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Employee Ownership Day 2013: A Great Succession Solution

Posted on June 24, 2013

EO_DAY2013_full_colour.jpg4th July 2013 marks the first UK Employee Ownership Day; a day to mark the incredible successes of employee owned businesses within the UK and to highlight the benefits of employee ownership to those thinking about a move to such an ownership structure.

Employee owned businesses make up 3% of the UK’s GDP – around £30 billion of turnover each year.  They typically include increased productivity and innovation, reduced staff turnover and absenteeism and even improved health and wellbeing.  They regularly feature in the lists of best companies in the UK, while also increasing in value faster than non-employee owned companies.

These benefits are such that the government is now looking to support and encourage companies moving to employee ownership.  This includes not only the launch of Employee Ownership Day, but also financial support:  the Chancellor, George Osborne, announced in the budget this year that, commencing in 2014, the government will set aside £50m to help encourage and sustain employee ownership.

How this £50m will be allocated will not be confirmed until later this year (the consultation begins in July), but tax incentives to make it cost effective to transfer a business into employee ownership have been mentioned.

How is this relevant to you?  You may well be facing one of the most difficult business decisions you have ever had to make: What to do with your business now that you are ready to exit.  Pass it on to the family, sell to competitors in the trade, or sell it to a few key managers in the business?  Or you could sell your business to your employees.

A sale to your employees is an exit strategy which would enable you to be in complete control of the whole process.  You wouldn't need to share your financial data with your competitors and you could continue to work in your business for as long as you wanted.  In addition, the values of the business would be maintained, it could continue operating from its current location and you wouldn't need to be concerned about the future of your loyal employees.  All of these benefits and more are potentially available if you choose to sell your business to your employees.  This exit strategy can ensure a sustainable business and be a real catalyst for future growth.  And from 2014, you may potentially pay less tax.

Moving your company into employee ownership doesn't always require your staff to have the funds available to buy your shares, although they may well invest some of their own money in the business.  Instead the buyouts tend to be structured through a mixture of vendor finance and external borrowing.  With vendor finance you would receive payments over a number of years from the future profits of the business.  Therefore, there is a real incentive for the employees to work hard to increase profits and to ensure that you are repaid as soon as possible.  Alternatively, you may put in place a drip-down arrangement to sell your shares gradually over a period of time.

There are also various choices regarding the ownership model chosen.  Do you go for a John Lewis model in which all the shares held in a trust on behalf of the employees, do you give your staff shares directly or enable them to purchase them, possibly through the use of a tax efficient share plan (often a Share Incentive Plan [SIP], or Enterprise Management Incentive [EMI])?  You may even decide to go for a mixed model which can often be viewed as the best of both worlds, combining individual share ownership with the stability of having a majority of the shares held in an Employee Benefit Trust (EBT).

Financial participation alone is not usually enough to ensure the full benefits of employee ownership are achieved.  Employees must genuinely think, feel, and act like owners and this can only happen when information is shared and they are consulted on major decisions affecting their company.  They must understand fully the rights and responsibilities of ownership.  This change rarely happens overnight.

Most professional advisers are not aware that this is a viable exit option for business owners therefore it is essential that you talk to experts if considering this route.

RM2’s partner company, Baxi Partnership, has over 13 years' experience of providing advice and support to companies considering a transition to employee ownership. Whilst RM2 provide the share plan expertise our group colleagues can assist in relation to the cultural transition, financing, and governance aspects.

Free seminars are held and are of interest to anyone wishing to find out more about employee ownership. Similarly, workshops are available for business owners who are considering the feasibility of this option for their company.   For more information about their events or the article above, contact Ewan Hall at Ewan.Hall@baxipartnership.co.uk.

 
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