For architecture practices the question is often who will own us next?
The answer might be a sale to a larger competitor or a management buy-out by the next generation. However, both these routes have drawbacks: a trade sale can dilute the culture and identity that made the practice successful and a buy-out asks the next generation of leaders to find money they increasingly do not have.
There is a third option, which architecture practices have embraced faster than almost any other sector: a sale of the practice to an Employee Ownership Trust (EOT).
Here we explain why architecture practices are so well suited to employee ownership, why it removes one of the biggest obstacles to succession planning, and how RVE Corporate Finance (RVE) can help practices make the move.
RVE recently advised a top 100 London-based architecture practice (an AJ100 practice) on its sale to an EOT, and the experience reinforced for us how natural a fit the EOT model is for the profession.
The EOT model
With the EOT model the founders and other shareholders sell a controlling stake in the business, usually a 100% shareholding, to a newly created trust that holds the shares for the benefit of all employees. Crucially, the employees do not need to put in any money and the business doesn’t need to take on any debt with the EOT model.
The trust pays the founders and the other selling shareholders from the practice's future profits over several years, supplemented by any surplus cash already in the business.
This changes the ownership andleadership conversations:
- The business has a long term stable owner in the Trust
- The founders and other shareholders get a fair market price for their shares, paid at completion and in instalments from future profits and taxed at a lower rate of CGT (12%)
- Succession paths for the next generation of leaders become more tangible, and without having to commit capital to the business these individuals can benefit as quasi-equity partners once the Founders have been fully paid
- Every member of staff shares in the success, through tax-efficient profit share bonuses and a voice in how the practice is run.
Why architects are a natural fit
Employee ownership works best in businesses where the value lies in people, culture and reputation. Architecture practices tick each of these boxes.
The people are the business.
A practice's real assets walk out of the door every evening. Its designs, client relationships and reputation depend on the skill and commitment of its team. Giving that team a stake in the outcome aligns everyone's interests.
Culture and identity matter.
Clients often choose a practice for its design philosophy and ethos. A sale to a larger group can erode that. An EOT keeps the practice independent and lets the founders' legacy continue.
Collaborative ways of working.
Architecture is a team discipline. Design reviews, studio culture and shared credit already reflect many of the values of employee ownership.
Recruitment and retention.
In a competitive market for talent, being employee-owned is a strong differentiator for attracting and keeping the best architects.
The profession has noticed. According to industry reporting, around a quarter of the AJ100,the Architects' Journal's annual ranking of the UK's largest practices, are now EOT owned. No other sector has embraced the model so widely.
The tax position
EOTs remain one of the most tax-efficient succession routes available, although some of the rules have changed recently:
- Lower capital gains tax for sellers. Sellers get a 50% relief on any gain made which means an effective rate of CGT of 12% (versus the standard CGT rate of 24%).
- Tax-free bonuses for employees. Employee-owned companies can pay each employee up to £3,600 a year in profit share bonuses free of income tax.
RVE's experience with architects and beyond
Employee ownership transactions are a core specialism at RVE. We have advised founders / shareholders across a wide range of sectors on the sale of their businesses to an EOT, including all manner of professional services firms.
Our experience means we understand the issues that matter to architecture practices in particular:
- Valuing a people-based business with variable project pipelines and work in progress.
- Structuring deferred payments that founders are comfortable with and the practice can afford.
- Bringing senior architects through as directors and future leaders without any requirement to provide capital
- Setting up trustee boards and governance structures that work for a creative, studio-based culture.
We guide founders / shareholdersthrough every stage of the EOT transaction, from the initial feasibility reviewand valuation to HMRC clearance, legal documentation and completion.
Thinking about the future of your practice?
If you are a founder / shareholderor director in an architecture practice, starting the conversation early onownership and succession gives you more options and more control.
An EOT could let you:
- Receive a fair market price for your shares
- Keep your practice independent and its culture intact
- Bring your next generation of leaders through without asking them to put in capital
- Join the growing number of the UK's leading practices that are already employee-owned.
To find out whether employee ownership is right for your practice, contact the RVE Corporate Finance team for a confidential, no-obligation conversation.