The boss who gave away the business

This article by Andrew Bibby, in a slightly different form, was first published in the Financial Times, 2006

For the past forty years Peter Tracey has put, in his own words, his “heart and soul” into his family-owned business Herga Electric, a specialist switch manufacturer based in Suffolk. He has been successful: the six employees in 1969 have become 150 staff today, turnover has grown to £5m and Herga's strong export performance has been recognised with two Queen's Awards for enterprise. Now aged 68, however, Mr Tracey has recently had to tackle a new challenge: how to successfully remove himself from his business.

Problems of succession when owners reach retirement often bedevil private companies. Mr Tracey's own children are choosing not to take on his mantle, and he firmly rejects the idea of a trade sale or traditional MBO. These, he says, too often lead to production being transferred elsewhere and factories closed. Such a fate for his own business would be a sour end to his career, he maintains.

Instead he has chosen a more radical solution, one which involves gifting ownership of his business to the workforce. Very shortly a new Partnership Trust, with tightly drawn operating principles and safeguards, will take over Peter Tracey's majority shareholding in the firm and hold it in perpetuity.

“I had always admired how the John Lewis Partnership operates. So we looked to see what might be possible for ourselves,” Mr Tracey says. By gifting rather than selling the shares he has avoided a potential personal tax liability, but he has also ensured that Herga is not burdened in the future by a heavy level of debt, a common problem with many employee buy-out arrangements. “We wanted to leave the company with ample resources to develop,” he says.

The move to an employee-owned structure for Herga suits the management approach which Peter Tracey and Herga's current MD Richard Chatham have tried to institute. Richard Chatham, who took over as MD eight years ago leaving Mr Tracey as Board Chairman, describes the regular staff briefings and ‘lunchtime lectures' which he holds for employees as examples of the open management style he aims for. Past sessions have included not only updates on the company's sales performance and prospects but also introductory workshops which try to debunk the idea that business accounts are difficult to understand.

Since January last year [2005], however, the focus has been firmly on moves to the Partnership Trust, which among other things will require the election next month [Feb 2006] of an employee representative on the board of trustees. Preparatory steps towards the change have included arranging for three employee volunteers to meet representatives of other employee-owned businesses at a conference last summer. Richard Chatham says the conversion involves a process of change which may take a further eighteen months to complete, but that up to now the experience has been “fascinating, challenging and exhilarating”.

Whilst Peter Tracey mentions both the large UK retailer John Lewis Partnership and the successful employee-owned Northants-based polymers company Scott Bader as influences, in one respect Herga's new structure will differ from these. As part of the change, Mr Tracey is additionally gifting shares to all members of staff who have at least a year's service with the firm. After a minimum holding period these privately-held shares will be tradeable to other employees through an internal market at a price determined by reference to recent year's profits and current net asset value. The ultimate aim is for the company to develop to the point where it can buy out a residual minority shareholding transferred previously by Mr Tracey to a trust for his family.

Employee-owned businesses have been attracting attention in recent months, not least following Gordon Brown's participation in October at the launch of a report by JOL (formerly Job Ownership Ltd), an association which promotes the concept. This study claimed evidence to suggest that employee ownership can bring about higher levels of staff productivity, greater innovation and lower staff turnover.

The downside, perhaps, could be that the absence of the pressure from external investors may encourage management complacency. A survey of 96 employee-owned businesses, to be published shortly by JOL, will report that 19% of the survey identify ‘avoiding unpopular decisions' as the major perceived disadvantage. However, this is heavily outweighed by the 85% who see greater staff commitment as the primary advantage of employee-ownership.

The employee buy-out route as a solution for business succession is normally based on existing owners selling their shareholding to an employee trust. Peter Tracey, however, says that gifting ownership is the right choice for him, helping to protect a business for which he has a deep emotional attachment. He declines to put a value on the transaction. “We've always had tight financial control for the business and been strongly profit-orientated, but money isn't an end in itself ,“ he says.

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