Employee Ownership and Employee Ownership Trusts (EOT)
Employee Ownership is alive and well in the UK nine years after the introduction of the EOT. Emily Alston, Employee Ownership Consultant at Baxendale Employee Ownership explains.
Employee-owned businesses (EOBs) are companies where all or a significant proportion of ownership is held by or on behalf of their employees. Employee ownership is an increasingly popular ownership model for UK SME businesses that has been adopted across a number of sectors. In 2014 employee ownership trusts (EOT) were introduced and, nine years since their introduction, they are now the most common way businesses move into employee ownership in the UK.
On 27th April 2023, the government announced its proposed consultation on “the use and effectiveness of the Employee Ownership tax regime”, sparking a discussion on EOTs and their associated tax reliefs, with a particular focus on the capital gains tax relief for selling shareholders who sell a majority stake to an EOT as such sales incur no capital gains tax.
Although there is no doubt that the tax reliefs have raised awareness of employee-ownership amongst business owners and their advisers, tax alone should never be the reason for moving a business into employee ownership. To qualify for the tax reliefs, sellers must demonstrate a genuine transfer of control to an EOT, with the EOT required to act in the best interests of the company’s employees as the company’s majority shareholder. Not only do EOTs need to act in the best interests of the employees, but they are also subject to some strict rules around how income can be distributed.
Beyond the tax reliefs though, what else is there to know about EOTs and the companies that are using them?
According to recent statistics on the growth of employee ownership, released by the Employee Ownership Association (EOA) (the membership organisation for employee-owned businesses) on Employee Ownership Day this year, 23rd June, the number of EOBs in the UK has doubled between 2020 and 2022.
For an increasing number of SME business owners, employee ownership is ticking all their boxes for business succession and here are some of the reasons why:
- Protecting the most important aspects of the business for the current owners, its employees, and its community. Business owners looking for a succession solution have cited a need to protect the independence, values, culture and/or legacy of the business, as of great importance to them and vital to their customers. Employee ownership can also help ensure a business remains in its geographical location and retains its place in its local community.
- The ability for the Company’s employees to share in the profits they help create by receiving up to £3,600 income tax-free per year, if there are sufficient profits available. Many SME business owners want to reward their employees as they have contributed significantly to the business and they see the employees as being at the core of their business.
- In addition, sale to an EOT can protect employee jobs in circumstances where a third-party sale may not. Understandably, business owners are looking for a fair price for their business but can be concerned that their “exit” may have a negative impact on the people they have worked alongside, often for many years. Unlike a management buyout, a move into employee ownership benefits all employees, and employees do not need to fund, or provide guarantees to fund, the purchase of any shares – meaning the next generation of leaders only need to have the talent to run the business, not also the ability to fund a purchase of the shares.
- A sale to an EOT also means there is no need to find an external buyer for the business. Business owners can step back from their business on a timescale that suits both them and the business. In a sale to an EOT, the sellers can have more control over the sale process, terms, and timescale, which many not always be the case if the business is acquired by a third party, or even a management buy-out.
In terms of how EOBs perform in the long term, the “Ownership Effect” inquiry of 2017 by the EOA provided independent evidence of the strength, resilience, productivity and innovative behaviours demonstrated by employee-owned businesses. It’s worth noting that back in 2017 the number of EOBs was still relatively small and businesses that were early adopters of the EOT were still in their infancy in terms of their employee ownership. Therefore, with more and more businesses moving into employee ownership and on their own journey to being a successful EOB, we believe this trend has continued.
In 2023 there are more established employee-owned businesses to learn from and, in 2021, the EOA showcased stories from 35 EOBs’ members, highlighting their resilience in the face of the Covid-19 pandemic, in their EO Stories campaign. The EOBs showcased demonstrated resilience, leadership, engagement, and best practice approaches to employee wellbeing during a challenging time for most businesses and their people.
In our own experience at Baxendale Employee Ownership, helping businesses transition into employee ownership and working with existing employee-owned businesses, we have seen how our clients thrive in employee ownership. The sale to a trust alone will not create a culture of ownership of course, but where management and employees together understand the true meaning of ownership and what it means to be an employee owner, extraordinary things can happen.
A key part of our proposition to employee-owned businesses is to help all parties understand ownership from the beginning, with our work not only being to find a deal that works for the sellers and ensure there is a well-balanced trust board that understands its role as a majority shareholder, but also to ensure that everyone in the business understands the changes that are taking place, what they mean to them, and the potential for what the future may hold for everyone.
We often work in partnership with accountants and other business advisers, who have long term relationships with the business, as they understand the importance of not only finding a succession solution that works for the sellers, but also a strong sustainable future for the business. Award winning business mentor, Christine Nicholson, who has worked with many businesses owners on succession and exit planning says; "EOT's are an amazing mechanism for encouraging succession planning and team cohesion, especially in professional service businesses. It's important not to let the tax benefits drive the deal. Communication and Culture of the organisation are critical factors in a successful EOT and Baxendale Employee Ownership is a great partner in pulling sellers intentions into the EOT so everyone benefits".
Nine years after the introduction of EOTs, EOBs across all sectors continue to demonstrate that becoming employee-owned is not simply an “exit strategy”, but a better way to do business, building strong, resilient and successful businesses for the long term, whilst creating better and more fulfilling working lives for their employees. As advisers on employee ownership, we welcome the government’s review, which we hope will give us the opportunity to shine a light on many of the successful and innovative employee-owned businesses who continue to benefit from the introduction of employee ownership trusts.
Main image: Emily Alston, Employee Ownership Consultant (and employee owner) at Baxendale Employee Ownership