Transitioning to employee ownership: Common myths busted
Whilst employee ownership trusts have been around since 2014, the concept of employee ownership nevertheless remains novel to many people and, at times, misunderstood. We thought it would be useful to de-bunk some of the myths!
Employee ownership is only suitable for certain types and sizes of business
One of the advantages of employee ownership is its flexibility and adaptability. You don’t have to be a John Lewis, a Richer Sounds or an Aardman Animations to transition to employee ownership. A large number of lesser-known SME businesses across a vast range of sectors have taken the same journey.
Employees will control the company’s decision making
Whilst it may be appropriate to consult with employees more widely in an employee-owned business, the operational independence of the trading company board is not compromised. Like all businesses, an EO company will need a strong independent leadership team to operate effectively. A trustee acts as the custodian of employee ownership on behalf of all employees, so staff don’t hold shares in their own name but become incentivised as stakeholders in the business.
The current owners won’t be able to realise a full market value for the business
Whilst it is certainly possible that owners can sell at less than market value, in practice that is untypical of EO transactions. More commonly, the business will be independently valued by an accountant to determine the prevailing market value and that will form the sale price.
An owner may need to accept that a significant element of the purchase price needs to be deferred and the company will need to demonstrate underlying profitability. However, owners will have the comfort of not having to run the gauntlet of a potentially unreliable trade buyer who may seek to re-negotiate the sale price or restructure or delay the deal.
All of the Shares must be sold to the EOT
The only requirement is that the current owners transfer more than 50% of shares to an employee ownership trust in order to take advantage of the tax benefits associated with EOTs. It may be appropriate to sell less than 100% of the shares:
if the business cannot afford to support the purchase price for all the shares;
- where a retained minority stake may benefit from future growth leading to increased share value; or
- where it is considered desirable to retain an element of family ownership capable of being passed on to future generations.
Many owners do sell 100% (or a significant majority) of the shares but the company then offers direct share incentives to senior management often via the grant of share options.
The transaction itself is highly complex and time-intensive
Provided you have the right team of advisers on board, an EO transaction can be more easy to project manage than other types of exit structures, as there is not the unpredictability of unconnected third parties operating to different timescales or agendas. It is important, though, that a full understanding of what it means to be employee owned is gained before embarking on a transaction.
All employees must receive the same profit share
As an employee-owned company, employees are entitled to receive bonus payments exempt from income tax (subject to statutory limits). Whilst all eligible employees must be entitled to receive a share of any bonus payment in order to take advantage of the favourable tax treatment, that does not mean that they all have to receive the same amount. The amount each employee receives can be flexed based on salary, hours worked and length of service, provided the criteria is applied fairly across all employees. It is also possible to exclude any employee who is in a disciplinary process for gross misconduct and any employee who has been employed for less than 12 months.
EO is a tax scheme open to challenge by HMRC
Advance clearance should always be sought from HMRC (as would be common with many other kinds of transaction involving a significant disposal of shares). However, it is important to stress that a transition to employee ownership is not a “scheme” to avoid tax. Employee ownership is a model supported by government as a means to share ownership of companies more widely and help create better, more resilient businesses. The availability of CGT relief for selling shareholders is written into the legislation that was created in 2014 to better promote employee ownership.
There must be a catch that means this isn’t for me
The business needs to be profitable, the owners need to be committed to the benefits and responsibilities of employee ownership and the right professional advice must be sought. There are, however, no trap-doors or pitfalls to achieving a succession though employee ownership. Indeed EO is one of the fastest growing business ownership models in the UK.
Brabners have a specialist employee ownership team who can guide you through the process and advise you on how your business can become employee-owned.
Join us for EO Day 2021, a national celebration of employee ownership on 25 June 2021, and shout about why business is #BetterTogether for the individual, the business and the economy.
