The second ‘Selling your Business’ masterclass in the series took place with Louise Fisher from Baxendale EO talking through various ownership succession options, before focussing the session on employee ownership – and how to ensure the employee buyout is a smooth process. We then heard from Lucy Fisher from publishing services company Prepress Projects detail their employee ownership story before Louise shared why and how mechanical and engineering contractor Fusion Mechanical became employee-owned.

You can view the recording of the webinar below.

The webinar presentations can be viewed here:  
Scottish Enterprise
Baxendale EO
Prepress Projects Ltd

Question and Answers

Q. Do you have advice for companies where the staff maybe want to take over the business but not the business properties due to the extra costs and responsibilities involved?
A. It is possible to do this. The transition can be structured where employee ownership works for the operating business and the properties can be separated off. Separating the trading business from the properties can make a transition to employee ownership more affordable because the EOT doesn’t have to pay for properties that are sitting in the trading company at completion. However, when you’re looking at the best interests of the employees in becoming an employee-owned business, you have to consider the fragility that may be inherent in a trading business not owning the property it trades from. For example, in a manufacturing business, ensuring that you can continue to trade from your premises could be essential – without it you don’t have a business. Whereas for a consultancy business where everyone works from home, lack of premises may not be fundamental to the business’ ability to be sustainable, successful and independent in the future.
The questions that need to be asked are: how can you ensure that there’s security for the operating business if the company that operates the business no longer owns the properties? So for example, will the exiting owners retain the properties? Will there be a long-term lease in place that ensures that the operating business has premises to work from?

Q. What is the most tax efficient way to plan any handovers?
A. So in broad terms, employee ownership is or certainly can be the most tax efficient way to transfer the shares in your business. If your transition is structured correctly, the selling shareholders will not pay any capital gains tax on the sale of those shares to an employee ownership trust. However, you never want to let the tax tail wag the dog. Employee ownership is about much more than just tax advantages. It is about creating sustainable, successful and independent businesses and it is important that these principles align with your succession objectives if you are considering employee ownership as a succession solution for your business.

Q. We have recently become 100% employee owned i am now interested in allowing staff to purchase shares do i need to offer this to all employees or can it just be key employees. I would also like to ‘gift’ shares to some key employees what is the process for this and will they be liable for capital gains tax ?
A. The basic rule is that gifting shares to employees is a benefit in kind which means that the employees would have to pay income tax and potentially National Insurance on the value of the shares. There are a number of tax efficient share schemes that you can use to allow your employees to purchase shares. Some of those share schemes such as share incentive plans, are intended to be to allow all employees to buy shares. Other schemes such as enterprise management incentive options schemes (EMI)s, allow you to incentivise key employees, e.g. the next generation of leaders. A tax efficient share scheme ensures that there aren’t any upfront income tax costs for employees and generally when the business has just become employee-owned, it’s a good time to think about setting up one of these tax efficient share schemes.
So what you would do post completion is get a revised valuation of the shares in the company from HMRC, at which point you can justify a really big reduction in the price of the shares. You then have an opportunity to offer shares or share options to employees or key employees at a significantly reduced price.

Q. At what stage should we ask for a feasibility study – do you need to be beyond the ‘exploring options’ stage?
A. If you’re thinking about an exit, that is the time that you should look at the feasibility study. It is cost neutral, you pay the advisor upfront, we refund you the costs. There is very little risk involved, therefore the earlier the better. The feasibility study may bring to light some things which you didn’t consider. Some owners change their minds at that stage and may go sooner or later in in terms selling the business.

Q. My wife (55) & I (55) are 50/50 shareholders in the business. We are exploring an EOT in 3 years, using financial year end (31st December 2027) for valuation purposes. Our ideal scenario is for us to retire at this point.
Both our children (26) & (22) work in the business. We are exploring a 49.9% (Our 2 children) & 50.1% (Employee ownership). Interested to understand more on valuation & CGT tax position in this scenario.
A. Hybrid family business/employee ownership options are going to be explored more and more often by families, particularly in the light of the budget changes to inheritance tax.
So firstly, this idea of a majority of shares being held by the Employee Ownership Trust for the benefit of the employees and a minority being kept for the benefit of the family is something that is absolutely doable and something that has been done frequently. The exact split of ownership between the family and the EOT is something that can be discussed, explored and tested with HMRC. It terms of family business succession planning, the most important thing is that it is possible for a significant minority of shares can be held for the benefit of the family in combination with a majority of the shares being held by the Employee Ownership Trust. Thinking about what this will look like for the family and the business in the future, it’s important that both senior and next generation family members are all on the same page. The best advice would be to get the succession discussion started as soon as possible so that you’ve got an idea of the roles that your children are going to have in the business going forward and their attitude to ownership of the business in the future. Is family ownership in terms of of keeping shares as an individual or collectively as a family important to them or is it a sense of legacy and governance of the business that’s important? Could you think about a role for the family on the trust instead of keeping shares in the future? As the selling shareholders the most tax efficient thing would be to sell all of the shares in the company to the employee ownership trust on day one and take advantage of the capital gains tax exemption, but there are also some incredibly good reasons for you to hold on to a significant minority of these shares for the benefit of the family in the future. So if you’re thinking about a transition in 2027, think about having starting these discussions now because the most important thing is everybody in both generations is on the same page in relation to what succession is going to look like. CDS support is structured so that the first thing is to explore all of the options and then just test the succession solution you’re considering. Think about everybody’s succession objectives and make sure that the succession solution works for everyone in the family and then business. Then you can start to think about how the detail starts to be built up in relation and what that will look like going forward.

 

For all business owners considering employee ownership as a succession plan for your business, we are hosting a series of workshops aimed at deepening your knowledge of the EOT process.  Find out more and register: https://cdsblog.co.uk/the-employee-ownership-transition