Capitalism is facing challenges, and Employee Ownership is part of the solution. Productivity in the West has stagnated and economic growth for most Western economies has slowed due to aging populations and the increased state burden of associated social costs. Additionally, consumerism, a cornerstone of capitalism, is under scrutiny due to its environmental impact and a growing realisation that material possessions do not necessarily lead to happiness. Capitalism relies on credit, which requires economic growth to repay the debt. However, constant consumption is needed to sustain the development, creating a dilemma.
Politicians are unsure of how they should address these issues, but a quiet revolution is underway – employee ownership. At Avondale, we recently completed our 20th employee-owned sale, with the company becoming one of approximately 1,600 businesses in the UK, including Avondale, that have turned to employee ownership.
The traditional limited company model divides labour and capital. Shareholders, who take risks, often reap significant rewards when business is going well. However, the workers who generate the profit typically receive ‘just enough’ wages, leading to inequality and low morale. During the past decade, the richest 1% have captured and now control almost half of all global wealth according to Oxfam Davos World Economic Forum.
Employee Ownership offers a simple alternative
The company is sold to its employees on an arms-length basis, with payments to the exiting shareholders spread over time. Shareholders receive a reward for their initial risk and shareholder value with payments under the employee ownership scheme (2014 Finance Act) currently benefiting from 0% Capital Gains Tax (“CGT”) to encourage the adoption of the model.
More importantly, this creates a legacy where workers can earn more as they are more invested in the company’s success, contributing ideas and fostering commitment. Research consistently shows that employee-owned businesses are more productive, pay higher wages, and retain and train employees better. Employee ownership also allows individuals to become owners, not through savings, but through their work which addresses economic inequality.
With payments based on forecasted cashflows and spread over time to achieve commercial value, selling a company via employee ownership may not be as immediately appealing to shareholders as an all-cash deal, but the 0% CGT on a sale compared to 10% on the first £1 million after Business asset Disposal Relief and 20% thereafter for a non-EOT sale, together with the vendor and advisor-led process, often compensates for this. Moreover, the long-term benefits, including the legacy and reward for employees, and the shift towards more purposeful capitalism, make it an attractive exit strategy and a compelling business model. The quiet revolution is underway with more than 350 companies converting per annum.
The workers do not solely manage the Employee-owned business – the management team continues to hold a key and central role in formulating strategy and ensuring the business’ competitive edge. However, instead of solely catering to short-term aspirations, they prioritise the well-being of both the company and the employees, with a trust company holding a watching brief to provide checks and balances. Consequently, employee-owned businesses remain highly competitive in the free market, often investing more in the long term and providing a higher contribution to Government tax revenues.
Capitalism’s wealth creation requires a contemporary sense of self-responsibility to mitigate inequality. It thrives in a free market where companies compete to generate wealth, but it needs to evolve to uphold values that prioritise ethics. Increasingly, entrepreneurs are grasping this significance and appreciating the potency and purposefulness of transitioning to an employee-owned model. This quiet revolution of employee ownership is gathering momentum and offers a pragmatic solution to allow capitalism to evolve on a more equal basis and perhaps preserve our way of life more sustainably.
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If you would like more information about our service offering and case studies on our recent deals, please visit our website at https://avondale.co.uk. Alternatively, if you would be interested in a free consultation with one of Avondale’s experienced M&A advisors, please call us at +44 (0)1737 240888, email us at av@avondale.co.uk or fill out the attached form and we will get in touch straight away.
