Employee Ownership accounts for well over 100 businesses in Scotland and is said to positively impact on productivity, absenteeism and business growth - but what is it, what benefits does it offer, and could it pose as a workable exit strategy for your business?
What is an employee-owned business?
An employee-owned business is one where its employees directly or indirectly (through the operation of a trust established for the benefit of employees) hold a majority of shares in that company.
Why is it relevant?
The idea of an employee-ownership model is not a new concept. It is well established that employees having a stake in the business incentivises them to drive the success of the business and have more fulfilling and engaging employment but it also has its place as an alternative exit strategy to a traditional trade sale. This is because it allows owners to exit on terms which are aligned with their objections, safeguard jobs and more tax efficient than other similar options.
How is it structured?
Employee-owned companies can be structured in one of three ways:
- Direct Ownership
This is where employees become individual shareholders and physically hold shares in the company.
- Indirect Ownership
Often referred to as the “John Lewis” model, this is where shares are held collectively on behalf (and for the benefit) of employees through an employee ownership trust (EOT).
- Hybrid Ownership
A model which combines direct and indirect ownership where some shares are held by an EOT and others by individual employee shareholders. Hybrid ownership allows a means for owners to scale down their shareholding over time and make a phased exit from the business or for new shares or share options to be offered to new management to attract or incentivise the new driving force of the business.
What are the benefits?
Among the benefits to the business, economy and employees (in terms engagement and financial wellbeing), if certain qualifying conditions are met, there are also some tax benefits to a sale to an EOT, and these include:
- Full capital gains tax relief for the owners on the disposal of a controlling interest (i.e. more than 50%) to an EOT; and
- Employees benefiting from a tax-free bonus of up to £3,600 annually.
Is it the right fit for my business?
It depends.
The question of whether an exit to an EOT is right for your business will be subject to a number of factors such as the financial climate at the time (a trade sale may offer better financial return to a seller), the nature of your business, tax, the employees and funding (an EOT will usually finance the purchase using existing and future cash reserves or through external funding). However, it could be an option and, from our experience, is becoming a popular exit strategy for businesses involved in manufacturing.
Insight from Neil McWilliam, Corporate Legal Director at Thorntons. For more information contact Neil on 03330 430350 or email nmcwilliam@thorntons-law.co.uk.
