Employee ownership is becoming increasingly popular for architects, with 15 of the UK’s top 100 practices adopting the model. Colin Marrs finds out why
At the end of last year, Allford Hall Monaghan Morris announced it had transformed its ownership structure by converting to an employee ownership trust.
The AJ100 big hitter is not the first to have handed over its equity to its staff in recent months. Indeed, figures from the Employee Ownership Association show that 15 of the top 100 architectural practices have already adopted, or are in the process of adopting, the so-called ‘John Lewis model’.
These include names such as Make, a pioneer of this increasingly widespread business set-up, having been employee owned since its 2004 launch (pictured above).
So why is the structure proving so popular in the profession? And for those making the switch, what are the advantages and challenges?
For AHMM, in common with many of the other practices adopting the structure, the major motivation is succession planning. ‘We wanted to make things as simple as possible when any of us might think about retiring,’ says director Peter Morris. ‘It is still a long way off for all of us. But we have been together a very long time as students, directors and friends and the last thing anyone wants is for it to become troublesome when we are retiring.’
These days, younger people are so heavily in debt they can’t afford to borrow to buy in
Under the traditional, director-ownership model, succession planning can be fraught with emotion, expense and practical difficulties – not least finding suitable staff to buy out the shares of retiring directors.
William Franklin, partner at chartered accountant Pett Franklin, which has assisted many architects through the process, says: ‘These days, younger people are so heavily in debt they can’t afford to borrow to buy in.’
And Paul Beaty-Pownall, managing director at BPR Architects, which became employee owned in 2015, adds: ‘I was always a bit uncomfortable that those who felt wealthy enough would be able to buy into the business. It didn’t convince me that the right people would end up running the business.’
Graham Nuttall, solicitor and tax adviser at law firm Fieldfisher, has advised a large number of practices adopting employee ownership. He says that although the model works at every stage of a business’s life cycle, ‘succession planning is where the issue is forced’. The large number of UK practices run by those from the baby-boomer generation partially explains the number now opting for the model, he says.
However, the trend was given a boost following a 2012 report that Nuttall produced on behalf of the Department for Business, Innovation and Skills. The report, with backing from the Liberal Democrats as well as then prime minister David Cameron, led to changes in the tax law aimed at easing the process of conversion.
‘There was a recognition in government that something needed to change in relation to how private companies were run and to increase the variety of business models,’ Nuttall says.
The 2014 Budget introduced two major tax reforms aimed at easing conversion to employee ownership
In the 2014 Budget, chancellor George Osborne introduced two major tax reforms aimed at easing the conversion process. Firstly, sales of shares to a newly established employee ownership trust were relieved of capital gains tax, so long as a majority of shares in the company were sold. Secondly, trading companies owned by such trusts were allowed to pay bonuses to each employee of up to £3,600 a year, free from income tax.
Not many architects will state on the record that the tax break was their main motivation for moving to an employee-owned model, but Neil Farrance, director at Formation Architects which switched in 2016, admits it is a ‘huge financial incentive’.
He explains: ‘Without the tax break, it was an extremely expensive move – you have to defer profits or find extra money, which all takes attention away from the day-to day-architecture business.’
And Morris admits: ‘No doubt the tax break was an added nudge, but it was something we were already thinking about.’
Typically, a full employee ownership model sees the creation of a trust to own the shares, with business carried on by a trading company.
Nuttall says: ‘To a great extent, the day-to-day management is business as usual. However, the board of directors becomes answerable to a trustee board.’ Often, these boards include two members of senior management, two representatives of employees and one independent member.
Some firms have adopted a ‘hybrid’ model – the majority of shares owned by a trust, with a proportion remaining in the hands of directors. David Heslop, managing director at ADP, says: ‘In January last year we transferred 75 per cent of our shares to an employee-owned trust. The other 25 per cent are still owned by the six former owners. As each of us retires, the trust will buy the shares. This way we have some continuity, allowing the directors to stay on board.’
ADP has over 100 employees - and owners - in seven equal studios across the UK
Whichever model is chosen, involving staff in your practice’s management structure can throw up new challenges. Stride Treglown chairman David Hunter says it has taken time for a new staff forum to come into its own. ‘We are three and a half years in and we are now starting to see an understanding from staff that they can flex their muscles and hold our feet to the fire,’ he says.
The firm’s staff have already asked awkward questions on how career progression decisions are made and on the performance of parts of the business, according to Hunter. ‘We are lifting the lid on information and being more transparent. That is a culture shift that requires quite a bit of patient explanation and re-explanation to some members of staff. For some there is a dawning realisation that there are a whole series of complicated reasons we are making certain decisions.’
ADP’s Heslop adds: ‘In traditional partnership, people would be afraid to put their head above the parapet. We have spent some time re-emphasising to staff that they should contribute. Now they are starting to come through.’
Trusting staff with more information on financial performance also has to be handled with care, according to Hunter. ‘There is a risk if you haven’t explained properly that people can get quite spooked and preoccupied by troughs in performance,’ he says. ‘We have to be careful that information is accurate and proportionate and explained.’
Peter Inglis, practice manager at Cullinan Studio, which has been employee owned since it was set up in 1965, says: ‘We ask people to sit and look at the numbers four times a year. We have a group of staff who are pretty interested, but it is not for everyone. Some people just like to be told what to do and get on with it.’
But despite the challenges, significant benefits can spring from greater staff involvement. Opening up opportunities for staff to progress to senior levels without having to put their hands in their pockets to buy shares has already led to greater staff retention at Formation, according to Farrance. ‘In addition to keeping more staff, those we are recruiting are often very interested in the model – particularly the millennials,’ he says.
Architects are accidental businessmen. Employee ownership allows us to get on with what we enjoy doing
Becoming an employee-owned trust can also help with marketing services to certain clients, thinks BPR’s Beaty-Pownall. ‘We do a lot of work with universities and other public sector clients – it can be a useful message to give them,’ he says. ‘Private developers are not so interested, so marketing material can be adjusted to emphasise the issue to different clients.’
Most of those who have gone down the employee ownership route recommend getting good advice and thinking through the implications before embarking on a change of ownership model. But none spoken to by the AJ have regretted the move, with most agreeing that employee ownership fits well with the egalitarian, flat hierarchies often found in architectural practices.
According to Julian Williams, director at north-London BB Partnership which switched in February 2017, employee ownership removes a whole layer of stresses from the process of managing an architecture practice that can distract from their core job.
‘Architects are accidental businessmen,’ he says. ‘Employee ownership allows us to get on with what we enjoy doing. [It is] the way that most architects’ practices will one day be owned.’
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