Is Employee Ownership still a viable business model?

After the announcement by the John Lewis Partnership that it is considering ending 100% employee ownership, are we looking at the end of the employee ownership model?

When the John Lewis Partnership announced in March this year that it was considering diluting its partnership structure to raise between £1 billion and £2 billion pounds ($1.22 billion-$2.44 billion) of new investment, it generated shockwaves through the employee ownership community.

The John Lewis Partnership is the largest employee-owned business in the UK, with total trading sales of over £12.3bn and a workforce of 80,000 employees or “partners”, and is often held up as paragon of the employee ownership model.

If anything, the recent announcement further supports this, as it demonstrates the flexibility the employee ownership model can offer. There are different potential employee ownership structures, and 100% employee ownership is not always the most suitable choice. While any plans would first have to be approved by a partnership council formed of employees, a hybrid structure might allow John Lewis to secure external investment and continue to offer benefits to its employee partners. It’s also worth noting the sector-specific challenges John Lewis will be facing, with the cost of living crisis hitting retailers as they’re still recovering from the impact of the pandemic on the high street. There has been no indication that the proposed changes are a result of any failings with the employee ownership structure and in fact, the decision to consider diluting the 100% employee ownership has been met with negative criticism from employee partners and retail experts.

The John Lewis case demonstrates the lack of understanding about how employee ownership 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 conversation with founders about the best option for their company's future.

So, with the employee ownership model holding strong, could it be an option for your business?

By considering employee ownership as an exit strategy, a founder could see their creation thrive and grow, rather than be lost amid an acquisition or merger. While it's true that employee ownership may not be the right option for a founder wanting to maximise the lump sum of the sale proceeds on the day the sale completes, it may in fact yield the same or more after-tax cash as a longer-term option. Owners who sell more than 50 per cent of the company to employees directly or to an employee ownership trust receive valuable capital gains tax relief. It's also encouraging to see signs that there is increasing availability of specialist finance for the employee ownership 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.

It’s also important to remember that employee ownership is not just for retiring owners or entrepreneurs with no heir. Founders can choose to step back gradually, remaining a director if appropriate, rather than making an abrupt departure. This is often welcomed by staff who may not have the experience to take immediate control over day-to-day decisions. With careful planning and the proper level of support, we have seen management teams rise to meet the challenge and assume leadership in inspiring ways.

Employee ownership can offer founders a way 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.

So, if you are interested in employee ownership as an option for your business, get advice from experts to consider the best model for you.

This article was first featured in The Scotsman.