Transitioning to an employee-owned business
Employee ownership is an increasingly popular form of business ownership.
In the UK, the number of employee-owned businesses is growing at an annual rate of 10%. These businesses contribute around £30 billion per year to the economy—roughly 4% of the annual GDP.
But what exactly is employee ownership and what benefits does it bring? Is there an optimal time to start the process, and what steps would you need to take to transition into an employee-owned company?
What is employee ownership?
An employee-owned company is one in which its employees are able to participate meaningfully in decision making and have a significant financial stake in the business.
It’s a flexible business model that can be successfully adopted by many different types and sizes of businesses and organisations, including SMEs.
There are three main forms of employee ownership. In direct employee ownership, the majority of the company’s shares are held by individual employees. In indirect employee ownership (also known as the trust model), the company’s shares are held collectively on behalf of employees, typically through an employee trust. The third form is a hybrid of these two models.
Regardless of the specific ownership model, it’s essential that employees have a say in how the business is run. It’s up to each company to figure out how to best facilitate this, but potential ways include forming an employee council, or appointing employee directors to the board.
The most typical way to become an employee-owned business is through an ownership succession plan. But succession is not the only relevant point in a business’s life cycle where employee ownership is a viable option.
New start-ups and public service spin-outs are also good candidates for employee ownership, as are companies that are either expanding rapidly or under the threat of closure.
What are the benefits of employee ownership?
A boost to employee motivation
Employee ownership can make a huge difference to how engaged and motivated employees feel. Having a stake directly in the long-term success of the company increases the sense of belonging and accountability among staff and leads to greater levels of commitment.
A shared purpose of helping the business to succeed can also foster a more collaborative attitude in the workplace and pay dividends in increased productivity and innovation as well as reduced absenteeism and staff turnover.
Better business performance
A highly-motivated workforce typically translates to faster growth and greater adaptability and resilience.
Employee ownership, particularly when it’s community oriented, may also inspire greater levels of customer support and brand loyalty, driving more sales.
Research shows that employee ownership helps companies become more profitable and sustainable. In 2019, the top 50 employee-owned businesses in the UK had a 3.5% increase in sales and a 2.5% median increase in operating profit. 60% of these companies had no debt.
Easier succession planning
An increasing number of retiring owners are looking into employee ownership when planning for business succession.
Selling to employees can be a practical way to ensure the continuity of a business and avoid job losses and disrupted supplier relationships while preserving the company’s unique culture and values.
Selling to employees may also be far less hassle than searching for a suitable external buyer and convincing them of the business’ value.
Access to tax breaks
In the UK, generous tax breaks for both retiring owners and employees were introduced in the Finance Act of 2014 in order to encourage more companies to adopt the employee ownership business model.
When an owner sells some or all of the company shares to an Employee Ownership Trust at full market value, they become exempt from capital gains tax liability and individual employees are able to receive a tax-free bonus of up to £3,600 each year.
In addition to tax breaks, funding providers have been paying more attention to employee ownership in recent years too. Banks and other mainstream funders as well as alternative funding providers are increasingly aware of and prepared to support employee owned businesses.
How to transition to employee ownership
Create opportunities to discuss its potential
The first step in moving towards employee ownership is assessing the level of interest within the workforce and company as a whole, for example through questionnaires.
If there is sufficient interest in the idea, provide a structure for employees to share their thoughts, concerns and ideas on the potential change. These discussions could take place via a specific communication group or online discussion forum, or during an allocated time in meetings.
If necessary, guide the discussion with specific questions. Is employee ownership a viable option for this company? Which model would suit our circumstances the best? Would we need to seek funding to help us with the transition? Which forms could decision making take to ensure a high level of genuine employee participation? How should the transition period be handled? What are the principal values that we seek to preserve? What is our ultimate vision for the company?
Seek specialist advice and support
Most organisations in the UK that become employee owned are assisted by the Employee Ownership Association (EOA).
The EOA provides case studies, helps interested parties access specialist advisors and can arrange visits to see successful employee-owned businesses in practice. For companies committed to the transition, the EOA offers help in choosing the right model of employee ownership.
Write a detailed project plan
There are many different routes to employee ownership. It’s essential to create a customised project plan for the transition that takes into account the unique circumstances of your company.
The project plan should describe the various stages of the process and the roles of the board, senior management and employees during the transition period and include a realistic timeline for completing these steps.
Finally, while all the small details are important, always keep the big picture and the long-term legacy you’re aiming for in mind.