We caught up with Rod Hutchison, a partner at law firm Ledingham Chalmers, to find out why he thinks employee ownership could be a great succession option.
Succession is an issue that many business owners choose to ignore, but it’s not one that’ll go away.
Bearing in mind planning and preparation make for a painless succession process, it is important shareholders take the time to properly explore exit routes, and there are a number of options on the table.
Many business owners avoid the topic because they can’t bear the thought of someone else owning their business. And that’s understandable.
Entrepreneurs invest their time, their energy and their expertise into their company, so it can be difficult to think about seeing another name over their door. The trade sale can mean relocation, and for many business owners, there’s a reluctance to jeopardise the employment of a loyal workforce.
I attended a Scottish Enterprise-hosted seminar recently that presented a different kind of exit that could be the solution these business owners are looking for: the employee ownership trust (EOT).
The speaker was tax specialist Graeme Nuttall, author of the Nuttall Review of Employee Ownership, which was prepared as an independent review for the Department for Business, Innovation & Skills (BIS).
Graeme is responsible for the introduction of the EOT, ushered in with the Finance Act of 2014, and set up specifically for companies where a significant shareholding is held in the interests of the employees.
The aim is to allow owners to sell the business to their employees, putting the company into the hands of those who often know it best: those inside the firm.
In this way, business continues as usual. Relationships are maintained and jobs are protected for as long as the business continues to flourish.
What’s more, there’s mounting evidence businesses tend to outperform conventionally-structured firms on a range of different factors including productivity, profitability, customer satisfaction, innovation and employee health and happiness.
For example, Matrix Evidence’s Employee Ownership Association-commissioned research said this model can improve employee satisfaction, innovation and productivity (with a tailored approach likely to be most successful).
Plus, the association’s own impact report said the growth rate of employee-owned businesses was 50% higher than the UK economy in 2012.
The government introduced a tax incentive to promote the take up of EOTs. If a business owner sells a controlling interest in their company to its employees, then that transaction is exempt from capital gains tax, subject to certain conditions being met.
The company functions like any other private business: a board of directors is still responsible for driving the success of the company, and management continues to run the organisation.
However, the shares are generally held in the EOT on behalf of the company’s employees, rather than directly by the employees themselves.
The seller can, and often does, remain involved in the company for a period to ensure a smooth transition to employee ownership.
The path to ownership
The path to employee ownership can be quite straightforward and, as these transactions don’t have the adversity you sometimes find in trade sales, they can be a smoother and often a more collaborative deal.
And, as the parties involved are internal, there is no need to open up company to external scrutiny.
It was interesting to hear from Sarah Deas of Scottish Enterprise who described how the number of employee-owned businesses headquartered in Scotland is just about to pass the 100 mark: a threefold increase over the past three years.
And with the number of employee owned firms in the UK sitting at around 300, Scotland is certainly punching well above its weight.
Employee ownership means that companies remain local, sustaining jobs and skills, and both Scottish Enterprise and Highlands & Islands Enterprise offer financial support and signposting to business owners looking to explore this further.
As the baby boomer generation approaches retirement age, it’s easy to see why employee ownership is gaining traction as a succession solution —
- The owner achieves the exit they want at a price they are happy with
- The employees have a stake in ensuring the company’s future prosperity
- It’s business as usual for customers and suppliers
And because the trust can exist for the long term, the issue of business success is resolved for the future.
Winners all round.