Until recently if you asked the public if they could identify an employee-owned company, they would undoubtedly mention John Lewis who has long been the flagship for employee ownership.
However, in 2014 the government introduced two very generous tax incentives which have seen the number of employee-owned companies rise and this trend is likely to continue as the word spreads about this new ownership model.
Why employee ownership?
It offers business owners an exit route which yields full market value but safeguards the core business, culture, and ethos. The owners can choose to stay on in the business and continue in their existing roles or can take the opportunity to retire and pass on the leadership of the business to the next generation. It is also possible to incorporate a share option scheme into the arrangements to incentive the new leadership team. Whilst the employees indirectly own the shares, their voice is heard through the medium of an employee forum or staff counsel.
What does Employee Ownership involve?
An Employee Ownership Trust (‘EOT’) is set up for the benefit of all qualifying employees. The shareholders then sell a controlling share, anywhere from 51% to 100% of the share capital of the company to the EOT. Once established all employees can then benefit from the trust based on certain criteria including hours worked, length of service and level of remuneration.
Liz Gallagher - Tax Partner
What are the tax advantages?
For the shareholders selling their shares, then subject to control passing to the EOT, no capital gains tax will be payable by the business owners. In addition, all eligible employees can receive annual income tax-free bonuses of up to £3,600 per annum.
Advantages for the business:
The employee-owned business sector in the UK is growing because co-owned companies tend to be more successful, competitive, profitable and sustainable. Because they are co-owners, staff in employee owned businesses tend to be more entrepreneurial and committed to the company and its success.
Ordinarily, because employee-owned businesses have high employment standards, involve staff and give everyone a stake, these businesses are better at recruiting and retaining talented, committed staff. When run in an open way, employee owned businesses tend to have a strong commitment to corporate social responsibility and involvement with the communities they operate in.
In terms of delivering results, independent research suggests that a combination of shared ownership and employee participation delivers superior 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.
How is it funded?
Whilst all this sounds well and good, there is the matter of funding. As the EOT will have no funds available to buy the shares, the funding comes from the trading company by way of capital contributions. There is no requirement for the contribution to be paid in one go and the trading company can fund these contributions from a mixture of cash on the balance sheet, external borrowings and by way of deferred consideration which is settled from future profits of the business.
Could this be a solution to your succession plans?
Subject to having the necessary funds or ability to borrow, employee ownership is a credible and attractive alternative to a third-party sale or Management Buy Out. As the process does not include any outsiders, it allows the owners to set the pace of the transaction and to design the model so that it works for all stakeholders.
If you think employee-ownership is something that could benefit you or if you want to hear more, please contact Liz Gallagher by clicking here or by calling 0161 477 2474.