In 2022, the UK witnessed a surge in the creation of Employee Ownership Trusts (EOTs), with a record-breaking 332 companies joining the fold. This brought the total number of employee-owned businesses in the country to 1,418 (source: Employee Ownership Association). This trend can be attributed to various factors, including succession planning needs, the allure of 0% capital gains tax, and the streamlined process of transitioning to employee ownership compared to complex trade deals. The EOT business model also boasts inherent advantages, enhancing employee retention and engagement; but what does it entail to run an employee-owned business?
Transitioning to an Employee-Owned Business
Becoming an employee-owned business involves selling company shares to a trust, which holds them for the benefit of the company’s employees. The employees themselves do not buy the business. Instead, the Trust utilises initial reserves and future cash flow, potentially aided by bank debt, to facilitate the tax-free sale on behalf of the employees. This sale process is led by the seller, with an independent valuation. In this context, following completion, the first aspect of employee ownership is that it resembles leveraged deals, much like a management buy-out, making cash management crucial post-deal. However even if you sell all your shares, you can continue as a director to assist in managing the transition and ensuring the business’s continued success.
Company Management Post-Sale
To smoothly transition to an employee-owned business, it is imperative to establish a well-trained and business-savvy trading company management board, capable of making effective decisions to maintain a competitive edge. With EOTs, sellers often remain involved post-sale, allowing for a gradual transition that can span several years.
The primary focus of the trading company board must revolve around achieving commercial success, which involves staying attuned to market dynamics, customer demands, and competitor activities. Assessing what’s working well and identifying areas for improvement is essential. While employee input is valuable, the ultimate decision-making responsibility lies with the management board and CEO. The long-term success of an employee-owned business hinges on the competence of its management. Managers may need to evolve into effective leaders, moving beyond mere reliability to innovate and enhance the business model.
Running an employee-owned business requires a clear management succession plan, comprehensive training, well-defined roles and responsibilities, and increased accountability; features that are often lacking in many small companies. This approach, while not overly burdensome, is notably more commercially focused. To facilitate this, the EOT should implement improved board practices, specific board meetings, thorough minutes, and meticulous record-keeping—hallmarks of good governance that can be overlooked in the daily operations of owner-managed businesses.
The Roles of Trustees
EOTs are governed by Trust Law, mandating that each Trustee is responsible for the trust’s assets and actions on behalf of its beneficiaries, much like other forms of trusts such as charities, family trusts, and will trusts. In the case of EOTs, the beneficiaries are the employees. The Board of Trustees, which operates above the management board but isn’t involved in day-to-day operations, typically comprises:
- An Employee Trustee: This individual represents the employee team and is nominated.
- A Professional Trustee: Serving as the chair, organiser, and impartial mediator, this trustee ensures alignment among all parties.
- An Ex-Shareholder/Seller: Responsible for ensuring that the business benefits employees, including repaying loan notes. They must remain unbiased as trustees while also upholding pre-agreed seller protections.
Ideally, there should be a minimum of three Trust Directors to prevent deadlock. Their duty is to advocate for employees’ views and interests. In larger organisations (100+ employees), this role may coexist with an employee council. Additionally, it is their responsibility to ensure the repayment of the vendor loans (the customary way to cover the cost of the sale).
Employee Trustee
An Employee Trustee serves as a spokesperson and advocate for all employees’ interests. Typically, this role isn’t held by someone in a senior management position, allowing for a broader perspective from the workforce.
Professional Trustee
The Professional Trustee plays a pivotal role in maintaining impartiality and balance among stakeholders. They focus on employee engagement, understanding the Trust’s purpose, aligning performance with budgets, ensuring that managers prioritise employee benefits, and monitoring cash flow for loan note repayments and employee bonuses. The specific responsibilities may vary based on the business size, structure, and Trust setup, but the overarching goal is to safeguard the employees’ best interests. The Trust has the ultimate power to appoint the trading company board of Directors as is the case with any majority shareholder. As the Trustee should not be operational it in effect makes the roles of the trading board and the Trust board symbiotic and they should work in tandem.
Trustee Meetings
It is advisable to conduct quarterly meetings after operational company board meetings. These meetings serve the purpose of reviewing the company’s financial accounts and plans and making decisions to either support or address exceptions. The Trustee Board should only be presented with items for approval when deemed necessary, particularly in cases where the business deviates from its established plan.
Summary
Employee Ownership sales have proven to boost employee motivation, leading to enhanced staff retention and productivity. They offer vendors a viable exit strategy while promoting business growth, economic contributions, and employee well-being. Navigating the legal and financial intricacies of implementation is straightforward with the right guidance. While technical details are important, the focus should remain on the long-term legacy for employees and customers, thereby enhancing the competitive advantage of your business. Running an employee-owned business means there are a few more checks and controls than in a typical smaller company but the increased Governance can be a light touch and clarity and accountability is usually healthy for the growth of the business.
Contact Avondale Corporate
Avondale welcomes the opportunity to discuss your exit options with you and help you plan for your future. Please call us at +44 (0)1737 240888, our Contact Us page or email av@avondale.co.uk to speak to one of our EOT specialists. You can also visit our website at www.avondale.co.uk to learn more about our services.
Alternatively, you are invited to join our next discussion by registering here for our next webinar “Running an Employee Ownership Business” on 21st September 2023.
