Is employee ownership right for your business?
Employee owned businesses are relatively uncommon in the UK, with only around 1,100 businesses currently using this model, despite the recent upward trend.
However, the Employee Ownership Association (EOA) is keen to increase this figure, and have asked for £2.2 million in funding from the government to launch a pilot scheme to encourage more businesses into Employee Ownership (EO).
A key reason for the lack of uptake could be a simple lack of understanding about how EO works. There are few advisors that have the knowledge and experience to guide business owners through the process, meaning it's often left out of the options mentioned to founders alongside a trade sale, a management buy-out and a listing. This could mean that owners aren't making a completely informed decision on the best option for their company's future.
There are some common misconceptions about EO that may also be contributing to the slow uptake of this model. Company founders and entrepreneurs may initially think that selling their business to the highest bidder will be their best option, but by considering EO as an exit strategy, they could see their creation thrive and grow, rather than be lost amid an acquisition or merger. While it's true that EO may not be the right option for a founder wanting to maximise their day-one sale proceeds, as a longer term option it may in fact yield the same or more after-tax cash. It may also cost less than a typical sale to trade or Private Equity buyer, with a shift to an EO model being less complex than many assume.
Some founders may worry that their staff aren't ready for the 'responsibility' of ownership or that their senior management team don’t have the experience to take immediate control over day-to-day decisions. With careful planning and the proper level of support, however, these issues can be managed in the lead up to EO and become an opportunity rather than a challenge. In addition, founders can choose to step back gradually, remaining a director if appropriate, rather than making an abrupt departure. In fact, with the right communication the transition to EO can liberate employees and management teams to rise to meet the challenge and assume leadership in inspiring ways.
It's encouraging to note that companies that have made the switch to EO are reporting positive outcomes, with EO companies reporting that the model gives a "whoosh" effect in terms of performance. In the EO model everyone has accountability, as well as a greater sense of ownership and belonging, leading to increased motivation and reduced staff turnover, which in turn can lead to increased productivity.
It's also encouraging to see signs that there is increasing availability of specialist finance for the EO model. Mainstream providers, like the banks, are also becoming more aware and supportive of the model and the market of alternative funding providers is growing.
Employee ownership is not just for retiring owners or entrepreneurs with no heir. Founders who opt for EO may do so because they wish to preserve the ethos and values of their business, and reward those who have worked to make it a success. There is also the potential added benefit to their brand as a whole. Demonstrating loyalty to its employees, particularly if the business is embedded in the community it serves, will likely boost both customer and supplier support. A sale to trade could have the opposite effect, potentially resulting in job cuts or relocation away from its roots.
The potential benefits of the employee ownership model are very significant and we see plenty of support out there for those considering this new business model. Over the last year, we've seen an increasing call for employees to be given a greater voice, such as recommendations for the appointment of a non-executive director to represent employees in the boardroom, or the creation of an employee advisory council. So it would seem that companies are willing to learn from the employee-owned business model, even if they're not quite ready to go all in.
Top Tips
- Determine whether employee ownership is the right path for your business.
- Determine whether you are eligible for EO and which model (direct, indirect or a hybrid approach) will work best for your business.
- Determine whether bank funding will be required and whether this would be provided directly to the EOT or to the trading business.
- Consider whether the company will establish a formal employee council. (Recommended for larger companies but can be overkill for smaller entities).
- Confirm who will sit on the Company's executive board following transition and whether this will include an employee director. (This is optional and it should be noted that the executive board doesn't have to change at the point of the EO transition).
- Consider the make-up of the trustee board of the Employee Ownership Trust. (This would normally include an employee and an independent, but could also include the seller).
- Check whether workforce is entirely employed and if not, consider whether consultants will be disenfranchised if they cannot participate in some way.
- Determine whether all employees will be eligible to benefit through the EOT or just those with more than 12 months service.
- Plan a process of engagement with board, senior management and employees and map out a realistic timetable ahead of the big day of EO transition.
