not • bought as a affiliate of another company (which might have its head office elsewhere).

PILOT PROJECT OF JOSEK LTD IN REINO PROJECT

The aim of the JOSEK pilot project was to launch the concept of EBO (Employee Buy Out) in the region of North Karelia. The launching inclu-ded distributing information to pilot project companies and other stake-holders during the project as follows:

Two Workshops were organized for local business advisors, 1. consultants and other parties involved in business transfers (e.g. accounting firms, bookkeepers, auditors, bank employees, business mentors and employment authorities) to make them familiar with EBO process and to enable them to advise entrepreneurs as well as interested employees also in this process.

Workshops were marketed with a direct marketing letter sent among others to all members of the Regional Organization of Enterprises in North Karelia and all accounting and auditing firms, banks and advisory organizations in the region. In addition, advertisements marketing the workshop were published in a local newspaper.

The EBO Workshop held in March 2007 concentrated on distributing general information on EBOs and the REINO project. Mr Erkki K. Kangas from Cooperative Sataosaajat gave a lecture on the practicalities of EBOs and the situation in Finland.

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Psychologist Pirkko-Liisa Antikainen from Psykologian Tietotaito Ltd told her personal experience of changing from the role of an employee to the role of an entrepreneur.

Ms Hanna Koponen, chairperson of the local steering group, is working as Business Analyst at the Joensuu regional office of Finnvera plc and was able to present Figure 5 on how the different types of corporate acquisitions financed by Finnvera are distributed. The figure shows that employee ownership is exceptional also from the point of view of the financier, because only 5 % of the financing for corporate acquisitions is channelled to EBOs.

Figure 5. The distribution of different types of acquisitions financed by Finnvera.

The EBO Workshop held in November 2007 comprised mainly teamwork, although it also included a lecture on the determination of the company’s value and contract law in corporate acquisitions. Especially in EBOs, contract law has a crucial role, because ownership might often be divided even into equal shares between the new owners (who are usually not related). Therefore, for instance a thoroughly prepared shareholders’ agreement can be the cornerstone of the whole activity.

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Most of the time was used in workshops and therefore all participants were divided into five groups. Some participants had already chosen a suitable group when registering for the workshop and others were divided evenly to all groups. The groups were led by chairmen, most of whom were members of the local REINO steering group. The groups discussed the following questions:

How the trade union movement and organizations of enterpri-• ses could promote employee ownership i.e. EBO?How to make it more attractive to continue an existing busi-• ness than to start a new?New ideas for financing corporate acquisitions?• How entrepreneurship education and training can support busi-• ness transfers?How business mentors can promote business transfers?•

This type of business transfer workshops had not been organized in North Karelia before and therefore many were interested and took actively part in developing new ideas in the groups. The results of the Workshop were compiled in a file, which was distributed to all participants.

There is an EBO guidebook being prepared (16 pages, A5) for 2. the use of all interested in the subject. The booklet is intended to guide both parties of the sale. Half of the booklet is for the sellers’ guidance and the other half is to aid the buyers’ in the EBO sales process. The guidebook will be distributed to unemployment offices, enterprise federations and to chambers of commerce, as well as to all consultation organizations in the region. An electronic version will be available on JOSEK’s web site. During spring and summer 2008 there will be significant changes in the legislation of taxation of ownership transfers in Finland. These changes will be included in the booklet to ensure up-to-date information.

Information on the employee-ownership model was distributed 3. regionally in the publications and events by different trade unions and professional organizations as follows:

a. Articles on EBO in NEUVOKAS, a magazine for the members of the Regional Organization of Enterprises in North Karelia,

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and in the publication for the members of the local Chamber of Commerce.

b. An article in Karjalainen, the main local newspaper, in January 2007

c. An article in the North Karelia Yritysmaailma magazine in March 2007

d. Presentation at insurance company Pohjola’s Starttipäivä, day for starting entrepreneurs, in March 2007

e. Several presentations in different advisory organizations and events organized by local organizations of enterprises and banks.

Micro companies, women-led businesses and their employees were 4. encouraged to participate in the pilot project by offering them consulting services and long-term follow-up of activities as a carrot. Nine pilot project companies took part in the project, and manage-ment consulting was used in the EBO process of four companies. The consultants used in the EBO process were local management consultants, lawyers and experts in financial administration. JOSEK Ltd had already chosen them through a competitive bidding procedure to be used in its Business clinic project. The results and experiences from the pilot project companies will be dealt with later in more detail.

An active steering group has had an important role in distributing infor-mation on the pilot project. The members of the group are:

Ms Hanna Koponen, Business Analyst, Finnvera plc, chairperson • of the steering groupMr Keijo Mutanen, Managing Director, JOSEK Ltd• Ms Tiina Tolvanen, Project Manager, North Karelia Chamber of • CommerceMs Merja Blomberg, Organization Manager, Organization of • Enterprises in North KareliaMs Satu-Minna Piiroinen, Project Manager, North Karelia Adult • Education CentreMr Teemu Purmonen, Project Manager, Employment and • Economic Development CentreMr Jouni Mänkkönen, entrepreneur, Tilitoimisto Optimus Ltd, de-• puty chairman of the steering groupMr Pertti Hartikainen, Chief Shop Steward, Perlos Corporation•

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The convener of the steering group has been Project Manager Tapani Hirvonen and the secretary has been Ms Minna Koskimies, both from JOSEK Ltd The members of the steering group also took part in the in-ternational conferences in Joensuu, Haderslev, Venice and Athens.

The pictures below are from the Joensuu Conference held in September 2007, which had participants from all countries involved in the REINO project. JOSEK Ltd was in charge of organizing the conference.

Mr Keijo Mutanen, Managing Director of JOSEK, and Mr Tony Brunello of Studio Centro Veneto during a break at the conference.

Mr Poul-Georg Jertrum (UdviklingsCenter Haderslev) and Mr Michael Ahring Petersen (Business Link South Denmark) from Denmark with Heikki Luukkonen from Finland (Kosek Ltd).

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EXPERIENCES FROM PILOT PROJECT COMPANIES

Part of JOSEK’s regional business consulting consists of advising ageing entrepreneurs when they have to sell their business or transfer it to the younger generation. JOSEK Ltd has developed its own service for busi-ness transfers – the OSUVA counselling. It is the main responsibility of one business consultant to operate the service in the whole region.

The most visible part of the counselling is OSUVA-YRITYSPÖRSSI, a marketplace for buyers and sellers of businesses, available at JOSEK’s web pages www.josek.fi/osuva (in Finnish). It is a non-profit marketp-lace, where sellers can offer their businesses for sale anonymously. All contacts go through the business consultant coordinating the service, and financial statements and other information on the business is given out to the interested party only after they have signed a nondisclosure agreement.

The pages also have a form for people who are interested in continuing a business, but did not find a suitable one from the list. The companies only need to pay a registration fee of €60 + VAT per year, which inclu-des:

making an analysis of the present state of the business and pre-• paring a proposal for actionone year of visibility on the list of companies in the OSUVA mar-• ketplacelooking for buyer, exploring the background and examining finan-• cing options for the acquisitionensuring the confidentiality of the acquisition (e.g. nondisclosure • agreement)copying and posting business specific material and other practical • issuesorganizing meetings between the seller and the buyer, making • experts available to support the processthe national advertising and marketing of the OSUVA marketplace• business specific counselling and advice on the acquisition•

The businesses that participated in the JOSEK pilot project have all been customers of the OSUVA business transfer counselling; for most of them the reason for ownership arrangements was ageing. Some of the pilot project companies have also been advertising in the OSUVA marketplace and in some cases EBO was chosen already during the first negotiations.

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1. Building maintenance company in Kontiolahti -company form: limited partnership

The company had operated in the area for almost twenty years and had established a strong market position. The main task was taking care of the maintenance of municipal rental flats, which was based on a written agreement with the town. Besides the owner, the company had one full-time employee and in addition part-time labour was hired for cleaning work.

When the entrepreneur first contacted JOSEK, his intention was to sell the business, either to another company in the field or to somebody else. Because the selling price had not yet been estimated, the value of the business was determined. The value determination was made for both the current value of net assets and the capitalized earnings value, and the final asking price was a compromise between them. The machinery of the company (special machines for building maintenance) was of good quality and therefore the current value of net assets was a substantial sum. The business was also profitable and therefore, even if the profit and loss account was adjusted with the expected salary of the entrepreneur (in a limited partnership), the business also had capitalized earnings value.

In terms of the taxation of the entrepreneur, the best possible alternative would have been to sell the partnership shares of the limited partnership, because it would have enabled the entrepreneur to deduct the anticipated acquisition cost, i.e. 40 % of the selling price, in taxation, because he had owned the partnership shares for more than ten years. In practice, 40 % would have been deducted from the selling price and the rest would have been subject to capital income taxation. (at present the tax rate in Finland is 28 %)

When buyer candidates started to emerge, it became evident that they were all interested in an asset purchase, which would result in higher taxes for the seller. Quite many where interested in buying the business and especially other companies from the same line of business saw it as an opportunity to reach a new market. The business was put up for sale at the web pages of JOSEK Ltd’s OSUVA market place (www.josek.fi/osuva) and the Finnish Employment Office (www.mol.fi).

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Even though many were interested, the purchase price was generally considered too high and therefore the initial interest did not lead forward. For example, for the other companies from the same line of business the problem was that they would have to buy a lot of ‘unnecessary’ equipment, which they already had enough of.

The sale took an unexpected turn, however, when the long-term employee of the company contacted the contact person of the OSUVA market place and told him he had heard that the company he is working for is for sale. The son of this skilled worker was willing to become a partner in his fathers business, if the purchase would take place.

It had not occurred to the seller that a buyer might be found that close. His first reaction was doubt about financing. However, the thought of an employee continuing the business felt very good to him and therefore they proceeded with the transaction. At this stage the buyers were offered the services of a management consultant with the support of the REINO project. The expert services were of importance, because the buyers did not have any experience of business activities or the corporate acquisition process.

With the help of the expert the buyer candidates wrote business plans and presented it to the financiers. Although the plan was considered realistic, the buyer’s ability to cope with the large loan roused suspicion. The purchase of partnership shares (which was the seller’s wish) was also met with a cool response. All the financier is concerned about when granting financing is how to ensure the borrower’s ability to pay the loan; the seller’s interests always take second place.

At the same time other buyers became active and made the seller a counteroffer which was very close to the original asking price. However, the seller wanted to see how the employee could organize the financing.

When the seller was told that the buyers financing will not work out and it is not possible to sell the partnership shares, his reaction was surprising; he wanted to come down in price and agreed to an asset purchase, disadvantageous to him in terms of taxation.

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After this explicit phase, the transaction proceeded quickly and there were already several alternative sources of financing. The banks were actually competing for the buyers. When the external buyer heard the stage of the transaction, he made a new offer, even a little higher than the original asking price! Nonetheless, the seller had made up his mind and wanted to sell the business to his employee.

For buying the business, the employee established a new limited company with his son and the transaction was made in the company’s name. The management consultant also assisted in the establishment of the company and, although the owners were related, they prepared a shareholders’ agreement with the help of the consultant.

The buyers had contacted the local Jobs and Society Enterprise Agency before establishing the new company and they were both granted a start-up assistance to support the initial stage.

2. Construction company in Lieksa -company form: limited company

A construction company based in Lieksa had four employees and in this case the seller’s aim was clearly to sell the business to them, because his son did not want to continue the business. However, the son had a degree in the field of construction.

Preliminary discussions on employee ownership had already taken place between the employees and the entrepreneur during coffee breaks. None of the employees had previous experience of entrepreneurship.

The first step was to organize a meeting, which was attended by, in addition to the seller and the buyer candidates, also a business consultant. The business consultant explained the acquisition process to the participants. The buyer candidates chose a person form among them to function as the head negotiator in future. Because of their inexperience, the buyers also wished to have an expert to support them and they were provided with one through the REINO project. In the same meeting all buyer candidates signed a nondisclosure agreement and therefore financial statements and

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other information on the business could be given out freely to the buyers.

In the next step of the process the buyers became acquainted with the financial administration and activities of the company. The expert offered them help also in this phase, because they were not able to interpret for instance the financial statements. It was a slight surprise for the buyers, that although they had received their wages regularly each month, the company’s liquidity was rather weak and operations had high seasonal variation. However, the company had not used temporary lay-offs.

Already before starting the process the seller had had the company’s value determined by an external expert and it was shown to the buyers. However, they wanted to have the company’s value determined again, which was done with the support of the REINO project. The person who carried out the value determination was not the same who was offering support to the buyers.

After the new value determination, quite similar to the previous one, was completed and it had been discussed in a meeting between the employees and the expert, things started happen. Two of the buyer candidates announced in the meeting that they do not want to be involved in the transaction. They resigned from the company soon after the meeting and started working for other companies in the same line of business.

The negotiations were continued with the remaining two buyer candidates, but they too started to have doubts about their ability to cope with the loan taken to pay the purchase price. After all, the purchase price would be divided among the two of them and furthermore they both had a significant personal mortgage to manage. It came out that both of their spouses started opposing the transaction. One reason might have been that they did not have enough background information on the subject. They should have definitely been included in the process right from the start.

Further, the seller submitted a proposal to the buyers, that part of the purchase price (30 %) would have been left to be paid within three years, but nonetheless, the buyers withdrew from the sale.

The entrepreneur’s son was familiar with the developments of the

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transaction and when it finally became clear that the employees would not buy the business, he suggested that the operations were moved to Tampere, his place of residence. He had created a network there through which he could use the knowledge and machinery of his father’s company. At first the entrepreneur employed his son to the company and part of the machinery was moved to Tampere where operations were started.

After all, the final outcome might be a normal business transfer within the family in a couple of year’s time.

3. Stone product company in Joensuu -company form: limited company

A stone product company in Joensuu has been operating for more than 50 years and has established a strong market position in its line of business. The company owns land from where the raw material is quarried. Previously their main product was gravestones, but nowadays the production of decorative and landscaping stones is increasing. Recently the product development has concentrated on garden furniture and furniture for public spaces made of natural stone as well as ovens.

In 2003 ownership arrangements took place in the company, as a result of which a strong development of the operations started. Marketing has been strengthened by recruiting new salesmen and by developing for example the layout and functioning of the web pages. At the same time investments were made on a new showroom and the production facilities were modernized.

One of the new persons recruited was a young woman who had just finished her studies in stonework. She is responsible especially for developing and marketing new products.

During the ownership arrangements in 2003 a large part (70 %) of the shares were passed on to a capital investor and the development activities were started with his financial input. However, the capital investor is willing to give up his investment and to pocket the gains. He has offered his share to the young woman working for the company. The principal shareholder also committed himself to buying the minority shareholder out.

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Thus, the object of purchase would have been a portion of the company’s shares (70%), and because also in this case the buyer does not have any experience on corporate acquisitions, expert help was offered to her with the support of the REINO project.

The acquisition process started in spring 2007, and at first the value of the shares was determined from the point of view of the buyer. However, it became clear, that it would make more sense for the buyer to buy business operations instead of shares. The buyer candidate has also updated the company’s business plan with her assistant and they have started looking for financing. When updating the business plan, it has become clear that the extent to which the buyer is familiar with the business and its strengths and weaknesses has a great impact on how realistic the business plan is. This was emphasized in all pilot project companies and led to a concrete EBO PLAN product presented later on.

This acquisition has not yet concluded, because the seller did not accept the offer for an asset purchase, but made a counteroffer for a share purchase. However, at the moment it looks like the buyer is not able to obtain financing for a share purchase, because the seller’s asking price includes a substantial amount of goodwill value, which the buyer cannot utilize in her taxation. In the case of an asset purchase the Finnish tax law would allow the buyer to make depreciations on the paid goodwill value and thus optimize the tax benefit in the new company.

As the seller only wants to sell shares, the buyer would have to take a personal loan for the selling price and pay it back from her salary. This case also proves that financiers in Finland are not able to offer financing solutions customized for EBOs.

One temporary option that was considered was renting the business to the seller. The problem was what will happen to the public subsidies received for the construction of the buildings. No preliminary ruling on the matter was found and because the danger was the subsidies might have to be returned, the option was given up.

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Despite differences of opinion, the parties have continued the cooperation in good atmosphere and the latest event in the case is that the buyer has been appointed as managing director of the company. Thus she can improve her abilities to work as an entrepreneur and develop the company according to her wishes. Currently she is studying for a Further Qualification for Entrepreneurs.

4. A printing factory in Joensuu -company form: limited partnership

The company is a small micro company with only one employee in addition to the entrepreneur. The entrepreneur is already aged has not been involved in the business operations full-time for several years. His task has been taking care of invoicing and financial administration.

Therefore the skilled employee was even more familiar with the company than the entrepreneur, but he had no practical experience on entrepreneurship. However, for some time already the goal had been that the employee will continue the business. The seller was also ready to do what he could to reach the goal.

The buyer candidate himself has also been active; a couple of years ago he participated in a course on starting up a business organized by the Employment and Economic Development Centre and familiarized himself with the line of business by visiting trade fairs, for instance. However, the company had a problem, which is very common in a technology-intensive small business that has been operating for a long time. Only the necessary investments in the means of production had been made, as a result of which the technology was outdated. Therefore the new owner would have to make major investments in equipment.

After discovering this and discussing it with the financier a decision was taken that the existing equipment would have to be bought almost at the price of scrap iron and nothing could be paid to the seller for the goodwill value. Only this way a financing package could be put together which would allow the investments expected in the near future. Buying the partnership shares would not be possible either, instead the object of purchase would be the

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business operations of the limited partnership and the buyer would be a new company established for this purpose.

Of course this was a great disappointment for the seller, because he had assumed to be able to strengthen his weak retirement plan by selling the business. Many owners of small businesses in Finland have very weak retirement plans, because they have not ensured that the annual income selected as the basis of the self-employed person’s pension (YEL pension) corresponds with the reality. As recently as the last decade, everyone was able to select themselves the annual income which was the basis of the pension and of course entrepreneurs wanted to skimp on something that was not relevant at the moment. Only in recent years insurance companies have determined a line of business specific minimum annual income as the basis of YEL contributions and adjustments to contributions have also become possible.

The entrepreneur thought over the matter for a few months and became well aware of the situation he was in. If the company was put up for sale in public, it would be very unlikely that anyone would be interested in it because of its condition. At worst the business would have to be closed down and the machinery and equipment sold to anyone who was willing to pay for them. Most likely they would be sold almost at the price of scrap iron also in this case.

Nonetheless the entrepreneur had been running the business for decades and was very attached to it. Therefore the thought of closing it down was very difficult to the seller and finally he agreed with the employee on a transaction as described above. However, he wanted to have the option to visit the company every now and then to feel the atmosphere and to have a look on the activities.

This was agreed on, it was written even in the deed of sale of the asset purchase, and the acquisition was realized. Also in this case, the buyer had contacted the local Jobs and Society Enterprise Agency before establishing the new company and was granted a start-up assistance to support the initial stage.

It was also agreed upon that the long-term support of a Business Mentor would be arranged for the new entrepreneur. A suitable mentor with technical training and experience was found and

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several development projects have been launched in the company with the mentor’s support.

5. A telecommunications company in Joensuu -company form: limited company

The company in question operates in the same line of business in two different towns and the personnel in Joensuu are mainly responsible for the operations of the Joensuu office. The personnel consist of three persons; two men and a woman.

The idea to buy the operations of the Joensuu office occurred to the employees when they found out that they were working like an entrepreneur without gaining from it in terms of workload and salary. In addition, the owner of the company was more interested in developing the other office and the employees felt that the future of their jobs was uncertain if the operations were continued as at present. However, they had many ideas on how to develop the operations.

In this case the planning of the EBO started when the employees contacted a business consultant in order to obtain the basics of carrying out an acquisition. They were given the information, but right from the start the problem was that they had almost completely been kept in the dark about matters related to the company’s finances and the profitability of the business. In practice, all they knew was whether they had reached the budgeted target each month, but they were not familiar with the cost structure, for example.

Nonetheless the process was continued with the help of the business consultant by contacting the seller and telling him what the employees have been considering. It was a complete surprise for the entrepreneur and his first thought was that his employees are not able to work as entrepreneurs although they were “good employees”.

Later on the problem was that it was extremely difficult to obtain the necessary information from the seller to support decision-making. Furthermore early in the process he told the buyers what was the value of the business they were interested in and was not willing to have a value determination made of the company.

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The company’s bookkeeper was also on the seller’s side and made it difficult to obtain information. Finally when the financial statements were obtained, it became clear why they had been presented so reluctantly. The company was in a liquidity crisis and because in the bookkeeping the movements on the accounts of both sales offices were on the same accounts, money had been moved from wherever there was money. Therefore it was a difficult task to decipher the big picture.

The buyer candidates in this case did not either have any experience on running a business and therefore a consultant was chosen to assist them with support form the REINO project. The company’s value was determined by an expert and once the big picture had been deciphered the making of a business plan was started to explore financing options. The value determination showed that the value of the business was only approximately half of the amount the seller had previously asked for.

It was very difficult for the seller to bring out the reality, which he probably had been familiar with, and it looked as if the negotiations would cease immediately. However, having thought it over he gave the buyer candidates the permission to start exploring financing options.

The employees knew the everyday business very well and they were professionals in the field. Only they did not have any idea of the big picture. While they started to write a business plan with the help of an expert for a new company, which they might set up, a completely new model for business plans was developed, a so-called EBO PLAN. The model will be explained in more detail later on.

The EBO is not yet concluded, but the process is coming along slowly. The idea is to make an asset purchase on behalf of a company not yet formed. Because all contracts (except for contracts of employment) are usually cancelled in this form of purchase, it is crucial to ensure before the final acquisition that the main contract concerning the selling of telecommunication services will be transferred to the new owners. In order to ensure the transfer of the contract, a preliminary contract should be made with the client; the financiers will probably also demand it.

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6. A transport company in Ilomantsi -company form: limited partnership

The company has been providing coach transport services in the region of North Karelia for a long time. It also has its own travel agency with a tour operator licence. The business has been very active earlier, but increased competition and the purchase of trips through the Internet have resulted in a decrease in business activities.

The company still provides customized charter trips, but only in small scale. However, one of the two coaches is operating school transport, because of the decline in business activities. It forms the main business activity which is supplemented with charter trips.

The entrepreneurs of the family business are aged and no-one from the family will continue the business. Ageing causes also other problems to running a business; one of the coaches does not have a driver, because the entrepreneur’s right to operate a motor vehicle of this type has been terminated. The other coach is driven by an external hired employee.

The entrepreneurs have offered him the chance to buy the coach and obtain the rights to operate school transport services. In addition he could operate prospective customized charter trips if time permits.

This would be an asset purchase on behalf of a company not yet formed. The sellers would keep their limited company, which offers travel agency services. The other coach would be sold. The employee was very interested in the plan, because it was his own job at stake here; they did not know of any other jobs from the same line of business in the small town. However, he did not have any experience on running a business nor did he know anything about the productivity of the business.

With the help of the business consultant information was started to be gathered in order to make a business plan for the buyer. This time the problem was not in obtaining the information but in interpreting it. The pricing of the school transport was based on a tender made for the town authorities, and the employee had a clear understanding of the costs of the coach, which made it

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easy to make calculations. The surprise was, however, that the operation was barely productive and had only been carried on to keep the driver’s job.

Furthermore, sorting out the transport included in the charter transport and its share from the prices of the package tours sold turned out to be difficult. A customer paid a lump sum for the tour which included, in addition to the transport, also accommodation, meals, packaged activities, guiding etc. The company had never made an actual cost calculation of the package tours sold and therefore it was decided to choose five different tours and find out their cost structure receipt by receipt.

The study showed that the profit margins of the tours, mainly the transport, were very low. There were even two tours whose transport had made a substantial loss. The information obtained also surprised the owners; however they said they had once suspected something like this. The company was free from debt, so it could afford to even pay sometimes in order to get a tour organized!

From the buyers point of view the situation was different, because he would have had to take a substantial loan for buying the coach. As a result of all measures, the buyer withdrew from the transaction and the business operations continued as before. Apparently for as long as the company has enough money or until the couch reaches the end of the road.

7. A physical therapy business in Juuka -company form: limited company

The company is the largest company in its line of business in the region; it has three employees. It operates in rented premises on a good business location in the main built-up area of the municipality. For several years the entrepreneur has been developing a physical therapy training package together with another entrepreneur from the same line of business. They have already completed the product development and penetrated the market so well that they have established a new company, whose primary line of business is training services. It also seems that organizing the training takes

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so much time that the entrepreneur has to give up the physical therapy business.

In our meeting we discussed the feasibility of selling the business. The municipality of Juuka is a relatively small municipality in North Karelia and it would probably be very difficult to find an outside buyer for the business. Furthermore the present employees are highly skilled, so we also discussed the possibility of an EBO. The possibility is also favoured by the fact that the entrepreneur was worried about what will happen to the employees if the business is bought by an outsider who might bring their own employees with them.

Although the employees are trained professionals, none of them has any experience in running a business. All operational activities have been the responsibility of the entrepreneur. This is a fact that might become the biggest problem in the acquisition and therefore the seller is prepared to give support for the buyers for a long period of time.

In the value assessment of the physical therapy business, it is difficult to determine, what the goodwill value of the attained market position is, for example. The net asset value is not significant, because the company is operating in rented premises and therefore the assets comprise treatment tables, office furniture etc. The company also has a small gym and its equipment constitute a substantial part of the net asset value.

The entrepreneur wants to keep the possible acquisition entirely to himself at this stage and the employees are completely unaware of the new plans. The seller is clearly in the so-called awakening phase at present; he is gathering all available information on the acquisition prior to offering the business to his employees. Along with gathering information, an appropriate solution for carrying out an EBO is being created.

The acquisition is not yet completed, but the seller has a clear view on how to carry out the business transfer.

However, we do not know the truth until the employees are being offered the business.

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8. A specialized shop in Joensuu -company form: limited partnership

The company sells fish, canned fish, semi-finished products and other sea delicacies. The customers include private persons, and a number of restaurants and institutional kitchens. The reason the entrepreneur is giving up the business is ageing and in this case the company’s only employee had already for a while been interested in continuing the operations.

In terms of the taxation of the seller, it would have been in his interests to sell the partnership shares of the limited partnership, but the financier did not approve. The acquisition was carried out as an asset purchase and the seller promised to support the buyer by working with him for a couple of months.

In this case the written contracts between the business in sale and the restaurants and institutional kitchens played an important role, because they made up almost half of the revenue. Legally contracts are not transferred in an asset purchase, because the contracting party changes.

Before carrying out the acquisition, the seller and the buyer visited together all contractual customers and ensured the extension of the contracts. Basically, they had with them new contracts made in the name of the new company established by the buyer and their aim was to obtain the customer’s signature on the contract during the visit. It was important for the customers that the seller had promised to support the buyer after the acquisition and they were convinced by it that the operations will continue to be as flexible as before.

9. A construction company in Joensuu -company form: limited company

The company manufactures traditional log houses for residential and holiday use. The raw material used is close-grained North Karelian pine. The company’s products have a brand name which is rather well-known in Finland. The products have also been exported to Greece, for example, but only in small scale and as an experiment.

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The method of delivery varies according to the customer’s needs. The delivery can consist of a mere timber frame, a log home kit or the whole turnkey project.

The company operates from two locations in North Karelia. One contains only production and the other has a sales office in addition to production. It has about ten employees, mainly men.

The owner of the business has aged and although his son is working for the company, the company will not be transferred to him. The reason is that the entrepreneur feels that his son does not have what it takes to continue his business.

The company has an outside sales manager, who is in practice independently responsible for product sales for both consumers and wholesalers. In the summer 2007 the entrepreneur offered the sales manager an opportunity to buy the brand name, the market and the majority of the production machinery and equipment. The offer came as a complete surprise to the sales manager and at first he did not take it very seriously. However, his interest was gradually aroused and after he had signed the nondisclosure agreement and was allowed to see the company papers, his interest grew stronger.

The seller’s goal was that one of the locations, which had one of the main machines needed in the production, would remain in the limited company he owned. In practice the shares of the limited company would be transferred to his son by using the relief allowed by the law and the son would become responsible for running the operations on that location. However, he would no longer have any separate product to sell, but he would operate as a subcontractor to the sales company and would depend on its success.

The buyer candidate was a sales professional but he did not have any experience in running a business. Furthermore, he did not have any real securities on hand, as a matter of fact; the family had a substantial amount of their mortgage left. Moreover, his wife had set a condition on the acquisition that their permanent home would not be given as collateral for a business loan. Obtaining the financing would be quite a task because the purchase price suggested by the seller was substantial and the collateral value of the object was low.

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It was a very typical case: the buyer had a small amount of money/securities, the collateral value of the assets in the object of purchase was low.

After the initial advice given to the buyer, he was offered the services of a management consultant with the support of the REINO project. In this case the EBO PLAN introduced later on was followed right from the start. As a part of the process a value determination was carried out and it revealed that the seller’s estimate of the price of the company had in fact been smaller than what was showed by the value determination. The consultant who had carried out the value determination with the support of the REINO project was working to the buyer’s advantage so actually the value determination was never shown to the seller!

The buyer candidate was further encouraged by the positive news about the value of the business and by means of the EBO PLAN a business plan, based fully on the buyer’s vision and his solid experience of the business he was to buy, was put together. The EBO PLAN was also used when obtaining the financing and as a result an exceptional solution was arrived at. In this case, the total amount of financing for the acquisition was determined neither by the value determination nor by the purchase price suggested by the seller, but by the amount of a loan the buyer could afford in the long run! Therefore it was of crucial importance that the EBO PLAN was realistic, that is, its sales and profit targets were attainable. The buyer’s experience and vision convinced also the financiers and the financing for the acquisition was organized as planned. The maximum purchase price for which it was realistic to obtain financing came quite close to the seller’s original asking price, so in this case both the buyer and the seller were satisfied with the outcome.

Because a substantial part of the production would be bought from the company owned by the seller’s son, contract law became to play an important role in this EBO. After all, the buyer had to make sure that he could rely on the subcontractor in the future and, on the other hand, would not have to fear that the subcontractor would start to run a competing business.

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The seller and his son also had their own interests in the planned operations model. They had to make sure that the buyer’s company will actually use them as the subcontractor and will not establish a competitive bidding procedure to select another subcontractor. The aim was also to agree on the subcontracting fees.

Therefore contract law took plenty of time and both of the parties had to hire a lawyer to defend their interests. In practice the lawyers drew up the contracts in their mutual negotiations!

PROBLEMS OF EBOS IN THE PILOT PROJECT COMPANIES:

1. The buyers do not have experience on business activities and entrepreneurship

a. The sellers willingness to support the buyer after the purchase is often crucial e.g. in obtaining financing

2. The object of purchase is at the end if its life cycle and/or necessary investments have not been done

a. This is a common problem in many acquisitions but in EBOs it might not be as significant, because the buyers are able to use the outdated technology as well and know the weaknesses of the company (they do not come as a surprise)

3. Difficult to obtain and interpret the information needed for decision making

a. Basically all acquisitions have the same problem, because few micro companies have an up-to-date business plan or e.g. a technology strategy

b. It is important to make the nondisclosure agreement already at the beginning, to enable openness between the parties

c. The employees are usually not able to interpret the obtained information independently, but they need customized advice i.e. a contact person to help them

4. The seller doubts the buyers’ ability to go through with the acquisition

a. Based mainly on the outdated employer-employee role typing

b. Can cause e.g. the problem that the business is not offered for the employees at all, but is sold to an outsider

c. It can also be a problem that the seller tries to manipulate

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the buyer’s decision making in the role of “the boss”5. The buyers lack the perseverance and will to develop the

businessa. The reason is their inexperience in seeing the big picture,

because in paid work the operating area was narrower for the most

b. They also lack a broader view on predicting the future of the branch

6. In terms of taxation, the seller’s and buyer’s interests are often different

a. The seller would like to sell shares, while the buyer would gain more advantage by buying the business activities on behalf of a company not yet formed

b. This problem might not be as apparent in EBOs as when selling the business to an outsider

7. The buyers’ risk-taking ability variesa. If there are several employees as buyers, personal loan

liability might vary greatly and as a result it might be difficult to obtain financing

b. Finland lacks a financing instrument tailored to EBOs8. The business is priced by feeling rather than by reason

a. The same problem in almost all acquisitions, requires a value determination made by an outsider

b. The final purchase price can be a disappointment to the seller, he does not have the motivation to help the new owner

i. However, the need for the seller’s support is emphasized in EBOs, the financiers also demand it

9. The different role of the employees after the EBOa. Emphasized in situations where some employees become

owners and some remain employeesb. A challenge for personal management!

10. Accounting firms and the trade union movement lack knowledge on the EBO process so it is difficult to obtain assistance from them

a. Persons who could support the parties of the EBO are needed

11. The business that is for sale is often strongly identified with the entrepreneur

a. Difficult to assess the reaction of the customers, suppliers

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and stakeholders to the ownership transferb. Emphasizes the significance of the seller’s involvement after

the acquisition

When examining the companies involved in the JOSEK pilot project it is quite striking to notice that none of them represent the so-called Phoenix phenomenon, re-establishing a company in crisis, although it is the most common way of establishing employee-owned companies in Europe.

EBO PLAN

During the JOSEK Ltd’s pilot project a completely new model for making a business plan for EBOs was developed. Usually it is necessary in all acquisitions, whether carried out one way or another, to make a busi-ness plan, primarily for the financiers, which describes the company’s starting point and future plans.

The basic idea of the EBO PLAN is to tap into the intimate knowledge that the employees have on the company they are buying and to depict the future based on their experience and vision. In this regard, an EBO differs essentially from a ’normal’ acquisition, where the buyer is not familiar with the object of purchase, on the contrary he has to spend much more time on acquainting himself with the object. And even then, he will miss something essential.

The EBO PLAN aims at preparing a comprehensive action plan for the ownership transfer, where the company’s key personnel is preparing to continue the business operations and to take the entrepreneurial risk in continuing to run and develop the business.

THE THREE KEY QUESTIONS

When starting the EBO PLAN process, the first and most important task is to find out the profitability of the business. This is done by means of a value determination and an analysis of the present state of the busi-ness. A credit report for the company also has to be obtained and lia-bilities and commitments have to be identified. In order to obtain a full account of these issues, due diligence investigations, which take plenty of time and money, often have to be conducted.

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Just as important as the financial analyses are discussions on the future prospects of the business with the transferor and the buyer candidates. It is also worth getting acquainted with future prospects of the industry, changes in customer buying behaviour, changes in the industry-specific technology etc. One of the advantages of an EBO is that usually both parties of the purchase have intimate knowledge of the industry.

The second key question is to find out what the buyers are actually willing to do. EBOs are often a matter of securing one’s job and many people are willing to do a lot for it. However, it has to be born in mind that people have different personal economic situations and different possibilities to invest capital in an acquisition. People also have different views on spending money. Someone is willing to invest 30,000 euros in a new car without thinking that the sum of money will most likely al-most disappear in a few years time, while they do not have the courage to make the same investment in establishing a company and securing a job (which would pay for itself even in a year).

The third key question is what are the seller’s motives and goals in the acquisition. The answer is difficult to pin down and it might take a lot of background work. In addition, the interests of the entrepreneur’s fami-ly, which might not be the same as those of the entrepreneur, have to be kept in mind. Another thing to find out is whether the entrepreneur is truly willing to give up the business. In other words, does he actually intend to sell the business or is he only trying to gain additional finan-cing from the employees.

After dealing with these three key questions, a situation described in Figure 6. is arrived at and the final decision about whether to go ahead with the EBO PLAN or “go back to square one” is made.

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Figure 6. EBO PLAN process.

Thus the value determination is only one part of the EBO PLAN process; planning the future according to the buyer’s goals plays the leading role.

When planning the future, a detailed analysis of the present state of the business is of key importance; it shows what the business has resources for. It involves evaluating the company’s strengths, weaknesses, oppor-tunities and threats i.e. the SWOT analysis.

The analysis is tailored for each sector, for example, the following issu-es are examined in the analysis of the machinery and equipment of an industrial company:

Value determination and expected lifetime of the machinery• Capacity and the need to increase it• Investment requirements in the near future and their financing • optionsProduction bottlenecks• Human resources in production• Quality assurance• Product life cycle•

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Figure 7. EBO strategy.

A complete EBO PLAN also includes a follow-up. It should be carried out by the same person who has offered support for the buyer/buyers in the EBO process and in making the EBO PLAN.

The suitable time for assessing the situation is about six months after the transfer. At that time it is still possible to correct the potential mista-kes quite easily or even change the original EBO PLAN to better corres-pond to reality. The ’auditing’ should be a continuous, biannual activity at least during the first three years the company is operating.

COMMUNICATION AND PUBLICATION IN EBOS

The issue of how the ownership transfer is communicated during and af-ter the acquisition process is relevant in all acquisitions, including EBOs. The JOSEK Ltd’s pilot project also revealed, how important it is to keep the buyers’ family members updated of the developments. In the pilot

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company in question, this was not taken into account and it probably contributed greatly to the failure of the acquisition. On the other hand, it must be remembered to ensure that the nondisclosure agreement also binds the buyers’ family members and thus obliges them to keep the whole project a secret during the process.

A pending acquisition is sensitive to disturbance and fascinates the pub-lic greatly and therefore rumours start to spread easily. The news on the possible acquisition travels quickly to customers, competitors as well as to suppliers. Unless confirmed or refuted, these rumours will continue to grow and already early on they might become an obstacle to carrying out the acquisition. The secrecy and controlled communication of the acquisition are crucial factors in a successful acquisition. Usually these are ensured by minimizing the number of people who know about the acquisition, but in that sense an EBO can be challenging, because there might be several buyers.

Usually it is a custom in acquisitions that external business communi-cation is not conducted during the process. This custom is important in order to preserve the readiness for operation and prevent the potential transfer and its consequences from causing concern among the custo-mers, suppliers and stakeholders. One exception is informing the finan-ciers of the acquisition, which should be done already at an early stage of the process.

After the ownership transfer has taken place it is recommended that a communications strategy, which both the seller and the buyer agree on, is developed. All in all, the most important thing is that information about the acquisition is given out openly and extensively as soon as the transfer has taken place.

The easiest way to inform the general public is to organize a press con-ference, but even then a good press release has to be written for distri-bution at the press conference.

Although the acquisition is carried out as an EBO, informing the emp-loyees should not be forgotten. It is possible that only part of the emp-loyees were involved in the acquisition and the rest will continue as employees as before. In an ownership transfer situation, an employee usually has only one very personal question in mind: What will happen to me now? The preservation of jobs and the buyer’s plans should be openly communicated.

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In companies where the transferor has had a strong role it is recom-mended that meetings are organized between the most important cus-tomers and the representatives of both the seller and the buyer. The customers’ main concern in an ownership transfer situation is usually the question, how will they obtain the service or product they want in the future, and therefore one has to be able to tell this clearly to them in the meeting.

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PUBLISHED REINO PROJECT WORKING PAPERS

4. Toni Brunello. 2008. The Bank of Cases: Manual, Tool and Example Cases.

3. Jan Sten - Sakari Oikarinen. 2007. Process Flow Chart for Business Transfers.

2. Johanna Salmi - Veli-Matti Koljonen. 2007. The Outcomes and the Evaluation of the Pilot Project “Anticipation Method”.

1. Ari Peltoniemi (ed.). 2007. Baseline Analyses: Denmark, Finland, Greece and Italy.