Becoming Employee Owned

Becoming employee owned

Employee ownership is a highly effective ownership model, which works anywhere in the world and there is plenty of evidence to show that it can boost profitability, productivity, innovation, job security and employee wellbeing.

(See Employee Ownership Association, Cass Business School, White Rose University Consortium for evildence.)

Employee ownership can be implemented relatively easily and can be tailored to the needs of any organisation. It works across a range of sectors and at any stage in the life of a business, from start-up businesses, through to established companies dealing with owner/manager exits and succession planning.

The Employee Ownership Association has produced two very informative booklets on employee ownership; Employee Ownership: How to Get Started and Employee Ownership: Impact Report. Both of these can be downloaded from the EOA website, www.employeeownership.co.uk

Employee Ownership is a good option in any of the following scenarios:

  • Business succession or ownership succession – private owners, entrepreneurs or heads of family businesses, decide to sell to their valued workforce. This is the most typical route into employee ownership
  • Owner vision – as in the case of John Lewis, Arup Group or Scott Bader, the founder of a business opts for employee ownership
  • Professional partnerships – partners decide to broaden ownership and offer it to all employees, reflecting the need to attract, retain and motivate talented people
  • Insolvency or closure threat – employee buy–outs can prove an effective route to recovery for businesses that might otherwise fail
  • Independence – companies may decide that significant and even majority employee participation will protect the company’s independence
  • Privatisation – bus services and other privatisations have provided occasional opportunities for employee buy-outs

There are usually three share ownership options to consider when looking at employee ownership:

Direct Employee Ownership

Employees are individual owners of shares in their company, often using one or more of the tax-efficient share plans that are available. Employees have their own shares and therefore any financial rewards that accrue are directly linked to the success of the company, that they have helped generate. In addition, individual direct shareholders usually have voting rights under the governance structure of the organisation and can access information on how the business is performing. Incentive schemes for individual employees, such as annual bonuses, sit comfortably alongside this type of employee ownership.

Employees usually acquire shares in their business in one of the following ways:

  • Purchasing Shares: Employees buy shares in the company in which they work, sometimes via a tax-efficient Share Incentive Plan (‘SIP’)
  • Free shares: Staff can be gifted shares as a bonus, often through a Shareholder Incentive Plan (‘SIP’). Gifts of shares can be linked to the performance of a business
  • Share options: Employees are awarded share options, often via an HMRC approved scheme which allows them to purchase shares through the exercise of options.

In considering if direct employee ownership is most appropriate for your business, it is worth asking:

  • Do all staff have enough money to buy shares and do they want to?
  • Would the company make a repayable loan for staff to buy the shares?
  • Does the company wish to and can it afford to match employee share purchases or to give free shares?
  • How might the shares be acquired from the current owners, over what timescale and at what price?
  • Is the company able to operate an internal share market to enable staff to buy and sell shares?
  • Can the company afford to purchase shares from those who wish to sell them if there are insufficient “natural” buyers?
  • How will the company report financial performance to employee shareholders?
  • Will employees have to meet certain eligibility criteria before they are invited to become shareholders? E.g. be employed for a minimum of time
  • What are the tax implications of this model of ownership for both company and employees?
Indirect Employee Ownership

All or a percentage of the shares of the company are held indirectly on behalf of and for the benefit of the employees. The most common mechanism is an Employee Ownership trust (EOT). Most of the longest established employee owned businesses in the UK have the indirect form of employee ownership in at least part of their ownership structure.

Each EOT or equivalent will have a number of Trustees, usually made up of employees, directors and often an external, independent Chair. The Trustees hold any assets in the EOT for the benefit of the employees. An EOT will normally have its constitution outlined in a Trust Deed and sometimes the Trust Deed is also used to define the future of the business. For example, it could protect the business from asset stripping, or ensure the longevity of the employee ownership by stipulating that the interests of the future employees are considered alongside those of present ones.

Many companies use an EOT to hold all of the shares, often purchasing them from the existing owner or owners over a period of years. The EOT model is one which provides every qualifying employee with the same rights and benefits without the obligation to purchase shares directly with their own money. Also, it does not prevent the receipt of direct monetary reward for corporate or personal success through mechanisms such as bonus payments.

The EOT may waive its right to a dividend payment in order to increase the cash available to be spent in the business (for example, in the form of employee bonuses or investment in the growth of the business).

In considering if indirect employee ownership is most appropriate for your business, consider the following questions:

  • Over what period of time do the current owners wish to sell or gift their shares to the EOT?
  • What percentage of the owners’ shares will ultimately be sold?
  • Who should represent the owners on the EOT?
  • Are there any special conditions required in the Trust Deed in order to protect the future of the business?
  • How will the business fund the purchase of shares from the current owners?
  • Will the employees feel a sense of real ownership of the business in the absence of being direct shareholders?
  • What are the tax implications for the company of this model of ownership?
  • What are the tax implications for employees of this model of ownership?
Hybrid Ownership

Many companies find that a hybrid model combining direct and indirect ownership suits them best. In this case, the EOT or an equivalent vehicle will often hold a majority of the shares in order to ensure stability and long-term ownership and to provide an internal market through which people can sell & buy shares. A tax efficient share scheme such as a Share Incentive Plan or Enterprise Management Incentive can then be used to distribute the remaining shares to the employees.

Under these circumstances, those individuals who participate in direct share ownership can make capital gains on their shares and there is scope for additional payments to be generated in a tax efficient way from dividends on the employee owned shares.

All employees are able to share in success regardless of their personal ability to purchase shares but can still receive financial reward for corporate or personal success through bonus payments.

When considering the hybrid model, consider the following questions as well as all those above:

  • Whether you have the resources to deal with the extra complexity and administration associated with the hybrid form of employee ownership
  • What proportion of share ownership will be held indirectly by the EOT or equivalent vehicle compared to the proportion to be held directly by employees?