Employee ownership is one of the fastest growing business models in the UK. As we come out of the pandemic it is widely seen as having a key role to play in re-setting the UK economy.
Employee ownership is not a new concept – the likes of The John Lewis Partnership and Arup have embraced the model over a number of years – but the government tax incentives introduced in 2014 have given a significant boost to the sector. It is now becoming an increasingly popular ownership model for businesses of all shapes and sizes given the benefits for businesses, their owners and employees. Latest national figures show that 1 in 20 of all private company sales are to an employee ownership trust (or EOT), and that rate is increasing.
There are lots of varied reasons why businesses favour an employee ownership model, but the following characteristics and themes tend to be common to most.
A Better Succession
Employee ownership can be the right succession solution where an owner/manager is looking to retire but an exit via trade sale or management buy-out is not desirable or not achievable. This may be because:
- the concept of being acquired by a competitor or market consolidator is unappealing;
- the current or future management team does not have the appetite or financial means to structure a management buyout;
- as a family-owned business, there may not be a next generation willing to take over the running of the business;
- as a business with low fixed assets or limited recurring revenue, an owner may struggle to secure a fair price for the business.
Strong management, though, remains important. Any owner who is currently integral to the day to day management of the business must first identify a new leadership team before he or she will be able to step back fully from the business.
Legacy and Culture
Probably the over-riding reason owners look to transition their business to employee ownership is because it helps preserve the integrity and continuity of the business which they’ve helped to establish over many years. Businesses work hard to create and nurture a distinct culture and independence. Employee ownership can be a way to protect and enhance that culture for the long term.
There are key tax incentives associated with becoming employee owned. In an uncertain tax climate, it is notable that individual owners selling a majority shareholding to an EOT will have no capital gains tax to pay. Staff of employee-owned businesses also benefit through the ability to receive tax-free bonuses
A Profitable Business
An important factor when looking at employee ownership as a succession solution, is how the deal value is funded. Other than where certain structures involving external debt are used, the purchase price to be paid to the previous owners must be funded out of the after-tax profits of the business. This applies both to the up-front payment and to any deferred instalments paid over time. The affordability for the business is therefore an important consideration and one which requires careful planning.
Owners of well-run and profitable businesses will see employee ownership as a more achievable and straightforward exit route compared with owners of businesses facing a potentially more uncertain future.
Employee ownership ultimately works well for businesses that have their people at the core of the business. Becoming employee-owned can build on an existing employee-focused culture by providing a heightened sense of well-being as well as financial rewards to staff. This, in turn, can help drive business performance such that:
- employee-owned companies tend to be more innovative because managers go out of their way to consult, share information about the company and give staff responsibility;
- staff in employee-owned businesses tend to be more entrepreneurial and committed to the company and its success;
- because they involve staff and give everyone a stake, employee-owned businesses are better at recruiting and retaining talented, committed staff.
As with all decisions as important as the future ownership of your company, it is important to weigh up all the relevant factors carefully. There is an increasing number of business owners that feel employee-ownership is the right route for them.
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