8 minute read
Employee Ownership (EO) is an established exit strategy, whereby shareholders sell their company to a trust for the benefit of their employees. Since 2014, (“CGT”) free – this advantage is primarily driven by Government studies demonstrating that Employee Ownership increases company productivity, sustainability, local investment, and social mobility https://www.gov.uk/employee-ownership.
There are now circa 600 employee-owned businesses in the UK and the number is growing rapidly. With Employee Ownership sales being vendor and advisor-led in terms of valuation and structure, they can match and sometimes beat trade deals and MBO’s with the 0% tax the ‘icing on the cake’.
However, many fear that Employee Ownership through a trust structure is not a ‘commercial’ or ‘competitive’ business model. If by ‘commercial’ or ‘competitive’ we mean legal, focused, profitable, and able – this fear is misplaced and driven by the perception that all employees will run the business by a committee as they are co-owners, right? Well, no. The trust owns the shares for the benefit of the employees, there is no need for direct shareholding and so the company should be run and driven by a management board as with any commercial enterprise. Think of an Employee Ownership business like a mini plc that happens to be employee-owned, but 100% commercially driven by management but for the benefit of the employees whereas in a plc it is for the shareholders.
Many shareholders believe they need employees to lead the sale to a trust. Again, this is incorrect as most of the transition can be vendor-led, securing employee buy-in only at the end of the process, pre-completion. Some management may prefer a management buy-out route, but the downside to the key MBO managers is that they must take the risks and guarantee the deal.
Employee Ownerships’ do not have this challenge and shareholders may correctly believe that their management team is not ready to lead as they exit. This may be true, but under Employee Ownership sales, owner shareholders can exit gradually and train the second-tier management as well as ‘backfill’ management and this training can be focused on creating competitive advantage.
Whilst there have been many studies that show that greater engagement of employees in company strategy creates innovation and improves change management, no business in fast-moving markets can be fully democratic. After a sale, the long-term success of a business depends on the quality of its management as they make most of the decisions within an Employee Ownership business. The trustees are more like school governors – performing a check and control role to ensure that the business is run for the benefit of the employees, which can therefore mean being highly competitive to survive and thrive, which is in the ultimate interest of the employees.
Competitive advantage to thrive
The real success of an Employee Ownership business rests with how effectively the shareholders hand over and nurture the top talent in the organisation so they can develop the right strategy for the business going forward and create a competitive advantage. How can the company stay ahead of market forces, be better than its competitors and win more customers and sales? This will depend on how good the management team is at listening to the market, anticipating, implementing change, understanding strengths and weaknesses, and making decisions.
A few key thoughts:
- Employee Ownership advisors can make the ‘how’ sound highly technical.’ The lack of simplicity may leave owners believing that a trade sale is the only way to maximise shareholder value.
- Some Employee Ownership supporters over amplify the employee reward aspects of ‘giving back,’ leading to a perception that Employee Ownership structures do not maximise value on exit. With 0% tax and loan notes often structured over quite long periods, Employee Ownership can beat trade values in many instances.
- Often a business needs to disrupt itself to improve and Employee Ownership managers who have no management training may not have the instinct or analytical skills to judge when this is appropriate. A transition to an Employee Ownership business that secures advantage requires training investment.
- Under typical Employee Ownership structures, a new company is established as a corporate trust which buys the trading business. The trust owns the business on the behalf of the employees. Typically shares are granted directly to the trust company which owns all the shares for the benefit of the employees – think of the trust company as the steward. As with all contracts and structures, there is a myriad of complexities to be navigated but the basis of the sale is very simply that the trust buys the trading company for the benefit of the employees and operates it for their benefit – this is the same as in any M&A deal where a company buys for the benefit of shareholders.
Employee Ownership businesses are commercial enterprises that make money for the benefit of all employees rather than a few shareholders, who may, or may not, be involved in the running of the business. This is a more logical outcome than just the few who founded the business or had the initial capital reaping all the rewards. Rarely are all profits distributed and often Employee Ownership businesses invest more profits into growth than lifestyle-driven owner-managed businesses.
Employees may benefit from later share value, although Employee Ownership businesses are less likely to be resold, therefore profits are more often reinvested for growth for the benefit of the business. Most Employee Ownership businesses pay salaries in the upper quartile for their sector to senior management, along with the potential tax-free incentive bonus of £3,600 per annum to all employees.
As well as considering how Employee Ownership can benefit you as an exit strategy we can legitimately ask how the Employee Ownership business model can be better and create an advantage.
- What can you do to make sure you are better than your competitors?
- What will your future customers want and how have they changed?
- How can you address these changes most profitably and productively?
- What needs to change – whatever your history and however difficult?
It is not force that creates competitive advantage, but intelligence. The intelligence to strategically understand and continuously articulate where your organisation is now, how it can do better and secure effective change and selling via an Employee Ownership structure may simply be one of the changes to improve succession.
Contact Avondale Corporate
Avondale is a leading business advisor that helps ambitious owners buy or sell companies, secure investment, grow their business and enhance shareholder value. If you’re thinking about Employee Ownership, why don’t you give us a call for an exploratory discussion without obligation on +44 (0)20 7788 8250, view our Contact Us page or email us at firstname.lastname@example.org for further information?
Alternatively, you are invited to join our next discussion by registering for our webinar “Securing your competitive advantage through Employer Ownership” on 20th January 2022 here.