Professional services businesses rely on “human capital” and nothing else. Their assets go home at the end of every day and incentivising those assets is critical to the businesses’ success, which is why employee ownership has taken off to such an extent in that sector.
Businesses that are reliant on individual employees are ripe for transition to employee ownership.
Employees are not as keen as they were to “have skin in the game” when that involves putting their own hands in their pockets. Employees no longer wish to bet their houses and give personal guarantees – that entrepreneurial spirit that a business founder has is not necessarily echoed by its management team. The management team doesn’t want the company to be swallowed up by a competitor who might change the company’s values.
Is employee ownership the answer?
Who pays?
In an employee ownership trust (EOT), the purchase of the company from its shareholders is paid for by the business itself using the company’s profits. The employees do not pay anything themselves.
Doesn’t employee ownership mean selling the business at a low price?
No, it doesn’t, it means undertaking a proper valuation exercise to ensure that both parties are happy with the sale price. The government has also weighed in here and under new legislation in the October 24 budget, the trustees of the EOT must take all reasonable steps to ensure that no more than market value is paid for the shares. So, a robust process is necessary to protect both sides.
Will the business operate in the same way day-to-day, or will everything change?
It is often said when referring to employee-owned businesses that everything and nothing changes. Nothing changes day-to-day, the board of the trading company carry on running the business. The company’s shareholder(s) did not get involved in day-to-day business decisions before the company was employee owned and won’t do so afterwards. The employees do not get involved in day-to-day business decisions.
Who will own the company?
An employee-owned company is owned by either individual trustees or a company which acts as a trustee. The trustee(s) will own the company on behalf of the employees.
The involvement of the trustees usually extends to a few meetings each year – unless the business has financial difficulties or some other serious problem.
What are the advantages of employee ownership for the employees?
Employee-owned companies are permitted to pay up to £3600 per year to each employee free of income tax. Research has shown that employee-owned businesses have more satisfied employees, more of a culture of learning and development, more resilience and are 8 to 12% more profitable than similar non-employee owned businesses. Employees and employee-owned businesses are more motivated as they can see a direct link between their efforts at work and what’s in their wallet.
Our experience at Stephens Scown has shown that as an employee-owned business, our employees are less inclined to leave, we have lower employee attrition rates, and our employees are more willing to make suggestions that can improve our bottom line.
What are the advantages of employee ownership for business owners?
If a tax advantaged employee ownership trust is setup and purchases 51% or more of the shares in the company, the selling shareholders will pay no capital gains tax (CGT) on their sale proceeds. There are a few circumstances in which this CGT relief can be clawed back in the subsequent four years or so but with advice from experienced professionals this is unlikely to happen.
An exit via an employee ownership trust is likely to be a much more comforting exit for both the business owners and the employees. The employees won’t be worrying about the new owner consolidating its businesses and making redundancies, and the former business owners won’t be worried about running into their staff down the pub and being given the cold shoulder for selling out to a competitor.
In an employee ownership transition the company is in control of the timetable, so if the management team need to deal with any issues that arise, it won’t disrupt the process.
What makes a business ready for employee ownership?
Ideally the business will have a strong management team not solely comprising of the business’ owners. The business will have been run with transparency and strong employee engagement.
It might be worth ensuring that the management team is incentivised to remain in the business so it is stable through the early years of employee ownership – this will give reassurance to employees who might be nervous about the change in ownership and comfort to the former owners who are waiting for some of their sale proceeds to be paid to them using the profits of the business.
For more information on employee ownership or other forms of business succession, please contact our Corporate team on 0345 450 5558 or enquiries@stephens-scown.co.uk