About employee ownership
Employee ownership, sometimes called co-ownership, is a proven, successful business model and there are hundreds of businesses in the UK that are owned and managed in this way. It works equally well for young, start-up businesses as well as for more established organisations.
So why might you consider employee ownership?
- As the owner/director, you may be considering retiring and undertaking an employee buyout could solve your business succession challenge
- You may want the business to stay independent and secure the business legacy
- You may have a long serving and loyal workforce and this gives them the opportunity to take the business forward by which they can enjoy the fruits of their hard work in future
- If you are just setting up a business or are early in your growth stage, this is a great way to ensure that fairness is built into your structure and operational practice.
- Such businesses typically demonstrate a number of operational benefits too such as improved productivity and profitability, reduced staff sickness, turnover and absenteeism as well as being more entrepreneurial and innovative
An employee owned business (‘EOB’) is generally defined as a commercial enterprise owned by the people who work for it, and usually takes one of three forms:
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?
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?