Employee Ownership
Employee ownership is where the employees collectively own shares and have a meaningful say in how the business is run. UK businesses are increasingly considering employee ownership because it provides a good outcome for both the business owner and the employees. The business owner exits on fair terms and pays a reduced tax rate. The employees retain (and maybe improve) the existing culture and ethos of the business.
Experienced legal advisors can ensure that the arrangements meet the legislative requirements and will be able to advise of likely pitfalls post transition.
What Is Employee Ownership?
Employee ownership is either a direct or indirect share ownership of a company.
To obtain tax advantages more than 51% of the company must be employee owned. Most companies are 100% owned by an employee ownership trust (EOT). A small number of companies will have direct share ownership by their employees (this will mean that the employees have to pay for the shares though). Hybrid employee ownership is also possible – where the company’s shareholders are a trust and some individuals hold shares.
In “normal” share ownership the shares are held by a family or a few owner managers. Occasionally, two or three employees might receive share options
In an employee-owned business shares on held either by employees or held on trust for their benefit. This transition process is tightly managed to ensure that the legislation is closely followed by the documents.
In a trade sale the shares are sold by the few shareholders to company. This process will probably take around six months and will involve a lengthy investigative period and negotiation period.
For more information read our guide to employee ownership.
Why Businesses Choose Employee Ownership
Employee Ownership works for the business, the employees and the sellers!
Studies have shown that EOBs are 8 – 12% more productive than other similar businesses which are not employee owned. Staff attrition rates are lower. There is a more cohesive workforce as they are all in it together.
A sale to a qualifying employee ownership trust is eligible for a reduced capital gains tax rate – 50% of the prevailing rate – which is a perk for the seller. It is the most tax efficient way to sell your business.
If the company pays a profit share, this can be paid to the employees free of income tax up to £3,600.
An EOT is a long-term choice. It embeds a business in its location which contrasts with a trade sale – buyers often consolidate their purchase with their existing business in their existing location. Employee-owned businesses usually have better staff retention.
Is Employee Ownership Right for Your Business?
Businesses which are very suitable for employee ownership:
- Have a strong management team which does not just comprise of the owners
- Share financial information widely with employees
- Offer an excellent employment package
- Are interested in “better” business (B Corps, Investors in People)
Employee ownership might not be appropriate if:
- The business isn’t structured as a company
- The owner tightly holds all financial information
- There is no management team – just an owner
- It is being done just as it reduces the seller’s tax bill
- The business is in financial difficulty
What Misconceptions Do Business Owners Commonly Have?
- That they can’t be involved in the business after it becomes employee owned.
- That they can have security over their former shares – the legislation prohibits this.
- Profit shares are easy to get right and meet the income tax free requirements – it is a complex area.
- The employees must know everyone’s salary – absolutely not.
How the Employee Ownership Process Works
Investigating Employee Ownership:
- Consider various succession options (trade sale, management buyout, employee ownership) and think about the differences for the business owner and for the employees.
- Once EO has been selected, instruct experienced advisors (accountants, valuers, tax advisors and lawyers).
- Decide on a structure (direct or indirect share ownership) and what percentage of the shares is to be sold (at least 50% to obtain the tax advantages).
- Ascertain if any regulatory clearances are required.
- Get the valuation and tax clearance underway.
- Affordability is key – what working capital needs does the business have? What sums can be paid to the sellers at what regularity?
Implementing Employee Ownership:
- Draft all the documents (around 30 plus). The main documents are the share purchase agreement, the trust deed and the articles of association for the trustee if there is a corporate trustee.
- Refine and amend the documents.
- Appoint trustees or trustee directors for an indirect model.
- Receive tax and regulatory clearance.
- Trustees and trustee directors to scrutinise the valuation and agree a realistic affordable value for the business considering the valuation.
Executing Employee Ownership:
- Sign the documents.
- Pay the completion monies to the sellers.
- Employee Ownership Trust pays the stamp duty at 0.5% of the purchase price.
A typical transaction takes 3 – 4 months.
What Decisions Must Owners Make Early In The process?
- What advisors to use?
- What percentage to sell to an EOT?
- Direct or indirect share ownership?
- Whether to have individual trustees or a corporate trustee?
- How to incentivise senior leaders post EOT implementation (a share scheme, discretionary bonuses etc) to motivate leaders to work towards payment of all the purchase price to the sellers and to remain in the business long term?
Why Choose Stephens Scown for Employee Ownership Advice?
We are employee owned and have been so for ten years, in fact we were the first large law firm in the UK to become EO back in 2016. We have experts who:
- Could galvanise employees and motivate them for their and the business’ benefit.
- Are the go to legal recommendation for many accountancy firms.
- Are legal experts at a regulated law firm.
- Work very closely with tax advisors to ensure that the documents meet the legislative requirements.
- Can help with the trust registration process.
- Can draw on the firm’s experience and their own experience as independent trustees.
- Run monthly virtual knowledge share events and quarterly in-person events.
- Are members of the employee ownership association.
Read more about our experience of employee ownership.
Recent Client Stories:
Greengauge Building Energy Consultants
Speak to Our Employee Ownership Specialists
Get in touch today on 0345 450 5558 or [email protected]
Free Initial EO Consultation (30 minute)
We offer a free thirty minute initial call, which can help identify whether or not employee ownership should be something that should be on your agenda as a succession or growth strategy. A call can quickly focus on some of the issues that may be pertinent to you and your business and help to determine if you should apply a little more time and resource to investigating thoroughly.
EO Discovery Session (Half Day)
With up to 3 hours of time available, our Employee Ownership team can work with you to consider the opportunities presented by Employee Ownership to your business. It is recommended that, if possible, the key shareholders and leadership team should take part in the session which facilitates a deep dive into the following themes:
- Your aspirations and motivations with the business.
- Where the business is now and where it’s going.
- How an EO structure might fit your plans or where adjustments may be necessary.
- How EO can be utilised with or without direct incentivisation of management.
- How a communications plan can help drive employee engagement.
- Overview of key tax opportunities.
- Overview of financials in an EO project.
- Timetabling of an EO project: short & sweet vs deep & meaningful.
After the session a brief report will be provided identifying opportunities and challenges and an overview of an EO potential project for your business.
The cost of the Discover EO half day is fixed to £750 plus VAT. The cost will be discounted against any costs of subsequent engagement of Stephens Scown on an EO project for your business.
Times slots are necessarily limited and therefore please contact at your earliest opportunity!
Employee Ownership Trusts (EOTs)
What is an Employee Ownership Trust?
It is a type of discretionary trust in which a trust holds shares on behalf of employees. The employees do not have individual shareholdings. The trust documents are drafted in a specific way to ensure that the trust meets the requirements for tax advantages.
How does an EOT operate in practice?
The majority of day-to-day decisions in an employee-owned business are made by the directors of the business. Ideally an employee-owned business will have a culture of listening to its employees and various mechanisms should be in place to capture their feedback.
What legal and governance requirements apply?
The EOT board is there to act in accordance with the trust deed and in the best interests of the beneficiaries. It is responsible for challenging the directors (if challenge is needed) and ensuring that the EOT can pay the sellers for their shares.
FAQs on Employee Ownership
What is an employee ownership trust?
It is a special type of trust which holds shares on behalf of the employees of a company.
What tax reliefs apply to employee ownership?
The sellers to an EOT pay less capital gains tax than any other succession route. The sellers pay 50% of the normal CGT rate.
The employees who qualify for a profit share can receive up to £3600 per year free if income tax.
How much does it cost to move to employee ownership?
Less than a trade sale or an MBO and less tax for the seller.
How long does the process take?
As long as you want – the fastest we’ve done is in 6 weeks, but we have a client who wants to become EO in 10 years’ time.
Do employees have day-to-day control of the business?
No. The day to day running of the business is done by the directors of the company.
