Why employee ownership is the ideal business succession solution for you, your business and your employees

14^th January 2015

Sell your company to its employees. This could be the best idea you ever read.  An employee-buyout (EBO) ticks all the boxes including tax efficiency – and it is Government approved.

Nick Clegg, Deputy Prime Minister, explained: “What we want to encourage is for more owners to sell the business on to those people who know the business inside out, who will go the extra mile, the wider family who have worked to build it up and contribute to its success – in other words, the employees.”

Even without tax breaks, employee ownership (EO) is an ideal business succession solution. It has clear advantages over alternative exit strategies:

• An employee buyout is within the owners’ control as to timing and terms. Shareholders will not be subject to the external pressures that inevitably arise once an IPO or trade sale gains momentum. Owners can plan in advance and keep the flexibility to change the timing of the exit if, say, their retirement plans change.
• Employee buyouts have a good record of succeeding and can be structured to reduce the risks of failing. Most owners want to see their business survive and prosper. Some owners want to avoid post-exit redundancies and closures, and want to provide continuity for customers and suppliers.
• Employee buyouts avoid the commercial risks of some other forms of exit. For example, they avoid the disclosure of confidential information to competitors and other potential buyers of the company.

In addition, owners increasingly want to recognise the contribution their employees have made to building a business and believe employees should be given the opportunity to take over that business. This is not a philanthropic gesture. This attitude recognises the clear commercial advantages EO can bring to a business. As highlighted in the Nuttall Review, EO is good for business and for staff, because it encourages:

• better business performance
• increased economic resilience
• greater employee commitment and engagement
• improved innovation
• enhanced employee well-being
• reduced absenteeism.

EO takes various legal forms. Some employee-owned companies have all their employees owning shares directly and there are tax efficient ways of introducing this form of EO. There is another approach, in which shares are held on behalf of all employees through a trust – the so-called John Lewis Partnership model. The Finance Act 2014 introduced new tax exemptions for this form of EO which make it very attractive as a succession solution for both shareholders and employees.

As a result of the findings of the Nuttall Review there is now an unlimited exemption from capital gains tax on gains made on selling a controlling interest in a trading company (or parent of a trading group) to an employee-ownership trust (EOT). There is also an exemption from income tax (but not NICs) of £3,600 per employee per tax year for qualifying bonus payments made to employees of a company (or group) where an EOT has a controlling interest.

More information on EBOs and the tax exemptions for EOTs is available in the articles listed here and on the Nuttall Review website.

It is the success stories in the EO sector that really bring this idea alive. Long established employee owned companies such as the John Lewis Partnership, Scott Bader Commonwealth and Arup Group have been joined by Donald Insall Associates Limited (conservation architects), Wilkin & Sons Limited (Tiptree Jam) and Parfetts (cash and carry).

Since the new tax exemptions were introduced, others have adopted the EOT model, including Quintessa Limited, a scientific consultancy whose founder and former major shareholder David Hodgkinson said: “We are delighted to have secured the future of the business in this way. Independence and longevity is key to delivering the service our clients want and the EOT business model is a perfect fit for our business”.

Another organisation to have done so is TEn Insurance Limited, a broker network. Its managing director, founder and former major shareholder, Malcolm Lee, said: “…it was vital that TEn Insurance secured an independent future. By adopting the trust ownership model, the long-term future of the business has been secured for its broker members in a way which allows all employees to share in the success of the organisation.”

The EO sector is growing and by selling your company to its employees you will be joining a £30bn GDP sector that believes EO is good for selling shareholders, the employee-owned company’s business, its employees and the UK economy.