If you own and run your own business, employee ownership may not be the hottest topic on your mind at present.
In fact, the whole idea of your employees getting their hands on a business you have worked so hard on over many years might actually make you feel a bit sick. But there are some very good reasons to consider it, not least of which are some government supported tax savings.
Before breaking down all the reasons to consider employee ownership it is important to note that it is not just one thing and there are varying levels of employee ownership. These range from relatively minor ownership, perhaps as part of a share-based bonus scheme to, full business ownership.
Employee ownership can make good business sense so here are 3 good reasons for business owners to take a further look.
1 – A Simple Exit / Business Sale
If you are looking to sell your business in the future, then selling to the existing employees can be a simplified and low-risk option for all concerned.
It removes pretty much all of the risk of bringing in an external buyer and most of the risk associated with a change in ownership.
Clearly, if it is a family owned business and there are relatives to hand the business on to, you may not want to do this. However, family successions are often hampered by financial issues, or by unwillingness or incapability of obvious successors. In which case the options you are left with are an external buyer, a management buyout or a switch to employee ownership.
A switch to an employee-owned business can be a better option than you might think in tax terms. Transferring the ownership to an employee trust will mean that 10% Capital Gains Tax can be saved. This can be either a nice bonus or a way to reduce the cost to the new employee owners and speeding up the deal.
The transfer of ownership to a (largely) known quantity will put the minds of customers and suppliers at rest as the risk of a sudden change to commercial or operational practices is removed. This makes it much more likely the business will survive – which may also make you feel better about leaving it behind.
However, this last element may give you pause for thought. The capital gains tax exemption is for the transfer of a controlling interest of shares – ie more than 50%. This is, amongst other things, to remove any possibility that the change in ownership is driven by a wish to save tax only, rather than a strategic plan.
This means that if you (or the employees) are not in a position to sell out 100%, then you will have to surrender the control of the company while you wait for the rest be bought out. This type of half-way house solution is often fraught with risk and potential difficulty and so is not normally recommended.
That last negative possibility aside, this route to a business sale can often prove to be as good for the soul as the bank balance and is worth serious consideration.
2 – A More Efficient and Productive Business
One of the most successful employee-owned businesses in the UK is the John Lewis Partnership. So successful in fact that estate agents have recently made claims that a property located close to a Waitrose store can expect a significant boost to its final sales price.
The John Lewis Partnership is well known, but you may be surprised at just how many other employee-owned businesses there are. Some of the other names that crop up on the list include other well-known companies such as Mott MacDonald, Arup, Unipart, Hyperion Insurance and PA Consulting.
According to the Employee Ownership Association, the top 50 employee owned businesses had a combined turnover of 22.6bn in 2015 and employed 175,000 people. If, as a small business owner, those figures make your eyes roll back in your head, then consider also that last year these businesses grew on average by 6.3% and increased operating profits by 10.9%. These final 2 figures could apply to any business – no matter how big or small.
The point is of course that employee owned businesses are more often than not successful. This success is not necessarily spectacular, but results can regularly be above average. This can often lead to a reliable growth path built on solid finances – 69% of the top 50 employee owned companies operate with no net debt.
Of course, there will be differing models within this mix, but it is worth noting that share owning employees (in companies where an employee trust has a controlling interest) can annually earn up to £3,600 tax-free in dividends. Under normal circumstances, it would cost quite a bit more to put that amount of money into an employee’s pocket.
It is a well-known concept that money is not in itself a motivator, but it can be a demotivator if an employee’s pay is too low. The employee-owned companies seem to make a lie of this idea. This may be because money paid as part of a dividend in a business that you part own may have more worth than the nominal value. It is not just money, it is the result of a shared endeavour and something that can be celebrated by the whole company and (probably) a great opportunity for a party.
In other words, team spirit that might cost serious money to engender in another business is just built into the DNA of the employee-owned ones. Success is not guaranteed, but perhaps the business is more favourably aligned towards success.
An old adage in management consulting, that even now still needs repeating, is that with every employee you get a free brain. Perhaps letting the employees own part of the business is one, if not the best, way to fully engage all of those brains to make sure they are not just working in the business, but for the business.
3 – Growth and Expansion
For many businesses, the possibility of growth represents a threat as well as an opportunity. Loans may bring new employable cash into the business, but are a liability that can kill the business if the growth does not go to plan.
Employee share ownership can be one way to share and mitigate the risk on the promise of shared potential future rewards. It can also be a great way to align everyone involved to the business objectives and improve the likelihood of success – as with the efficiency and productivity point above.
You do not need to go the whole hog and set up an Employee Ownership Trust for this, you can instead use a Shared Incentive Plan or SIP. Employees who obtain shares through a SIP and keep those shares in the plan for 5 years, will not pay tax or national insurance on their value.
Also, keeping the shares in the SIP until they are sold will mean that Capital Gains Tax will be avoided.
This is, of course, a long game, but it is a good way of making sure results are not just one-offs. It is also a good way of ensuring employee retention, especially for key employees.
Similar schemes in some of the Silicon Valley ‘unicorns’ have made billionaires out of some early stage employees.
For many reading this, the idea of shared ownership of the business will be anathema. It is of course not for everyone, but there are differing options to suit a range of different situations from start-up to sell out.
Often the issue is about more than money or even control. It is about shared endeavour and a more inclusive culture within the business.
It is often said in the venture capital world that it is better to have a large share of a big cake than to own 100% of a small cake. Whether you are selling your small cake outright or working on that bigger cake, share options and employee ownership are definitely worth considering.