About Employee Ownership
September 19, 2023
Employee ownership has become a popular exit strategy for business owners in recent years, partly due to changes to business asset disposal relief in 2020. The significant reduction in the limit from £10 million to £1 million means that the sale of a business can now have a significant tax cost, making employee ownership an attractive tax-free option for business owners. This, in turn, has led to more consideration of employee ownership transactions among business owners.
One of the benefits of employee ownership is that it can make succession planning easier. However, it is not always the right choice, especially in cases where the business is entrepreneurially led or there is already an established management team expecting to lead a management buyout.
While tax savings are a significant driver for people deciding to pursue employee ownership, it is not the only reason. Other benefits include maintaining the business culture, legacy, and rewarding the staff who have helped build the business.
Based on our experience in completing several employee ownership deals, the most surprising element of the transactions is the value of a smoother transition and succession process. An EOT transaction separates ownership and management, as founders can stay on in a management role post-transaction, which may be less likely in an MBO or trade sale transaction.
However, there are situations where employee ownership is not appropriate. For example, in the case of a strong management team with a strong desire to do an MBA, not being offered that opportunity can lead to frustration and potentially leaving the business, which could weaken the business.
There are both risks and benefits to an exit through employee ownership. For the vendor, it is a balancing act between selling the company to people they know and trust as opposed to a trade buyer. Often trade deals will deliver additional day one consideration, which may be attractive to an exiting shareholder. EOT transactions often include an element of deferred consideration, meaning that some of the exiting shareholder’s value is at risk, and subject to the future performance of the business.
Want to find out more about how we can help you sell your business? Get in touch with our team today!