The Scottish Paralegal Association

Could employee ownership work for your business?

10 Mar

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Employee ownership offers diverse benefits, such as resilience, staff retention, tax breaks and a smooth exit strategy. Plus there is plenty of flexibility over the extent, pace and structure of the deal.

As a result of these benefits, employee ownership is expected to surge over the next years. A recent article in the Herald newspaper (30 June 2017) suggested that up to 5% of all Scottish businesses could end up being employee-owned.

A PERFORMANCE BOOST

There are numerous studies and statistics showing how employee-owned businesses outperform other businesses. For example, during the recession, employee-owned companies grew sales by 11%, while traditionally structured businesses managed an increase of just 0.6%. The positive figures in terms of productivity, absenteeism and growth for employee-owned companies are often referred to as ‘the John Lewis effect’, after the UK’s highest-profile employee-owned business.

Moreover, employee ownership can be used in many situations – from starting a business to exiting one – and you can choose what share of the business is owned by employees. It could certainly be a useful option for the 16,000 or so businesses which, according to the Herald article, will be seeking to transfer ownership in the next five years.

Already in Scotland, there are numerous successful examples in sectors from food and drink to engineering. An added incentive is that the Scottish Government provides feasibility and transition support for businesses that take this route.

THE POSSIBLE BENEFITS

In addition to the performance benefits referred to above, there are also advantages for owners and employees.

Taxation: Owners who sell more than 50% of the company to employees directly or to an employee ownership trust receive valuable capital gains tax relief on the sale. This can increase their overall gains from the sale or enable them to offer a lower price to the buying employees.

Phased and planned succession: The option for staged buyouts can reduce risk for businesses and employees, and allow vendors to control their pace of exit. For example, some successful buyouts in Scotland have included arrangements for the loan repayments to be phased over a decade

Employees: Gaining a stake in a business is an excellent incentive for staff to stick around and perform well. In addition, staff at an employee-owned business can receive a tax-free annual bonus of up to £3,600

STRUCTURING THE DEAL

Once it has been decided that employee ownership is a good course for you and your business, there are three main aspects to think about:

Financial – including value of the business, raising finance, tax and timescales

People – including employee engagement and governance

Legal – including ownership structure, assets and protections.

Ownership structure is a key point here, since some of the options are specific to employee-owned companies. In summary, there are three choices:

  • direct employee ownership, where employees become individual shareholders
  • indirect employee ownership, where shares are held collectively on behalf of employees, normally through an employee ownership trust
  • hybrid ownership, combining the two options above.

Each of these choices has its pros and cons, and will be more or less attractive in different scenarios.

Those pros and cons show why you need good legal support from experienced advisers in this area. You want a team who not only have expertise in the specific structures available but can also view them in the wider context of funding, tax, employment law, governance and the issues around succession in family-owned businesses.

WHY ISN’T IT MORE POPULAR?

Employee-owned companies in the UK already turn over around £30 billion annually and the popularity of employee ownership is growing.

However, moving to employee ownership is a specialist area. Many professional advisers don’t have experience of it, and therefore do not (or cannot) guide their clients through it.

There are also various misconceptions around it – for example, that it may mean losing out on a better sale price in the open market; or that finance can be hard to raise. These may deter businesses and families from looking into it.

Such fears are either unfounded or easily handled. Having worked on successful employee ownership deals, including advising on the recent transition to this structure for Harvey Map Services as well as with organisations such as Capital for Colleagues, which invest in employee-owned businesses, we see huge potential in this area for our business clients.

If you wish to discuss how employee-ownership could benefit your business then please contact Douglas Roberts in our Corporate and Technology team.

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