Worker co-operatives – what are the available funding routes for developing employee owned businesses?
Rob’s plan to take over Valley Bara is spoilt but are business angels the only source of finance available to employee buy-outs?
Financing an employee buy-out to is a critical aspect of the business’ development. So, what sources of finance are available?
As we’ve seen in the Baker Boys series, the employees of Valley Bara used their redundancy money to invest in the business. This is common in employee buyouts in these circumstances, and although it is unusual for employees to be able to raise the full cost of buying the business, it is essential to demonstrate to other funders that they are making some form of financial commitment to the enterprise. There’s also evidence to show that there are higher levels of productivity when employees have an actual financial stake in the business.
A Bank Loan
Although bank lending to businesses is severely reduced at the moment banks are still looking to support SME’s. Banks are commonly used as part of the finance package when employees are looking to buy-out a business. Banks can provide necessary finance to support the purchase in the form of debt finance and overdraft facilities to help get the business started.
Although the number of business grants available has greatly reduced, there are still some sources of grant funding that can be accessed to support an employee buy-out. Local authorities may have business grants available to support the purchase of assets for the new business, whilst the Welsh Government have repayable investment grants available to businesses, where repayment of the investment is based on the future sales royalties of the business.
There are a number of organisations that offer specialist loan finance specifically for employee buy-outs.
Co-operative and Community Finance provide loan finance to employee owned businesses that operate according to co-operative principles, such as ‘one member one vote’.
Finance Wales is an investment fund which makes commercial investments in Wales-based businesses with the potential to grow and it can provide finance to help support the employee buy-out process.
The Wales Co-operative Centre has used both of these providers to finance employee buy-outs.
A Business Angel
Xenos is a subsidiary agency of Finance Wales and offers a business angel matching service. Business angels can bring necessary skills and experience that the new employee owned business may find essential in its early stages of development. However, their investment may be in the form of equity, so they would have an ownership stake in the business. Other business angel services are available throughout the UK, but ensure that you find the angel that is right for you and for your business.
Many venture capital funds are now looking at providing debt finance to businesses as opposed to equity. This is a better proposition for employee buy-outs as it means they won’t have a control stake in the business, so ownership can remain with the employees. Venture capital funds would normally only be appropriate for large buy-outs.
Pulling together the funding package for an employee buy-out is a critical element of the buy-out process. The Wales Co-operative Centre can help with searching for the correct funding approach for your business.
The Wales Co-operative Centre was set up thirty years ago and ever since we’ve been helping businesses grow, people to find work and communities to tackle the issues that matter to them. Our advisors work co-operatively across Wales, providing expert, flexible and reliable support to develop sustainable businesses and strong, inclusive communities.