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11 December 2018 | By Ben Watson Community

Is employee ownership right for you?

There can be clear benefits from firms offering employee ownership. Ben Watson at UK law firm TLT explains what you need to know

Interest in employee ownership has taken some time to reach critical mass, but the mood is changing. In 2014, the government created a new form of employee ownership trust with generous tax breaks. In 2017, it launched an independent inquiry entitled 'The Ownership Dividend', which found that more employee-owned businesses would improve UK productivity, enhance the resilience of regional economies and motivate more engaged employees.

More recently, the use of the model by companies such as Riverford, Aardman Animations and other household names is fuelling a sea change.

A sale into employee ownership can be a good fit for many companies, particularly for those that are deeply rooted in their communities. It can work for businesses of any size. It can be attractive for firms who wish to retain control of their independence, ethos and values – and the concept of allowing all of those who contribute to the success of the company to share in its rewards is often a big attraction.

Importantly, not only does it share ownership among employees, it also gives the employees an additional voice. Studies suggest this enhances and solidifies the performance of employee-owned businesses against their market comparators.

But it is not a panacea and like any change requires focus, planning and a significant time commitment on the part of management to make it work. It can work for partnerships or corporates (although a partnership is likely to need to incorporate first), but tends to work better for those that are profit-making so that at least part of the funding costs can be met from built-up reserves, even if they need supplementing by a bank or specialist funder.

Is it right for you?

There is no right or wrong answer to this, but if you are considering an exit it should be one of the routes you consider alongside a trade sale, a management buy-out and a listing.

As a starting point, a sale into employee ownership can be beneficial where:

  • the business owners want to sell 51 percent or more of their business but retain some level of involvement or investment over a longer term;
  • a trade sale is not viable (because sellers aren't available) or attractive;
  • the owners want to balance maximising the cash they realise on sale with ensuring the business is in safe hands, preserving their legacy and providing ongoing job security for employees;
  • the company as a whole wants to keep going in the direction that has previously made it so successful, retaining the independence that has allowed it to thrive; or
  • a "people business" (such as a professional partnership) wants to evolve to a more inclusive model that allows all employees to have a voice and to share in the profits.

Employee ownership attracts tax reliefs that broadly mean any sale will be capital gains tax free for the selling shareholders and profit share to future employees will be income tax free up to £3,600. These reliefs are, of course, factors to take into account rather than reasons for moving into employee ownership, but they are further evidence of the government's continuing support for the employee ownership model.

There is plenty of local support for those considering moving to employee ownership, including specialist advisers and the Employee Ownership Association Regional Network meetings that happen every quarter in the South West & Wales, South East, Midlands, North and Scotland.

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