Employee ownership and succession planning for family-owned businesses
24 November 2023
Family-owned businesses form a key part of our economy and make up approximately 86% of UK private sector businesses but despite their many virtues, they also have their challenges. One of which can be succession planning.
When family members are thinking about disposing of their interest, it can be difficult to find a suitable purchaser who can be trusted to maintain the legacy, core values and culture of the business which has been cultivated so carefully over the years.
Furthermore, family owners tend to feel a much greater sense of responsibility towards their employee’s welfare and are keen to ensure their continued employment whilst avoiding the disruption that arises as a result of a conventional sale to external parties. Employee ownership offers a favourable solution to these issues.
The benefits of EOT ownership
Selling to employees via an Employee Ownership Trust (EOT) model can secure:
- continued employment
- minimal disruption to business
- a preserved legacy
- maintaining (and often improving) core values and culture
In addition to the benefits of retaining the existing work culture and job security, there are a whole host of other benefits to the employees which are associated with an employee-owned business (EOBs), including increased transparency, collaborative behaviours, productivity (and therefore profits), innovation and a much higher level of well-being and job satisfaction. Studies show that EOBs are 8% – 12% more productive than
Qualifying employees can also share in the fruits of their labour via tax free bonuses of up to £3,600 per employee per annum, only available for companies owned via EOTs. The tax benefits for owners are similarly attractive. Qualifying shareholders can transfer their shares to an EOT and enjoy the gains arising from their sale free of Capital Gains Tax (CGT) charges. So, it is very much a win-win situation for all parties.
What is an EOT?
The Employee Ownership Trust (EOT) model is a specific kind of Employee Benefit Trust, where employees become owners (or beneficiaries) via a controlling interest held by the EOT.
In order to become an EOT, the business must meet specific statutory criteria such as holding more than 50% of the share capital and voting rights and be entitled to more than 50% of the profits or assets distributable, amongst other requirements.
In the last 12 months, the employee-owned sector grew by over 30% (roughly 330 new EOBs) and between 2011-2023 has grown at an average annual rate of 16% (compared to 2.2% growth in all active companies in the UK over the same period). As of October 2023 there were more than 1,650 registered EOBs according to the People Powered Growth Report. The increase in EOBs can be largely attributed to the rise of the EOT.
There are many reasons why EOTs have found favour as an ownership solution including the cultural and tax benefits outlined above. The reduction in Business Asset Disposal Relief (formerly Entrepreneurs Relief) lifetime limit from £10m to £1m in March 2020 was also key.
How can Birketts help you?
Birketts has a wealth of expertise and experience in providing specialist advice for employee-owned businesses or those looking to transfer to employee ownership, working on these solutions for clients since 2015.
Birketts dedicated Employee Incentives Team specialises in employee ownership and draws expertise from a wide range of teams including the corporate, tax and trust teams.
Birketts have been members of the Employee Ownership Association since 2014 and can also deliver bespoke training to clients on the role and responsibilities of trustees in the context of employee ownership via EOTs.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at November 2023.