Employee ownership is one of the fastest growing business models in the UK, and as we come out of the pandemic it is widely seen as having a key role to play in the re-booting of the UK economy.
Employee ownership is not a new concept – the likes of The John Lewis Partnership and Arup have been doing it for years – but the new 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.
That means that businesses big and small across a wide range of sectors can decide to become employee-owned. However, over the years in which Brabners have been helping businesses to transition to employee ownership, there are certain characteristics and themes which tend to be common to all.
Succession
The current owners need to sell.
Employee ownership can be the right succession solution where a trade sale or management buy-out route is either not desirable or not achievable. There are lots of reasons for this.
- The current or future management team does not have the appetite to take control of the business or does not have the financial means to structure a takeover.
- The concept of being acquired by a competitor is unappealing.
- Having spent time and money pursuing an abortive trade sale, a business owner may be disillusioned by what trade buyers are able to deliver.
- Family owned businesses may not have a next generation willing to take over the running of the business and see a trade sale as a deeply unattractive alternative.
- Certain types of business with low fixed assets and limited recurring revenue struggle to secure offers for the business which are fair or which accurately reflect the true value of the business.
Legacy and culture
Looking to preserve the legacy and culture of your business.
One of the over-riding reasons owners look to transition their business to employee ownership is because it preserves the integrity and continuity of the business they’ve built up. Employee ownership represents the seamless evolution of the business with job security for employees and “business as usual” for clients.
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.
People-focused
A business that is driven by its people and their productivity.
Employee ownership ultimately works for businesses that place high value on the engagement and well-being of their employees.
Becoming employee-owned can build on an existing employee-focused culture by providing financial rewards to staff. This, in turn, can help drive business performance:
- Employee owned companies are 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.
Sustainable profits
The business needs to be financially robust
If your business does not generate a certain level of profits then it will be very difficult for the business to transition to employee ownership and for the current owners to achieve a market value sale.
There are key financial advantages in selling to an employee ownership trust, as the existing owners will benefit from a full capital gains tax exemption. There is also an ability to structure the deal such that the purchase price is paid with an element of up-front payment and a significant balance deferred over a number of years. The acquisition cost can also be mitigated by reducing the number of shares which are being sold (provided that more than 50% of the company’s shares are sold). It is also possible for the business to raise external debt, if needed, to help fund the purchase price or to refinance vendor debt in the future.
However, despite the tax benefits and the flexibility of how a transaction can be structured, the current and future profits of the Company will be critical in supporting the success of that transaction.
Often the suitability of employee ownership as a business structure will come down to a mix of these factors (and others), not least the particular circumstances of the business and its owners. Once the decision to become employee-owned has been taken, achieving that goal is then far more straightforward than you might think.
We would be delighted to assist you and speak with you about your options. If you wish to discuss anything raised in this article further, please contact myself or a member of our employee ownership team.
Join us for EO Day 2021, a national celebration of employee ownership on 25 June 2021, and shout about why business is #BetterTogether for the individual, the business and the economy.
