Each year, the UK community of employee-owned businesses celebrate Employee Ownership Day (EO Day). In 2024, EO Day is 21 June and the theme is 'Proudly EO'. In this piece, we consider why businesses might want to boost employee ownership participation, especially if their culture is already people-centric and striving for inclusivity and profit with purpose.
Companies are increasingly recognising the value of their workforce as not just employees but as integral stakeholders in the success of the organisation. A people-focused business, which places a high premium on the welfare and engagement of its employees, can reap benefits from transitioning to an employee-owned structure. This can be achieved through the sale of shares to an Employee Ownership Trust (EOT) and/or the implementation of employee share plans.
Enhanced employee engagement and productivity
When employees have a stake in the business, they are invested in its success. This leads to increased motivation, commitment and productivity, as employees feel their contributions directly influence the company's performance and, consequently, their personal rewards.
Our article "Incentivising talent today for the brands of tomorrow" looks at the evolution of shared ownership, what this now means in the workplace and explains some of the main share plan arrangements that can deliver that alignment of stakeholder interests.
Attracting and retaining talent
In a competitive job market, attracting and retaining top talent is a priority for any employer. The prospect of owning a share in the business can be a compelling incentive for prospective employees and can also help arrest attrition, reducing churn rates and the associated costs. In certain industries, especially those which are technology driven, an equity incentive is often seen as a prerequisite part of the employee value proposition.
Alignment of interests and financial benefits
Employee ownership aligns the interests of the employees with those of the business. This alignment can lead to better decision-making, as employees understand that their actions will have a direct impact on the company's success and their personal benefit over the longer-term. This shared interest can foster a more collaborative and innovative work environment, driving the business forward.
Employee-owned companies can also enjoy financial advantages. Studies have shown that such businesses are more resilient during economic downturns and have a higher rate of growth compared to their non-employee-owned counterparts.
Some larger quoted companies, operating statutory all-employee share plans (i.e. Save As you Earn (SAYE) or Share Incentive Plan (SIP)) are set to deliver a bumper crop of rewards this year for plans with awards made during the early years of the Covid pandemic now reaching maturity and benefiting from a value-add recovery in share price. Over time, such capital returns can help support worker social mobility.
Succession planning
A November 2023 research study by the UK think tank Ownership at Work found that 31% of owners (representing 54,000 SME businesses) are likely to sell part or all of their shareholding in the next 5 years, with that number rising to 50% over 10 years. The most cited reason for this (69%) is age and a wish to retire. It is clear that a significant change in UK business ownership lies ahead, yet the survey findings show that only 18% of owners have formulated succession plans already in place. For the remainder, the time to start planning is now.
For business owners looking to retire or step back from day-to-day operations (or stay operationally involved but take some money off the table), transitioning to employee ownership can be an effective succession strategy. It ensures the continuity of the business by placing it in the hands of those who are familiar with and invested in its success. This can sometimes be a more appealing option than selling to an external party, which may lead to uncertainty and changes that could adversely affect the company's culture and values. Family-owned and eponymous founder-led businesses in particular can be drawn to a trust-based model of future ownership and governance that preserves independence, local community job creation and delivers a patient capital exit that should not financially stress the business and with a transaction timeline that is curated to their needs and wishes.
For others, there may be a desire to align with a third-party strategic purchaser and this may mean implementing an equity incentive that will focus behaviours and attainment on the strategic commercial metrics that will position the company as an attractive target in the marketplace. Striking the right balance to ensure prospective rewards are meaningful and not too token or bountiful is important and if your business is built on employee-equity participation then finding an acquiror with a similar offer will be preferred. Furthermore, if a business has previously operated an all-employee statutory SIP, a recent employment tribunal case, Ponticelli Ltd v Gallagher, held that the acquiror needs to offer an equivalent incentive to any employees under the Transfer of Undertakings (Protection of Employment) Regulations 2006.
Nearly ten years on from the introduction of the EOT legislation, some businesses that embraced that approach in prior years have fully paid off the vendor consideration and are exploring how to further grow, potentially on an acquisitive basis or via external investment or geographical expansion. Some EOT trustees are therefore wrestling with decisions about whether and how that model can best accommodate any such new needs of the business.
Tax incentives
The UK Government recognises the benefits of employee ownership and offers tax incentives to encourage this business model. Recognising that the 4 July general election fast approaching, it is also worth stating that employee ownership, in all its different forms, has broad cross-party political support.
Business owners who, individually or as a collective, sell a controlling stake in a trading company to an EOT can benefit from a Capital Gains Tax exemption, making it an efficient exit strategy. Additionally, employees can receive tax-free profit share bonuses (as explained in our article here).
The UK leads the way in relation to tax-advantaged share plans, but changes in legislation and company circumstances mean any plans implemented should be regularly reviewed. Businesses that are in-bound to the UK should be wary of rolling out a foreign share plan to the UK workforce as that might not always land well (as illustrated here).
Culture and challenges
A people-focused business thrives on a strong, positive company culture. Employee ownership can contribute to this by fostering a culture of transparency, trust, and giving employees a voice and more of a say at the table (although ultimately the Board and controlling shareholders take the decisions). As co-owners, employees are more likely to have access to information about the company's financial performance and strategic direction. Make no mistake, becoming employee-owned does not suddenly fix a disengaged workforce, but for a business that already has a culture of trust and nurtured engagement, this can be further empowered and turbo-charged by conferring co-ownership rights.
While the benefits of employee ownership are clear, it is not without its challenges. The process of transitioning control to an EOT requires careful planning, legal, tax and valuation expertise, and financial investment. Companies must ensure that the structure of the ownership plan aligns with the strategic goals, is affordable and that employees are adequately supported and educated.
Crucially, this is not a soft deal. There are trip-hazards in the legislation that can catch out those who are not expert in navigating the details.
If a business has failed to attract a buyer in the open market, some introspection may be required to assess if the financial hygiene, innovation and commercial acumen is up to scratch in relation to timing and sustainability of any ownership handover. Some tempering of vendor expectation around share sale price may also be required. As much as private equity might at times be maligned for debt leveraging, some employee-owned businesses that refinanced to accelerate vendor payouts are now finding the rising cost of that debt to be somewhat brutal and a threat to operational health. Any business that is considering an EOT structure should be robustly stress-testing its future cashflow projections and EOT independent trustees may be wary of an obviously impatient and bullish seller.
Employee-owned businesses are not immune to failure and there is no one-size fits all solution. So, yes, let's by all means be proud of the many inspiring success stories. But let's also not be complacent about the need to regularly review business ownership arrangements and refresh how best to steward these in a climate of change, uncertainty and opportunity.
For further information contact:
Liz Hunter
Partner, Incentives.
