Growing the business

In the fourth article in our series, Employee Ownership Trusts: Looking to the Future, the TLT Employee Ownership team discusses the ways in which an employee-owned company can continue to grow after transition.

How can growth be achieved following the transition to employee ownership?

When it comes to growing the business, an employee-owned company is fundamentally the same as a company under conventional ownership. Therefore, the avenues available to an employee-owned company looking to grow include:

• the acquisition of competitor and/or complementary businesses;
• seeking investment from third party investors; and
• organic growth from the company’s existing business.

However, there are some specific considerations that an employee-owned company will need to take into account when planning for growth which we explore in further detail below.

When should an EOT owned company start planning for growth?

This is likely to depend on the way in which the consideration for the acquisition of the shares in the trading company (or the parent company of the trading group) is funded by the EOT.

Typically, an EOT will not hold sufficient cash to enable the trustee(s) of the EOT to fund the consideration for the acquisition in full on completion. Where this is the case, it is likely that the EOT will fund the acquisition in one of two ways:

• by making a cash payment to the selling shareholders on completion of the sale and paying the balance of the consideration as deferred consideration in instalments over a number of years following completion (typically 4 to 7 years); or
• by borrowing money from a bank, or another third-party lender, to pay the full consideration to the selling shareholders on completion.

The EOT will be reliant on the company making contributions to the trustee to enable the trustee to pay any outstanding consideration to the selling shareholders and/or repay any lending. Post-transition, profits realised by the company are likely to be utilised in making contributions to the EOT, which may limit the company’s opportunities for significant growth until the EOT is “debt-free”. There may also be restrictions in the company’s governance documents, or in the terms of any facility agreements with lenders, relating to what steps the company can, and cannot, take, whilst deferred consideration or lending is outstanding.

By contrast, where, at the time of the sale to the EOT, the company has sufficient retained profits to enable the EOT to acquire the company debt-free on completion, the company may be better placed to pursue a growth strategy shortly after transition.

We explore the funding of the EOT’s financial commitments in further detail in this insight.

What is involved for an employee-owned company to grow by acquisition?

The same acquisition process will apply to an acquisition by a company owned by an EOT as applies to a company under conventional ownership. The structure of the transaction (i.e. whether a share or asset purchase) and the broad commercial terms will be agreed at the outset between the board of the employee-owned company and the board of the target company, due diligence will be required and a share purchase, or asset purchase, agreement will be drafted and negotiated.

There are, however, some important considerations which apply to acquisitions by an employee-owned company, including:

• consents - the company’s governance documents, including the articles of association, are likely to contain restrictions on what the company board can do without the consent of the EOT trustee and, potentially, the approval of employees (via an employee council or employee director of the EOT trustee board);
• funding the acquisition – banks are typically less familiar with the EOT structure than more traditional corporate structures and therefore if bank lending is required, early engagement with the banks to assist them in understanding the structure will be important. If the employee-owned company has outstanding lending, restrictions imposed under that lending may cause difficulties;
• culture – one of the reasons commonly cited by selling shareholders for the choice of sale to an EOT, as an alternative to a trade sale, is that the EOT structure enables the maintenance of the ethos and culture of the business, which has sometimes been established over many years. The EOT and the employee-owned company will want to be confident that the target company will be a good fit for the employee-owned company; and
• employee engagement – to retain and motivate the employees of the target company post-acquisition, the board and the EOT trustee will need to engage with them at an early stage in the acquisition process, building on the lessons learned.

Is there a role for third party investment in an EOT structure?

Yes definitely. The acquisition of a company by an EOT does not close the door on future third party investment into the business, whether by debt financing, the issue of equity or a combination. As long as the EOT retains a controlling interest in the company (broadly more than 50% of the ordinary share capital and voting rights in the company), an equity investment by a third party would not cause the EOT to lose its qualifying status.

In recent years, third party investors have become increasingly interested in investing in employee-owned businesses and there are now specialist investors who understand the EOT structure well who are actively looking to invest in these types of company.

Given that the EOT structure is intended as a long-term employee ownership structure (such that a sale of the company to a third party is unlikely to be anticipated), the mechanism for the investor to exit the business and realise value from any equity investment will be a key consideration. An exit might take the form of a buyback of the investor’s shares from the employee-owned company or a sale of those shares to the EOT. That said, we are increasingly involved in sales by EOTs as acquirers notice the impressive performance of employee-owned businesses.

There are numerous ways in which third-party investment can generate growth for the employee-owned company, including:

• enabling the company to pursue an acquisition growth strategy;
• providing liquidity for employees who may hold shares in the company under employee share incentive arrangements; and
• facilitating the payment of deferred consideration to the selling shareholders or repayment of lending, so that the company can pursue its growth strategy “debt-free”.

How can being an employee-owned business lead to organic growth?

The benefits of being an employee-owned company can lead to increased profitability and those profits can be reinvested in the business to boost growth.

This can be seen in research by the Employee Ownership Association (EOA) which reports that employee-owned businesses are 25% more likely to have seen profits grow in the past 5 years post transition.

Employees can play a key role in the success and profitability of an employee-owned company. The EOA research also found that employee-owned businesses are:

• 50% more likely to expand their workforces than other businesses;
• 8-12% more productive per employee; and
• 73% more likely to have increased employee satisfaction, motivations and work-life balance.

There are a number of ways in which an employee-owned business can incentivise employees post-transition. In addition to the annual bonus of up to £3,600 per employee which can be paid to each employee free of income tax, there is a wide choice of reward structures that an employee-owned company can adopt to give key, or even all, employees the opportunity to acquire actual shares in the company.

Further detail about incentive structures for employee-owned companies can be found in our insight here.

TLT comment

Being an employee-owned company can bring a range of opportunities for growth. For many EOT owned companies, the EOT becoming debt-free by the payment of all deferred consideration or repayment of lending will signal the beginning of a new phase as profits become available for growth.

As for every company, growing the business is vital for the long-term future but it is not without its challenges. However, with careful planning, a clear understanding of the company’s objectives and early and consistent engagement with the EOT trustee and employees, an employee-owned company can successfully pursue a growth strategy.

How can we help?

TLT has been a leading firm active in the employee ownership sector for a number of years. Our specialist, and experienced, employee ownership lawyers have a diverse range of clients in England, Wales, Northern Ireland and Scotland.

We provide insightful strategic direction to employee-owned businesses at every stage of their journey and have led a number of the most high-profile employee ownership transactions within the UK.

If you are interested in discussing any of the topics covered in this article, get in touch with our employee ownership specialists below.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at March 2025. Specific advice should be sought for specific cases. For more information see our terms & conditions.