Awareness of the many benefits of employee ownership continues to grow in Scotland, with uptake of the business model also increasing. However, there are a number of misconceptions around the model which can ultimately deter business owners considering employee ownership.
Here, Clare Alexander, Head of Co-operative Development Scotland, addresses five of the most common myths about employee ownership.
Myth 1: The process of becoming employee owned is a complex transaction
“While additional elements such as setting up a trust are required, an employee ownership transaction tends to be more collaborative than a standard business sale as everyone’s interests are aligned. All parties want what is best for the business and its workforce, therefore less time and resources are spent resolving potential conflicts and the transaction is typically completed more efficiently.
“Furthermore, CDS offers a wealth of advice through its expert advisors, who can guide business owners through any perceived complexities throughout the employee ownership process.”
Myth 2: Employees cannot afford to make the investment
“Typically, when a business becomes employee owned, the majority of shares are bought on behalf of the employees by an Employee Ownership Trust. This is usually financed by contributions from the company itself, or a loan that is then paid back by the company. Employees don’t carry any personal liability for the debt assumed by the company in an employee buyout. Furthermore, when the trust pays out bonuses the first £3,600 is free from income tax, so is very tax efficient for employees.
“In some cases, employees also have the opportunity to invest their own money in company shares. However, this is a relatively small amount of the share capital, is usually voluntary, and will likely be undertaken using one of the HMRC recognised tax effective schemes.”
Myth 3: Employee ownership is only an option for retiring family business owners or entrepreneurs with no heir
“While this can be a common reason behind employee ownership, some owners may opt for the model despite having a suitable successor in order to reward the loyalty of staff and root the business in the local area. The seller may trigger an employee buyout a long time before they intend to withdraw from the company, remaining involved in the day to day running of the business for years before retiring.
“An increasing number of companies are choosing employee ownership as a means to attract, retain and reward staff”.
Myth 4: The vendor will have to sell their business at a lower price
“As they don’t have to negotiate with another business, the seller holds a great deal of control over the process. There is no reason that a carefully considered employee buy-out can’t deliver a fair price in line with the company’s market value. Indeed, when the tax advantages are considered, many sellers believe that they achieved a better deal when selling to an Employee Ownership Trust, than they would have achieved by pursuing a trade sale.
“With increasing number of businesses choosing employee ownership, specialist finance is now becoming available. Mainstream providers, like the banks, are also becoming more aware and supportive of the model.”
Myth 5: Employees will be more interested in keeping company profits for themselves than investing in the long-term health of the business
“Employees are well informed and understand the importance of investing in the businesses for the long-term. Decisions on bonus and share distributions are carefully considered in this context.
“Evidence shows that priority is given to investment in businesses’ long term success, for example in purchasing new equipment to improve efficiency while bonus and dividend payments being paid at a realistic level.”