Guest Blog: What does 'good EO' mean?
At JGA, we work alongside a small number of carefully-selected Trusted Partners – chosen for their shared commitment to the clients we serve. In this guest blog, we ask Gavin Poole, Corporate Partner at Stephens Scown, for his view on what ‘good EO’ means today – and why Stephens Scown’s story shows how it can evolve.
Stephens Scown’s enthusiastic team
Gavin writes…
Being ‘good’ at something does not necessarily mean that you excel at it, or does it?
Whether it is a sporting event, the behaviour of a child or the performance of a business, it is likely that ‘being good’ could always be bettered.
At its base level, ‘being good’ might mean ‘being not bad’. For example, in the context of employee ownership, while the tax treatment is an incentive, if the reason for such a transition is purely tax-driven, that might be regarded as ‘bad EO’.
Being ‘good’ is going to be a relative term that may be judged by certain hallmarks.
Gavin Poole, Corporate Partner, Stephens Scown
Striking the right balance
In the context of an employee-owned business, ‘basic’ includes some structures that would not otherwise be seen in non-employee-owned businesses.
For example, an EO business is likely to have employees engaged (to a greater or lesser degree) in decision-making, a profit share distribution, an employee on the trust board… and so on.
While beneficial, could those structures (or the way they are used) be bettered? An ambitious business might say that being ‘good enough’ is not (in fact) good enough.
There is always going to be room for improvement but with possible implications.
For example, the reach for a better profit share might be at the cost of worsening working conditions. A balance will need to be struck.
The role of governance
‘Certainly, the journey of Stephens Scown (from being one of the top 100 businesses to work for), moving to an employee ownership model (with the benefits that this delivers) and most recently achieving BCorps™ accreditation… shows how ‘good’ can evolve’
Gavin Poole, Corporate Partner, Stephens Scown
And the balance tends to be the domain of the leadership of the business.
Good governance will help with setting a clear strategic direction, create lines of communication and reporting, accountability and boundaries – with flexibility to adapt as times change.
And ‘good’ might look very different from one perspective to the next.
At a time where employee retention and business resilience is becoming ever more important, recruits are looking more and more at the values of businesses and the extent to which they might be ‘good’ (or perhaps more accurately ‘appealing’).
An evolving journey
Certainly, the journey of Stephens Scown (from being one of the top 100 businesses to work for), moving to an employee ownership model (with the benefits that this delivers) and most recently achieving BCorps™ accreditation (which measures high standards of social and environmental performance, transparency and accountability) shows how ‘good’ can evolve.
So perhaps ‘good’ is a relative measurement that needs to be seen in the context of delivery of specific aims, whether that be a gold medal or behaviour at a family event. ‘Good EO’ is likely to start with good governance that defines a clear strategy which is well communicated to a workforce that is engaged in delivery.
It can be tough to deliver ‘good’; exciting to discover ‘good’; for a true evolution, the conditions should be in place for each person to be able to move the business to ‘better’. Perhaps that is ‘good EO’?
Stephens Scown is an award-winning South West law firm with offices in Cornwall, Devon and Somerset. It has been employee-owned since 2016 and has a strong track record of successfully supporting company owners through the legal transition to employee ownership.
Find out how JGA supported Stephens Scown to unlock the benefits of its own EO model in our case study.
Read more about Stephens Scown on their website or get in touch with them directly via the link below.
What difference does it make?
At JGA, we’re always interested in evidence-based research on the impact of employee ownership and how this might inform what we do. For our latest guest blog, we invited Dr Jonathan Preminger and Dr. Dimitrinka Stoyanova Russell – both Senior Lecturers in Management, Employment and Organisation at Cardiff Business School – to share what emerged after they spent 12 months’ researching a key question for every EO business: what difference does being EO actually make?
Dr. Jonathan Preminger and Dr. Dimitrinka Stoyanova Russell
Does employee ownership (EO) make a difference? Champions of this increasingly popular organisational form assert that the change of ownership structure, accompanied by forums for employee voice and participation, leads to better decision-making, greater commitment, and improved employment terms and conditions, which enhance productivity and, ultimately, increase the organisation’s success. It seems one cannot go wrong, so what more is there to discuss?
Well, academic research is more circumspect. Scholars investigating EO over the years, looking at various ownership models and governance structures, have failed to agree on an unequivocal answer to the question: what difference does it make? The range of models and structures has contributed to the difficulty of researching EO meaningfully. The Finance Act 2014 and the resultant rapid growth of the Employee Ownership Trust (EOT) model have created an opportunity for a more systematic investigation and robust comparison across sectors, with greater conceptual clarity. By focusing on a single model, we can cancel out the variation due to different structures, and look at the impact this specific kind of EO is likely to have on businesses and the experiences of those working with and within them. And this is what we set out to do.
For the last year, we have been speaking to key people in EO firms throughout the UK in order to understand the transition process and the benefits it brings to employees. To unpack the latter, we chose to use the concepts of ‘decent work’ and ‘job quality’. Why? Firstly, ‘decent work’ has recently been in the spotlight and on the agenda of major international organisations like the UN and the ILO, as well as a key policy concern for the UK government. Secondly, and we hope you would agree, if EO is to be more than merely an elaborate profit-share scheme, it should improve the experience of work – and the concept of ‘job quality’ can capture this. Thirdly, HRM suggests that having happy, fulfilled and engaged employees is likely to increase the success of the organisation, so we wish to explore the potential of EO to do exactly that.
Discussing ‘job quality’ however is not straightforward. Though there is little agreement on its precise indicators, it is generally agreed that it is “constituted by a set of work features that have the capability of enhancing or diminishing worker well-being”. Focusing on such work features, we investigate the organisation of work, skills and development, wages and compensation, job security and flexibility, and engagement and representation. As you too would be aware, employees’ perspectives are subjective: their understanding of job quality is likely to be related to personal backgrounds and expectations, and it must be remembered that even when employees are satisfied with workplace conditions, these may be detrimental to workers’ physical (or mental) health. Likewise, pay and remuneration are important, but pay is a poor proxy for job quality on its own: conditions can deteriorate even as wages rise. With these words of caution in mind, let us now turn to what we found so far.
Over the five key components, and despite some variation, our findings suggest that EO is likely to lead to a modest rise in job quality. This is encouraging, but let us examine this further. Wages were often a prominent concern, but beyond profit-shares and dividends, we also discovered firms which aspired to pay above market rates for the lower-paid employees; a few cases even aimed to reduce pay differentials between senior management and shop-floor staff. Aspirations for greater remuneration equality were reflected in employees’ perceptions of a greater sense of mutual respect despite organisational hierarchies, and an equal voice in developing organisational culture and values. Similarly, many firms spoke of their efforts to avoid an ‘us and them’ culture between core employees and administrative/maintenance staff, as well as trying to reduce their use of subcontractors, labour agencies and self-employed staff.
Employees noted a greater sense of control over the firm’s vision. All the firms we spoke to had set up or formalised some kind of employee council; in some cases, employee representatives sit on both the board of directors and the board of trustees, too. Almost all firms noted that there was more transparency of the organisation’s key data, and many had formalised the processes by which this data was distributed to employee-owners. Educating employees about reading those and various other business issues was also not uncommon. Many people we spoke to talked about their organisation as simply a ‘nice place to work in’, of ‘being in it together’. This was sometimes supported by concrete steps, e.g. more opportunities for job rotation or at least having a taste of colleagues’ jobs. Linked to this idea, we found many employee-owners were more willing to share the burden during tough times to avoid laying off staff.
However, the increased job quality was sometimes rather marginal. Indeed, a key finding from our research is that for many of the organisations the transition to EO was a way of preserving what good the firm was already doing and ensuring it continued to operate in the same way, without fear of buy-outs that could change the organisation’s character. This finding is unlikely to surprise anyone recently involved in a transition to EO. Importantly, such preservation does require some adaptation: most prominently, formalising what had already been done before the transition. We discovered that in many cases various HRM processes such as training, career progression, voice and participation, were formalised often just to seal pre-existing practices rather than make improvements. Crucially, in many cases this formalisation extended to the understanding that the business should be retained within a specific location and community: an important aspect of recent conceptualisations of job quality that take a more holistic view of an organisation’s role within its locale. Is this a significant positive impact of the transition? The degree and evaluation of this may vary across firms and across perceptions, but in any case, this is an important question to consider.
From our preliminary findings, we can say that EO in itself is unlikely to guarantee an immediate improvement to job quality: its impact seems to be conditioned or at least mediated by pre-existing aspirations and informal practices, or by the organisational culture. The transition to EO, then, is both an opportunity and a stimulus for preserving and formalising elements of job quality already enjoyed by employees, and a way of anchoring a status quo in firms already considered to be “nice places to work in.’’ This is reassuring. But is it sufficient?
For vocal advocates of EO, this may appear to be a somewhat lacklustre claim. But let us not forget that the EOT model is still in its early stages. We also found some evidence to suggest that the length of time a firm has been EO matters. The participatory aspects of EO in particular seem to get stronger with time, and respond better to changing external context. In addition, the sector in which the firm operates is significant, not only in terms of overall job quality (employees in some sectors enjoy ‘better jobs’ than others regardless of EO), but also in terms of what aspects of job quality are appreciated by employees. In some sectors, EO is likely to be more impactful in helping to retain local jobs and ensuring relatively good wages, while in other sectors it might ‘merely’ formalise pre-existing structures of voice and profit-share. Finally, it is worth noting that EO may benefit different employees to different extents within the same organisation: for example, core professional staff such as dentists or architects may not feel greatly the changes resulting from a transition to EO; yet support staff, cleaners or contract labour may find their job quality and working lives significantly and positively impacted by the transition. This, we think, is already an achievement worth celebrating.
About the authors
Dr. Jonathan Preminger is Senior Lecturer in Management, Employment and Organisation at Cardiff Business School and author of Labor in Israel: Beyond Nationalism and Neoliberalism (ILR Press, 2018). His research interests include employment relations, the sociology of work, and alternative organizations. Jonathan is a member of the Editorial Board of Work, Employment and Society, co-convener for the Work, Employment and Economic Life study group in the British Sociological Association, and director of the Employment Research Unit at Cardiff Business School. Email: premingerj@cardiff.ac.uk
Dr. Dimitrinka Stoyanova Russell is Senior Lecturer in Management, Employment and Organisation at Cardiff Business School. She has published on skills and performance, social networks, diversity, careers and skills in the UK Film and TV, employment and emotional labour of stand-up comedians. Dimitrinka is a member of the British Sociological Association, a member of the Editorial Board of Work, Employment and Society, and a Research Associate of the Institute for Capitalising on Creativity at St Andrews University. Email: stoyanovarusselld@cardiff.ac.uk
Are you in an EO firm? We’d love to hear from you! Please get in touch
If you’d like to know more about how JGA can support you and your organisation through our Transition, People and Governance services, please get in touch here
Hybrid Employee Ownership: More than just an Employee Ownership Trust
At JGA, we work alongside a small number of carefully-selected Trusted Partners – chosen for their shared commitment to the clients we serve. For our latest guest blog, we asked Robert Postlethwaite, MD of Postlethwaite Solicitors to explain what hybrid employee ownership involves, and what owners need to consider when exploring this option.
Robert writes:
If you’re thinking about what legal structure to use when moving your company into employee ownership, the simplest approach is to use an employee ownership trust (EOT). The EOT’s trustees own the company but for the benefit of its employees (the beneficiaries), so employee ownership is indirect ie through the trustees. Ownership by an EOT means there are few moving parts: all employees (and new joiners who’ve completed an initial period of employment) automatically enjoy the benefits of ownership, leavers automatically cease to do so.
For many employee-owned companies this works perfectly well, the EOT permanently holding all the shares in the company (or all of them apart from any that the company’s founders have retained). Some, however, choose a different arrangement, where alongside the EOT’s indirect ownership sits a separate direct form of ownership under which all, or some, employees each have their own personal ownership stake.
This is often called a hybrid: a mix of indirect and direct employee ownership. What are the advantages of choosing hybrid, how can it be done, and what are the challenges involved in making it work?
Why choose hybrid?
Most companies choose hybrid because they want their senior leadership team or other key people to have a targeted incentive and reward to grow the business, the business being more heavily reliant them than on other employees. Of course this could be achieved by a special bonus arrangement and often this is the chosen solution.
But some companies wish to go further and create a long term reward arrangement for key people involving personal share ownership. This has two potential financial benefits for participants: it enables them to receive a dividend on their shares if linked to company profit (on top of any general employee profit share) and gives an opportunity to enjoy capital growth, that is the ability to sell their shares at a profit in the future of the company’s performance means it grows in value.
The UK tax regime provides incentives for companies doing this (see further below).
So we sometimes see a hybrid arrangement under which (for example) an EOT will hold a minimum of 80% of a company, with up to 20% allocated to key people.
There is another form of hybrid under which all employees – not just the key ones – are able to hold shares personally alongside the EOT’s majority stake. This is occasionally seen but it not common. A company might do this because it feels some personal share ownership for each employee will make ownership feel more real and make it easier to engage employees as owners.
It is even possible to have hybrid ownership involving both of the above, or hybrid ownership plus some shares retained by founders
How to do it?
For key employees, a good starting point for most companies will be EMI share options. Participants can be selected and will be granted a right (option) to purchase shares at a fixed price (normally their value at that time) from a future date (eg after three years). If the shares’ value grows over that period, they may then take up the right to buy the shares (exercise their option). Participants enjoy a reduced rate of tax on any financial benefit through growth in the value of their shares. Not all companies are eligible to grant EMI share options.
A company looking to create personal share ownership for all its employees might consider doing this though a share incentive plan (SIP), under which employees can be awarded free shares without this being taxed as a benefit, or given full tax relief to buy shares (or both).
What are the pitfalls?
Any hybrid arrangement is going to involve more administration. There will be work to do to create individual share ownership, administration and record keeping, and when participants leave (or simply wish to sell their shares) further work to do to bring their share ownership to an end.
Every participant will (unless they leave relatively soon after acquiring shares and are therefore required simply to forfeit them) eventually wish to turn any growth in the value of their shares into cash. If the company has grown significantly, those shares could potentially be very valuable. It is vital to avoid the arrangement becoming a victim of its own success because the company cannot afford to pay for the shares to be bought back. This can partly be addressed by a mix of advance planning (financial modelling to predict future repurchase values and building a cash reserve) and terms of ownership (for example, employees who are selling are paid in instalments).
Further details are available via this link in this ‘Guide to becoming an employee owned company’
To find out more or if you would like to discuss an approach that would align best with your objectives, get in touch with Robert Postlethwaite, who would be happy to talk in more detail about the different options.
About Postlethwaite
Postlethwaite Solicitors are a team of specialist employee ownership and share scheme lawyers.
With top tier firm and lawyer rankings and over eighteen years of employee ownership and share scheme experience from a wide range of commercial transactions and situations, we are able to stand by your side and ensure you have a solution that is fit for purpose, commercially sound and wherever feasible, tax efficient.
Since 2003 we have assisted hundreds of businesses in setting up employees share schemes and over 70 companies in making the transition to becoming employee owned. We focus on helping our clients find the approach and structure that is right for them and then assist with putting it in place.
Sale of a company by an EOT
Next in our guest blogs series, we ask Andrew Evans, Partner at Geldards LLP, to share with us what they found out when they were asked to research the implications of selling an EOT.
In this briefing we look at the tax consequences should an EOT decide to sell the trading company (and end the EOT). EOTs are normally set up to hold shares in the trading company on a long term basis. However, there may be circumstances where the trustees of the EOT decide to sell the shares in the trading company to a third party.
Sale to another EOT
The transfer of the shares to another EOT should not have any adverse tax consequences. The transfer will be treated as a gift of the shares to the EOT buyer and the shares will transfer on a no gain no loss basis. The selling EOT has to submit an election to HMRC to claim the relief from chargeable gains on the transfer of the shares. A transfer of shares in this way will mean that the employees of the selling EOT receive nothing for their indirect interest in the shares. The employees do obtain an indirect ownership in a larger group.
Tax consequences of selling the trading company and ending the EOT
We were asked to pitch for a piece of work advising the EOT trustees on the sale of the shares in the trading company after the management team received an attractive offer from a third party buyer. This caused us to look at more detail into the tax consequences of a sale of the shares and even we were surprised at the high amount of tax that would be payable.
The sellers are at risk of paying CGT on the sale if the EOT breaches the qualifying conditions by the end of the tax year following the tax year in which the disposal takes place (in simple terms, a maximum 2 year period). The sale of the shares held by the EOT would be a breach on the basis that the EOT no longer controlled the trading company.
Once the sellers’ risk period has ended, the CGT risk passes to the trustees of the EOT. The EOT is treated as taking over the base cost of the shares in the company from the sellers. In many cases this could be the nominal amount paid for the shares on incorporation of the company. On a sale of the shares by the EOT, the whole of the increase in value of the shares is taxed as a chargeable gain in hands of the trustee because the trustee is deemed to have sold and reacquired the shares at their current market value. No deduction is given for any deferred consideration due to the sellers. The current rate of CGT for a trust is 20%. The EOT will then be left with a cash lump sum from which it has to pay any deferred consideration. The balance of any money has to be paid to the beneficiaries (the employees) and the payment will be taxed in the same way as a cash bonus, so subject to income tax and National Insurance Contributions, a further 63.75% tax for the highest rate taxpayers. The effective rate of tax could be 71%, so for every £100 received on a sale up to £71 is paid in tax.
Example
A company is sold to an EOT 4 years ago, so the tax risk lies with the EOT trustee. The sellers are still owed £8m in deferred consideration. The management team (which includes some of the sellers) receive an offer of £12m for the company which they wish to accept and recommend to the EOT trustee.
The EOT trustee pays tax at 20% CGT on the £12m due to the deemed sale and reacquisition rule, so pays £2.4m in tax.
The sellers receive the £8m deferred consideration (still paid with no CGT).
The EOT trustee is left with £1.6m out of which it has to pay the costs of the sale (say £100,000), so £1,500,000 is left to be paid to the employees. If there are 50 employees, they would each receive £30,000 (gross). After basic rate tax and NICs, they would be left with around £15,400 each which is not a brilliant return on the sale of the shares for £12m.
Conclusion
The trustee of an EOT needs to carefully consider any sale and particularly the tax consequences where there is a substantial amount of deferred consideration outstanding. The trustee must also consider the wider interests of the beneficiaries to satisfy its fiduciary obligations and act in the best interests of the employees. Even if the EOT deed does not require a vote by the employees in favour of the sale, the trustee may wish to consider holding a vote to ensure consultation (and approval) by the beneficiaries, or in the last resort, obtain a ruling from the Chancery Division of the High Court (which decides on trust issues).
Any decision may be made easier, the larger the potential pay-out to the employees. A “lottery” sized pay-out, even after tax, may be sufficient compensation for the employees at risk of losing any job security. However, the trustee directors must ensure they satisfy their fiduciary duties in reaching any decision.
Geldards have an established track record advising owners and their companies on the transition to employee ownership via an Employee Ownership Trust (EOT). Their combination of Corporate and Tax expertise provides a seamless service when dealing with the technical requirements to qualify for the tax benefits of being EOT owned.
To explore your employee ownership needs contact Andrew Evans directly here
To find out more about how JGA can support your EO business with our Transition, People and Governance services, please get in touch here.
Succession Planning – the importance of expert valuation when selling to an EOT
In the second of our new guest blogs, we ask Tom Lethaby, Business Development Manager of RVE Corporate Finance, why selling your company to an EOT could be the right approach for your succession planning – and how an expert valuation will ensure you agree a fair price.
Selling your business is likely to be the most important financial transaction you’ll ever undertake. It can be a stressful, costly and exhausting process which might not deliver the outcomes you had hoped for.
Since 2014 over 700 business owners have sold their companies to an Employee Ownership Trust (“EOT”). High profile examples of this sort of sale include Go-Ape (2021), TTP Group (2021), Richer Sounds (2019), Riverford Organic Farmers (2018) and Aardman Animations, the creators of Wallace and Gromit (2018). An EOT sale process tends to be a less stressful and less risky exit route for business owners - but it isn’t right for all types of businesses.
Managing your succession planning risk
An EOT is a low-risk transaction when compared to other types of exit process. It is essentially a form of share buyback, through which the shareholders of the company sell their shares to a newly formed EOT at a fair value, and the EOT pays off the purchase consideration using the historic and future profits of the company, which typically takes 5-8 years. In a sense, this is an internal transaction. The process isn’t reliant on any third-party buyer or bank, and the purchaser (the EOT) does not need to undertake extensive due diligence – the execution risk is therefore much reduced.
So how does the newly formed EOT decide what price to pay for the company it is buying?
The EOT is a trust which has a fiduciary duty to act in the best interests of the employees of the company. It is acting on their behalf to purchase the company from the existing owners. The Trustees (who typically comprise a mix of employees, independent professionals and perhaps also the company founder) must therefore pay a “fair” price and this is established through an independent valuation carried out by a corporate finance or accounting firm (such as RVE Corporate Finance “RVE”).
Agreeing a fair price for your business
There are several valuation methodologies used when assessing a company’s worth – generally either linked to profitability or revenue and occasionally linked to asset value.
Most EOT sales have been for small businesses, typically worth less than £20m (although the largest EOT deal on record was completed by our team at RVE last summer for £275m) and an EOT can be appropriate for businesses worth just £1m-£2m. To help guide valuations for these SMEs there are several organisations which provide M&A transaction data to corporate finance and accounting professionals. Transaction data is often segmented by company size and industry sector. Mark2Market, CMBOR and UK200 all regularly report both revenue and profitability multiples paid for SMEs – and it is the latter which would most commonly be used in assessing the value of a business for sale to an EOT.
When a company is sold to an EOT the objective is to create a perpetual partnership-style structure, similar to that used by the John Lewis Partnership - indeed the benefits of the “John Lewis Model” were heavily referred to by the Coalition Government at the time of the creation of the EOT legislation in 2014. An EOT allows employees, as shareholders through the trust, to benefit from the future stream of profit that the company will produce – dividends can be paid in the form of profit share bonuses to employees once the initial purchase consideration has been paid off (typically 5-8 years).
‘Although the largest EOT deal on record was completed in 2021 by our RVE team for £275m, most EOT sales are for businesses worth less than £20m – and the process can suit those worth just £1m to £2m’
Tom Lethaby, Business Development Manager, RVE
When RVE values a company for the purposes of an EOT sale, we produce a 10-year P&L forecast, with the company’s management, to model how profits will be allocated to pay down the purchase consideration and thereafter to pay profit share bonuses to employees. If the purchase consideration, based on a market value for the company, can only be paid down from profits over 10 years or more, then this is an indication either that the “market value” is too high for this particular company, or that the company is not well suited to the EOT structure (because it cannot generate cashflow to pay a reasonable purchase consideration within an acceptable timeframe).
Companies are typically valued on a debt free/cash free basis but retaining enough working capital for the business to fund its ongoing trading activities. If the company holds significant surplus assets, beyond what is needed for working capital, (e.g. surplus cash) then the value of these assets will be added to the debt free / cash free value to arrive at the fair value of the company. Surplus cash in the company can be used by the EOT to fund an initial “Day 1” pay down of the purchase consideration.
Claiming shareholder tax relief as an EOT
With any EOT sale shareholders will need to be patient, as the Company’s future profits are typically the only source of funds available to the EOT to fund the purchase consideration. It will take several years for the purchase consideration to be fully paid down and during this time shareholders will be holding a credit risk. Offsetting this risk however are tax reliefs that the shareholders can claim - HMRC grants a special 0% rate of Capital Gains Tax for shareholders selling to an EOT (“EOT Relief”) - saving shareholders typically between 10% and 20% of the proceeds that would otherwise be payable in CGT. The UK Government introduced EOT Relief in 2014 and remains highly supportive of Employee Ownership. Through EOT Relief the government is encouraging the sector to grow, as businesses that are owned by their staff are proven to be more productive and more resilient.
What should you do next?
In summary, we at RVE believe that all businesses owners should consider an EOT as part of their exit plans because it will deliver:
Competitive market-rate pricing for the shareholders
A sale process that is not driven by external parties
A sale which preserves the business as an independent entity, with its reputation and team intact
A significant saving in CGT
RVE Corporate Finance specialises in advising and structuring employee buyouts, where business owners sell their business to a newly-formed EOT.
Discover how we could support you to choose this option as part of your succession planning by contacting us info@rvecf.com.
The different approaches to making your company employee-owned
At JGA, we work alongside a small number of carefully-selected Trusted Partners – chosen for their shared commitment to the clients we serve.
In the first of our new series of guest blogs, we ask Robert Postlethwaite, MD of Postlethwaite Solicitors, to explain the four options founders/owners have when employee ownership is part of their succession planning – and why there is no one size fits all.
Are you thinking of making your company employee-owned?
If so, did you know that there are actually a small number of alternative ways you can do this?
As with most things there is no -one size fits all. The best approach for you will depend on you and your company’s situation. Let’s look at the different options available in more detail…
Employee Ownership Trust
This is by far and away the most common approach. Your shares in your company would be transferred to a trust which would then hold the shares on behalf of the employees. If the trust is a statutory employee ownership trust, all employees will share in the company’s ownership, so this is a good model to choose if you are committed to everyone having a stake. This approach also brings tax incentives, in particular an exemption from capital gains tax if you (and any co-shareholders) sell more than 50% of your company to the trust and also the ability for any subsequent employee bonuses to be free of income tax, so long as all employees receive them.
Employee Benefit Trust
If you prefer a form of employee ownership that allows greater flexibility (in particular if it is felt important to allocate benefit in the trust to selected key or senior employees) you could instead choose a more generic employee benefit trust. However, this option does not bring the same tax reliefs described for an Employee Ownership Trust.
Any form of employee trust will need to be run by trustees. These could include at least one employee, perhaps combined with an independent trustee. The trustees do not run the company, this responsibility remains with the directors and leadership team who will be accountable to the trustees.
Hybrid approach
Alternatively, you could choose the hybrid approach. This would be best for a company that favours an employee ownership trust holding a majority of its shares but also sees an advantage in combining this with personal share ownership. In this scenario individual employees (or some of them) would be permitted to hold shares but the trust would always continue to hold more than 50%.
Where employees hold any shares personally, they will each hold their own share certificate and can receive a profit share through dividends. They can then sell their shares back on leaving the company or perhaps earlier, potentially making a financial gain if the company has grown. They will also have a shareholder vote.
This scenario is often used to:
enable all individual employees to have their own personal ownership stake alongside a separate indirect stake through the trust, usually by the trust transferring some of its shares to employees
and/or
provide a special incentive for more senior employees, for example through the grant of share options.
Personal shares only
It can also be possible to create employee ownership in your company without involving any kind of trust, although this would be unusual and often complex. Most commonly, it would involve a new company acquiring your shares. The owners of that company would be its employees, each holding shares personally. Usually, this approach is inferior to one that involves trust ownership, but it could on occasion be the best solution.
This approach involves several moving parts, and for a company with large numbers of employees and/or significant staff turnover, it would involve substantial administration.
Can we as the current owners be paid for our shares?
Yes, it is common on a transition to employee ownership, whichever model you intend to adopt, for the current owners to be paid for their shares. Typically, this involves payment in instalments, funded from the company’s profits.
To find out more or if you would like to discuss an approach that would align best with your objectives, get in touch with Robert Postlethwaite, who would be happy to talk in more detail about the different options.
About Postlethwaite
Postlethwaite Solicitors are a team of specialist employee ownership and share scheme lawyers.
With top tier firm and lawyer rankings and over eighteen years of employee ownership and share scheme experience from a wide range of commercial transactions and situations, we are able to stand by your side and ensure you have a solution that is fit for purpose, commercially sound and wherever feasible, tax efficient.
Since 2003 we have assisted hundreds of businesses in setting up employees share schemes and over 70 companies in making the transition to becoming employee owned. We focus on helping our clients find the approach and structure that is right for them and then assist with putting it in place.
We’ll listen to what you want to achieve, carefully design a solution to achieve your objectives, and think ahead. We do not provide off-the-shelf or commodity solutions.