Why Employee Ownership is the answer to succession for family owned businesses
16 July 2020
Business owners often struggle with succession. This issue can be even more of a challenge in family owned businesses where, arguably, even more time and emotion is invested.
At the point when family members are considering disposing of their interest, it can be very difficult to find a suitable purchaser, particularly one who can be trusted to maintain matters of importance such as culture, identity, core values and continued employment in the business.
The, perhaps less obvious, solution that many previously family owned businesses have already chosen is Employee Ownership. The Employee Ownership sector has grown by 10% a year since 2014 with its highest growth to date in 2019 when the sector grew by 28%. The latest evidence suggests that the sector is represented by approximately 470 businesses. This growth has been attributed, in part, to the increasing realisation by family owned businesses that Employee Ownership offers an ideal solution to the issue of succession. By acknowledging the role employees play in establishing the success of the business, owners can ensure their legacy is protected by the very people that helped to build it.
In an uncertain market, employee ownership offers owners the opportunity to begin planning their exit on their own terms and avoiding the natural disruption that arises from a conventional trade sale. Particularly attractive from a tax perspective, the Employee Ownership Trust (EOT) model is a specific kind of employee benefit trust (EBT). Employees become owners (or beneficiaries) via a controlling interest held by the trust. Employees can come and go without the need for any ownership to change hands, although turnover of staff tends to be much lower in employee owned businesses.
To be an EOT, it is necessary to meet specific statutory criteria. The headlines of which are that an EOT must:
- hold more than 50% of the ordinary share capital and voting rights of the company and be entitled to more than 50% of profits distributed and assets on a winding up; and
- subject to limited exceptions, benefit all eligible employees of a company or group on the same terms.
Where the legislative requirements are met, qualifying shareholders can transfer their shares into the EOT and enjoy the gains arising free of Capital Gains Tax charges. This is an increasingly attractive prospect following the recent reduction to the Business Asset Disposal relief (previously Entrepreneurs’ Relief) lifetime limit from £10 million to £1 million.
Employee Ownership via an EOT model creates an attractive tax efficient succession plan, without any complication of minority interests or voting conflicts. Employee Ownership can also be a compelling recruitment and procurement tool. EOA research shows that the model greatly appeals to the values of a millennial workforce and that employee owned businesses are inherently deemed to be more trustworthy.
The benefits to employees are mostly found in the altered culture of an employee owned business where longer term thinking, transparency and collaborative behaviours result in higher levels of innovation, employee wellbeing and greater job satisfaction; all factors of particular importance following the devastation of COVID-19. In addition, qualifying employees of a company owned via an EOT may be paid tax free bonuses of up to £3,600 per employee per annum.
If you are interested in finding out more about the benefits of employee ownership for your business, or you would like to learn more about the models for employee ownership and would like to discuss next steps, please contact Lisa Hayward, Head of Employee Incentives at Birketts.
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 July 2020.