Staying afloat when whirlpools spin

As retirement looms, the prospect of letting go of a business you built up from nothing can be painful. But the process was made a little easier – certainly financially – around 10 years ago. At that point, former chancellor George Osborne introduced tax breaks on companies opting to sell to a trust owned by employees.

It is easy to see the attraction of handing the fruits of your life’s work to your most loyal colleagues via an employee ownership trust (EOT). Succession planning becomes a doddle, while the stress of finding someone to buy the company’s shares is removed at a stroke – no small consideration in an industry with such unattractive margins as construction.

Over the past decade, more and more firms from our sector have opted to go down the EOT route. Happy days, you might think.

But a glance down the grim roll-call of high-profile business failures in the sector over the past year shows a number of EOTs featuring prominently.

Buckingham Group, Michael J Lonsdale and now Readie Construction are just three of the bigger EOTs to go bust. Between them, the trio paid out almost £35m to their EOTs, dwarfing the amounts sitting in their profit/loss columns. Was this bad luck or is there an inherent problem with the EOT model? Our feature takes a look at the issue in depth.

During the past month, details have emerged via administrator filings about Readie’s demise. These starkly lay out the difficulty of escaping a financial whirlpool once problems start swirling.

Issues started during Covid, when the firm’s margins weakened and projects dragged on. Materials shortages and inflation were exacerbated by the Ukraine war. Two of Readie’s biggest mechanical and electrical subcontractors went bust, with the process of replacing them creating “considerable strain on margins and completion dates”, according to the administrator.

The firm did everything it could – escalating attempts to collect retention balances, letting 11 staff go and starting redundancy talks with 19 others. Four board directors took a 10 per cent pay cut, with the fifth accepting a 25 per cent reduction. Ultimately, however, the firm could not escape the consequences of running down its cash reserves to attempt to keep going.

While this was an understandable strategy, the firm was finally done in by an unsustainable cash-to-debt ratio. Amid increasing creditor pressure, banks and bonds markets were unwilling to help a firm that couldn’t pay its day-to-day bills. The precarious Middle East situation could create a new economic shock. Readie will likely not be the last contractor, EOT or not, to look nervously at its cash reserves.

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