26 May 2016

Graeme Nuttall’s Speech

There is a generation of architects facing a succession problem. Baby-boomer owners need to bring in new managers and find a buyer for their practices. Employee ownership provides the answer to this problem. It is conceivable that employee trust ownership will be the main way architect firms are owned and governed within the next ten years. Formation Architects is leading the way with the sale of 100% of the company to an employee ownership trust.
Every business needs the right business model. We have a wide choice in the UK. Most architects’ practices are incorporated as privately owned companies. This provides limited liability. It provides protection from claims. It also means the business has shareholders. The business model works well when establishing a new practice or in the early stages of growing a practice, when that growth is driven by an individual or a few individuals. Those individuals have the necessary control of the practice and, as well as salaries, can receive dividends on their investment. But shares have a value and as a business grows so does that value. A question often left open by shareholders in architects practices is “who will buy my shares when I want to step back or retire?”
The directors of Formation Architects addressed this question in good time. The practice had a sole shareholder, its former MD. The directors saw how employee ownership could provide an ideal way to change the ownership of the company. In a family business there may be a next generation to take over. In an architects practice the usual choice of exit is a merger with a competitor or a management buy-out or MBO. Business owners are increasingly turning to employee ownership as an alternative to an MBO. Employee ownership offers ownership succession without the need for a group of managers to take on the financial risk of buying out an existing shareholder. An MBO can be seen as asking directors to, in effect, buy their jobs or asking senior managers to buy promotion. Why should someone’s role within the business depend on their ability to pay or a willingness to invest? And practices such as Formation Architects depend on team-work. Why should a few own a practice to which all contribute?
In many professional partnerships the owners do not have an equity stake in the business, so when they leave there is no need to value that stake and buy them out. Employee ownership using an employee trust achieves a similar effect in a private company. This is the route taken by Formation Architects. An employee ownership trust or EOT bought 100% of the company’s shares and has locked up all the equity of the business in trust on a permanent basis. This allows the directors to focus on running the business rather than worrying about who will buy them out when they eventually wish to retire.
The EOT trustee, Formation Trustee Limited, owns Formation Architects collectively on behalf of all Formation’s employees. Through the EOT all of Formation’s employees have a stake in the ownership, governance and financial success of the business. Employee ownership has secured the independence of Formation Architects and boosted the team work on which its success and growth over recent years depends.
There are now, in effect, no external shareholders. Key individuals in the business will continue to be incentivised on an individual basis but there is now scope for all employees to share in the profits of a good year. Following the Nuttall Review of Employee Ownership the UK government has introduced tax exemptions to raise awareness of the EOT business model. These exemptions were announced after Neil Farrance, Tim Quick, Michael Richter and Kees van der Sande decided on the trust route and one of these tax reliefs is literally an added bonus. Employees at Formation Architects can receive income tax free bonuses each tax year completely free of income tax of up to £3,600. This is a tax benefit available only to employees in an employee-ownership trust controlled company.
The reasons for a business to move to an employee-owned model are clear. Research and case studies show they are improved business outcomes and greater employee engagement. What the trust model particularly helps maintain is a company’s independence and its ethos. Formation Architects has moved from the traditional model of a single individual owning a practice to one where the practice is held by a trustee on behalf of, and run in the interests of, all employees
More architects firms need to know about employee ownership and I am delighted that Jane Duncan the President of RIBA has agreed to launch, officially, the Employee Trust . This is recognition of what Formation Architects has achieved both in the field of architecture and as a pioneer of the employee ownership trust business model, a model that could one day be the standard way architect’s practices in the UK are owned and governed.