Employee Ownership is a form of exiting a business that effectively passes control to the Company employees (by way of a share sale of >50%). Employee Ownership is not a new concept, you only have to look on the High Street to see John Lewis, probably the most famous employee-owned business. However, employee ownership is more relevant now and considered an option to explore for lots of exiting shareholders.
There are three main forms of Employee Ownership, a direct or an indirect or a hybrid combining the two.
Direct ownership is where each employee of the business has an actual shareholding in the business, personally owning the shares associated with them.
Indirect is often done through a trust set up for the benefit of the Company (most commonly referred to as an EOT or Employee Ownership Trust). The employees do not take any shares directly in this case but the EOT becomes the majority shareholder and any profits they receive from the trading company are appropriately distributed to the employees. We have found this is the most common method of Companies transitioning to employee ownership.
Hybrid is a combination of both the above where some employees have direct ownership of shares but the rest are controlled by a Trust.
Recent Tax Changes
Changes in recent years to the CGT tax legislation have certainly made a sale of a business to employees, more relevant than ever. In summary, in the right circumstances, shareholders will pay zero tax on a sale to employees compared to rates of 10% or 20% when selling in any other way.
A sale to employees may be an alternative to a sale to an MBO team, the key difference being that the sale to employees must be for the benefit of all employees rather than just the leadership team. Both MBO’s and employee ownership have their place, and careful consideration has to be given to what is right for the business.
A sale to employees may create greater flexibility, more time, and a smoother transition from one leadership team to another. It is common for founder shareholders to stay involved in the business following the sales process.
Performance of Employee Owned Businesses
The Employee Ownership Association carried out research on the top 50 employee-owned businesses in the UK and found that profits increased by 5% and productivity was up by 6.9%. There are many more benefits to employee ownership to discover.
You can find more information at the website of the Employee Ownership Association website: www.employeeownership.co.uk.
We have worked with a number of teams across different sectors, advising them on their transition to employee ownership. For more information contact Chris Sellars, Matt Milnes or use the form below.