For those considering employee ownership there are a number of questions that are frequently asked, including: is employee ownership the right exit strategy for me?
What is Employee Ownership?
Quite simply put, it is exactly “what it says on the tin”. The shares of a company are owned by its employees, either in full or partially. Before 2014, very few businesses were employee owned. Many would agree that employee ownership was, and quite possibly still is, synonymous with the John Lewis partnership.
How do employees own shares?
There are a number of ways:
- direct ownership – direct ownership is simply the shares are owned by the employees personally. This is rare.
- indirect ownership – indirect ownership is when the employees are beneficiaries of an Employee Ownership Trust (EOT) and own the shares in the company via the EOT. In 2014 the Finance Act 2014 introduced the EOT structure. This method of ownership has gained significant momentum since its introduction.
- a hybrid – a hybrid model is when some shares are owned by the employees via an EOT, and some shares are owned personally by the employees.
Tell me more about EOTs…
They are growing – 2,750% in the last 5 years. Staff retention and happiness in employee-owned businesses is higher than in comparable non EO businesses. EO businesses perform 8 – 12% better than their competitors – the sense of being in business together leads to improved employee productivity.
Why consider this exit route in the first place?
Founders and/or shareholders (Sellers) who are selling their shares to an EOT can benefit from tax reliefs (subject to the careful planning of the transaction and it qualifying for employee ownership tax relief). Once the structure has been agreed, the actual sale can be very straight forward as the Sellers do not need to find an external buyer. The entire process can be much less stressful and more friendly for all involved. The Sellers are in control of the sale process and the timing of the sale.
By following this route, there is also stability and certainty for the employees. The business is acquired by them, not an unfamiliar third party. This in turn promotes employee engagement. Usually, there will be an employee appointed to the board of the trust company to ensure that the employee voice is heard. Often an independent trustee is also appointed to the trust company board so that fresh ideas are introduced. The EOT structure also permits each employee to receive up to £3,600 as an income tax free annual bonus. All of the above contribute to a much happier and stable workforce which can only contribute to the hopefully continued success of a business.
If this is such a good idea, why aren’t more businesses following the employee ownership route?
The legislation, rules and conditions are complicated. It is common for an HMRC clearance to be sought in order to ensure that the sale by the Sellers will qualify for the tax benefits in the first place. This can be time consuming, and the structure and application must be carefully drafted.
A trade buyer may be prepared to effectively “overpay” for a business and pay more than market value if it creates synergies with its existing business. An EOT cannot pay more than market value and a contemporaneous valuation is undertaken to value the business as part of the EOT process.
Sellers who are selling to a third party, often receive consideration for their shares at the point of sale or soon after. By following the employee ownership route, the EOT will often not have the necessary consideration to pay the full price to purchase the shares, so a detailed payment plan is often put in place where the Sellers receive money for their shares over a period of a number of years, often 5 to 10 years depending on the performance of the Company. Effectively, the company’s profits are used to repay a loan of the remainder of the purchase price from the Sellers. There is more uncertainty regarding the payment of the entire purchase price as the business needs to also continue to pay its other bills.
Is it still a good idea to go down the EOT route if there are so many hurdles?
It depends, but the benefits may well outweigh the risks. Whilst the legislation and conditions can be complicated, the tax advantages for the Sellers and the benefits for the employees and business are very attractive. Sellers who have worked hard to make their business successful, can enjoy tax benefits for selling their shares as well as ensuring the business they built up is sold to a “buyer” who cares about the same business. The members of our team can draw on their years of specialist experience and expertise in helping local and national businesses become employee owned so that the complicated conditions and legislation are complied with and are explained in a manner that is easy to understand. We will deal with the complex structures whilst the Sellers can focus on the important things for them, namely ensuring the business they are exiting continues to succeed.
Is it a viable exit strategy for a care sector business?
Absolutely!
Do the employees of a business need to pay any money towards the business becoming employee owned?
No, the employees do not have to pay to become trustees. The purchase money is paid out of the business profits.
What can we do to help you?
Why not book one of our EO Discovery Sessions. With up to 3 hours of time available, our Employee Ownership team can work with you to consider the opportunities presented by Employee Ownership to your business.