Employee ownership offers alternative for family business successions

Business principals looking to secure their legacy, but missing a family successor, could take inspiration from the founder of Richer Sounds who is transferring the bulk of his shares worth $4.4 million into an Employee Ownership Trust.

Julian Richer (pictured) is the founder, managing director and sole shareholder of the British home entertainment retail chain. The entrepreneur is one of the UK’s most successful business people, starting his business aged 19 in 1978 and buying his first Rolls Royce and private jet in his early 20s. However, he and his wife Rose do not have children.

Richer said he always planned to leave his £157.5 million ($201.6 million) company in trust on his death for the benefit of his 522 colleagues across the 53 stores in the chain. He will receive £9.2 million ($11.7 million) for his 60% stake and £3.5 million ($4.4 million) will be distributed among his employees.

Each of his 522 staff will be due £1,000 ($1,279) for every year at the firm, an average pay out of £8,000. Some 39 people have worked for the firm for more than 20 years and one for 40 years.

“Having hit the ripe old age of 60 in March, I felt the time was right, rather than leaving it until I’m not around, to ensure that the transition goes smoothly and I can be part of it,” Richer said.

“The company’s banks, suppliers and customers should feel that the move is (hopefully) seamless and Richer Sounds carries on as normal.”

Richer intended to stay involved with the business, but leave the daily operation to its existing management board, along with a Colleagues’ Advisory Council and trustees.

The company said in a statement the board was made up of longstanding directors, the newest of which had served for 25 years, and they were “steeped in the culture of the company”. The council will consist of employees and tasked with representing their interests and concerns. A trustee will chair the council.

“The Richer Sounds Trust, as the Employee Ownership Trust will be known, will operate according to a set of principles within the trust to make sure that Richer Sounds continues to operate in a responsible manner, and is based on honesty, commitment, trust and respect,” the statement said.

“These principles ensure that the company continues along the lines that Richer has built the company on for the previous 40 years.”

A devout Christian, Richer donates 15% of profits to several charities. Staff have the use of the dozen company-owned holiday properties. He explained his progressive approach to employment in his book The Richer Way: How to Get the Best Out of People.

The transition to employee ownership has been 18 months in the making. Overseeing the transition was David Robinson, chairman of the company.

“It’s incredibly exciting times and allows our colleagues to feel even more connected to the company,” Robinson said.

“They have a real stake in the success of the business and can take pride in knowing that they are shareholders, building for the future.”

Who will inherit the business, built over a lifetime, is the most common concern for principals who want to see their labours flourish in the future. Yet half of all family offices do not have a succession plan in place, according to Campden Wealth’s Global Family Office Report 2018. There has only been a one percentage point increase in succession plans since Campden Wealth and UBS warned of the problem the previous year.

While families have traditionally looked to their children in succession planning, life is not always so straightforward.

Billionaire Karl-Erivan Haub, the 58-year-old fifth-generation heir to Germany’s Tengelmann Group, was lost while skiing in the Swiss Alps in 2018. Sole younger brother Christian Haub, 55, had to take over as chief executive.

Founders and former romantic partners Domenico Dolce and Stefano Gabbana rebuffed acquisition overtures for their $1.4 billion fashion label, instead creating a trust last year.

Childless Giorgio Armani (pictured), 84, has not declared an heir to his $2.9 billion empire, but he set up a foundation overseen by a group he called “The Faithful” to run his business in 2016.

Fiona Graham (pictured), policy director at the Institute for Family Business (UK), said employee ownership can be a really interesting option for those family businesses that perhaps do not have a next generation who want to carry on the business, or for families looking to exit.

“Employee owned and family firms share a number of characteristics, particularly their strong sense of culture and long term outlook,” Graham said.

“When you’ve put your heart and soul into growing a family business making the decision to exit can be difficult—and for some owners transitioning to employee ownership can help them overcome some of the emotional barriers, knowing that the staff and customers will continue to be well looked after.”

Prof Melanie Richards, at the University of Bath School of Management, said providing loyal staff with ownership shares fostered staff identification with the firm and its legacy, which enhanced their motivation to work hard and go the extra mile.

"Employees will also be incentivised to stay at the company and contribute to the firm’s long-term success rather than solely pursuing their own careers," Richards said.

Giving employees ownership provides the unique opportunity to remain independent and to leave the firm in the 'right hands', which is an important wish for many family business entrepreneurs who are emotionally attached to their firms."

An important part of Richer's success was based on the notion of Ethical Capitalism that he enthusiastically developed with his employees, according to according to Prof Philippe Pelé-Clamour (pictured), HEC Paris adjunct professor specialised in executive education.

Richer "has previously written that he would like to see Richer Sounds turned into a John Lewis-style employee-owned trust," Pelé-Clamour said.

"Without children, he puts his convictions into action by transmitting to his employees 60% of this share.

"Employee-owned companies have ethical and trust issues that differ from other companies. It provides a structure that aligns a corporation's private self-interest with public goals such as distributing wealth, providing retirement benefits and social values. This alignment promotes ethical conduct. It is becoming increasingly popular to boost employee motivation."