Manufacturing is often affected by rising costs such as wages, energy costs, fuel costs, import and export duties as well as increased costs of materials. It may take a long time to train an employee in a manufacturing business and with squeezed margins affecting wages employee retention is critical to the success of the business.
Employee ownership for manufacturing and engineering companies is well established, and they comprise the top two industry sectors for employee-owned businesses. Manufacturing and professional, scientific and technical (which would include engineering) businesses are 43% of the employee owned businesses according to EOA research (EO Sector Snapshot – July 2025.pdf).
The Ownership Challenge in Manufacturing & Engineering
There are a number of succession or exit options for business owners. An owner could:
- Close the business – this could be done by winding the business up i.e. this would mean the end of the business.
- Sell the business – an owner could sell all or some of the business. There are a number of potential buyers for the business.
The business could be bought by:
- another business
- the business’ management team
- an employee ownership trust
Often if a business is bought by a competitor – it doesn’t “feel” the same. The buyer may not have the same approach to the employees or to customers. The buyer may not need all of the employees and they could move the business into to their existing operation. A buyer may review the business and decide to run it on a leaner basis prioritising cost savings over customer service. Most founders want the business to continue as it is. A purchase by the management team or an employee ownership trust are more likely to align with the founder’s previous approach.
What Employee Ownership Really Means for Industrial Businesses
An EOT is a sale of the business to an employee ownership trust (EOT). The EOT will purchase the shares from the founder and hold them on trust for the employees. Each employee does not have a shareholding. Imagine a cake – each employee does not have a slice, the trust owns the cake for them and for their benefit.
The company is still run by its directors not by the employees. In an employee-owned business, the directors are running the business in the interests of the employees as they are the beneficiaries of the EOT. The trustee of the trust (every trust must have a trustee) is usually a company limited by guarantee. The directors of the trust company should include at least one employee but preferably more.
There is a minimum size for a tax advantaged EOT which is to safeguard the tax reliefs being obtained where very few employees will benefit. There are no restrictions on how big a business can be in terms of employee numbers.
Why Owners Are Choosing Employee Ownership Over a Sale
There are tax advantages for the founder and the employees if the exact criteria are met. A sale to a third party is often adversarial and heavily negotiated and potentially quite stressful for a founder. In contrast, a sale to an EOT is more relaxed and can be done at the founder’s chosen pace. A keen founder could complete an EOT in around 8 weeks if they wanted a speedy EOT.
A sale to a competitor with due diligence and negotiation will cost significantly more than a sale to an EOT. The cost of selling to an EOT is a cost that is paid by the business whereas a sale to a third party is at the cost of the founder.
A trade sale is very likely to affect the culture and values of the founder’s business, as two businesses are being merged. A sale to an EOT will preserve the culture and values as it is likely that the majority of the management team will remain in place.
Founders who remain in the vicinity of the business have a vested interest in the employees remaining happily employed. There is usually a period of deferred consideration where the founder receives their sale proceeds over a period of years. The founder is therefore personally invested in the success of the business for several years as it owes them money. The founder’s ability to benefit from capital gains tax relief (CGT) is linked to the success of the business as if the business ceases trading with a particular timeframe, then the tax advantages are lost and the CGT that was forgiven is payable.
Does It Actually Work? Evidence from Manufacturing & Engineering
Employee-owned businesses:
- are 8 – 12% more productive per employee
- benefit from increased employee retention
- recruit more easily
- are more innovative
Employees are empowered to make suggestions that increase profitability. In an EOB that we transitioned to EO, the manufacturing process destroyed a vital piece of kit after one use. Once the business was EO, an employee suggested that the business could pay twice as much for a more robust piece of kit and use it 11 times before it was destroyed – saving the purchase of ten more items while only paying for two!
Some examples of large successful EOBs in manufacturing and engineering are:
- Scott Bader
- Arup
- Mott MacDonald
- Wilkin and Sons (Tiptree)
How the Transition Works in Practice
Usually, a founder will approach their accountant or lawyer to discuss business succession. Their accountant will raise the possibility of employee ownership. If this is something that a founder wishes to pursue the conversation shifts to the requirements to obtain CGT relief.
A tax clearance is sought by the tax advisor – this could be the company’s or the founder’s accountant or another firm. If the business is in a regulated sector (care, financial services, national security, accountancy, legal etc) then regulatory permission must be sought.
The company is valued and there are rules in place to ensure that not more than market value is paid by the EOT for the company. If the founder wants to benefit from the tax advantages, they must sell 51% to the EOT. This does not mean that the founder must leave the business – they could continue their involvement. Most EOTs are financed by the founder. The founder usually receives some of the sale proceeds up front – this is generally the spare cash in the business. Often these monies have accumulated over a period of time and are not part of the company’s working capital requirements. The outstanding monies are paid in instalments over a few years. It is possible to obtain bank funding for some or all of the purchase price.
The documents for an EOT must be drawn up by an experienced professional – there are a number of ways to lose the tax advantages and this would be a shame for the founder and the employees. If the EOT is structured correctly, the employees can receive a tax free profit share each year – the tax free amount is currently capped at £3600.
The founder must be aware that:
- there is a chance that they might not receive all the purchase price if the business cannot afford it
- the founder must not control the trust
- the CGT relief can be clawed back by HMRC in certain circumstances for up to 5 years
- the tax free profit share must be carefully calculated per employee in accordance with the legislation
Our Experience & Next Steps for Manufacturing and Engineering Business Owners
Stephens Scown has been employee owned for 9 years. In that time our EO has evolved and professionalised alongside the rest of the firm.
We have better than our sector recruitment and retention and the employee voice flows freely from our Scownership Council. We have changed our model over time to reflect our growth – larger headcount, changes in the legal profession, new offices etc.
We have realised that we can learn from our employee voice, and we valued hearing our employees so much that we put two on our strategy board.
We work with businesses considering EO and those that have become EO (using us or other providers). We provide proactive legal advice which is supplemented by our own EO experience.
If a manufacturing or engineering business owner is interested in EO they should get in touch with us for a free confidential initial chat.