Like their clients, Nick & Sarah Bruce knew that one day they would want to retire, but which would mean addressing the thorny issue of what happened next for their company.
By doing some research they learned that, largely because founders fail to plan for the event, more than two-thirds of family-owned companies fail during ownership transitions. Nick & Sarah were therefore determined to do the necessary planning to ensure this did not happen to Nightingales, but none of the normal options appealed. The prospect of selling to new owners seemed like ‘cutting and running’ from a business they had spent more than three decades building with colleagues they cared about. It would also have meant great uncertainty for their clients too. They therefore looked for other options that would allow them to eventually leave with their heads held high. The choice they made was to transition Nightingales to employee ownership.
Employee ownership is a proven way to minimise the risk of failure whilst also doing the right thing by the organisations’ employees and clients, but none of the normal ways seemed appropriate. Some owners simply give their companies to their employees, however, people typically do not value what they are given. This often means that the higher employee engagement and customer satisfaction that is common in employee-owned firms, and is essential to their future, only partially happens. Whilst the choice to sell the company to the employees addresses this risk, a different consequence is that the employees then have a mountain of debt to deal with at the very time the founding owner is no longer there to guide them. Nick & Sarah therefore came up with a third way.
They made a promise to all their employees to gift them half the company in the future if they ‘earned’ it by working harder and smarter now. The employees would never have to pay anything for their share, they simply had to work as if they were owners already. This promise has allowed higher employee engagement to happen ahead of employee ownership, which is in turn generating the higher performance that justifies that ownership. By earning half of the company through hitting agreed performance targets, the employees also really value the ‘gift’, and which comes with no accompanying debt mountain to pay. The process started in 2014, and so far we are on track to complete the first phase by 2024, whereby the employees will earn half the trading side of the company. The leadership of Nightingales is also transitioning whilst Nick and Sarah are still very much involved to ensure there are no ownership or leadership ‘shocks’ to destabilize the company.
Whilst the concept of the employee earn-out had not been tried before, it is already proving to be a win-win for everyone. Customer satisfaction is significantly higher as Nightingales clients are now cared for by people who think and act like owners. Employee engagement is also up as all staff now have a meaningful say in how Nightingales is run, enjoy a share of the profits now and will, in the not-too-distant future, own half the company. Whilst Nick and Sarah will have to give half the company to their employees, they also win as they retain half of what will have become a more valuable company for everyone. They are also delighted to know their Company will continue in the safest pair of hands – those of the people who helped to build it with them and have demonstrated, time and again, they share the same values.
For those of you interested in the technical side, each employee is earning an interest in the Employee Benefits Trust that will be created when the first earn-out completes. This will hold the employees’ half of the Company with each person’s share in the trust being pro rata to their income since 1st June 2014, when the process started. Therefore, the more each employee has contributed to making employee ownership happen, the greater their reward. In addition to annual dividends whilst they are with the Company, when eventually they leave on good terms they are ‘bought out’ of their share of the trust, giving them a meaningful sum to help their retirement. It also gives newer employees the opportunity to build the size of their share in the trust as the largest shareholders will continue to be bought out as they retire, until it is their turn.
The concept of the employee earn-out and planning Nightingales’ transition to employee ownership happened as part of studying for a Doctorate in Business Administration, being undertaken online by Nick with the University of Liverpool. This involved applying Participatory Action Research with his co-owner, Sarah, ten of the company’s employees, and two professional advisors to identify what the drivers of leadership succession were for Nightingales. It is hoped the thesis will be published in 2019.
If you would like to know more about our journey to employee ownership please email your questions to email@example.com.
Nick Bruce, DBA
Founder & Non-Exec Chair