Is employee ownership the future of business?

Employment & Skills | Reports
Barry Horner

In recent years, there has been a sharp rise in the number of businesses that have transitioned into a form of employee ownership, giving the staff a larger stake in the future of a company.

BLM looks more into this topic.

There are a wide range of reasons for this transition, but what are the benefits? How is it implemented? And, is it right for your company?

Historically, when a founder or shareholders are looking to move on from the company, there were a few options open to them; a trade sale, management buy-out (MBO) or asset-strip and dissolve the business. But now, companies are looking to employee ownership to safeguard the future of the business they have helped build.

Why should you consider employee ownership?

In 2018, the Employee Ownership Association (EOA) and the University of Leeds released two reports where it was revealed that there has been an 18.5% increase in the number of employee-owned firms, when compared to the previous year.

The sector has grown 62% since 2014 thanks to the introduction of Employee Ownership Trusts, and it now contributes over £30bn to UK GDP and employs 200,000 staff across more than 370 businesses.

Top sectors include professional services (50%), manufacturing (17%), wholesale & retail (9.8%), and health & social care (8.4%). The top five regions for employee ownership are London (25%), Scotland (16.5%), South East (11.1%) South West (7.6%) and Yorkshire & The Humber (7.6%).

So, why are these companies making this transition?

There have been some notable companies making the move to employee ownership in recent years, including household names like Aardman, Lush Cosmetics and Richer Sounds.

Christian Wilson is a partner and head of the corporate team at Stephen Scowns LLP, a law firm that itself went through a successful employee ownership restructure, and now is an expert advisor on the matter.

He comments on the success it has had at major companies in the UK: “If you look at some of the big employee-owned companies, John Lewis, Aardman and Richer Sounds, you’ll find that employee engagement is at the heart of their business. The owners want to make sure that the employees are the future beneficiaries of the business once they have left and moved on, so that they can develop the business in the way in which it was intended.

“If you look at what is going on in the business world at the moment, there is a lot of concern about why we are in business. Purpose and empowering employees is the cornerstone of modern business, not just about profits. This is what employee ownership is all about.”

The Nuttall Review

If there has been such a positive response to employee ownership, many would be excused for questioning why it hasn’t been commonplace in the business world for the last few decades.

The UK’s largest independent audio and TV retailer, Richer Sounds were one of the pioneering employee ownership businesses, and had been interested in transitioning to employee ownership for a long time. However, it wasn’t until the 2012 Nuttall Review that their ambitions could become a successful reality.

Up until May this year they were completely owned by Julian Richer, and then he transferred 60% of the business into employee ownership.

David Robinson, MD of Richer Sounds comments: “We looked at employee ownership in the past, and it was quite restrictive. What then happened was the Nuttall Review, which gave so much more flexibility to how employee ownership can operate. This means that it can give you the opportunity to get employee ownership to fit into your culture, as opposed to getting your business to fit into the old employee ownership structure. That was the significant change.

“Prior to that, it was restrictive and one size fits all – now it is about tailor making it to your business. The pros of this are that you can now safely safeguard the future of the business through employee ownership in what the business feels are the right hands.”

Graeme Nuttall, who was the Government adviser on employee ownership for the review explains: “Employee ownership is a great idea. It means a significant and meaningful stake in a business for all employees. It creates successful businesses in which employees enjoy working and which deliver wider benefits.

“The longevity of companies with employee ownership is impressive. Employee ownership is an adaptable concept and whatever the business or the stage a business has reached, employee ownership can work well.”

The review showed the government’s desire to see employee ownership in the mainstream of the British economy. There has been all party support for many years, and successive governments have promoted the ideas of the review.

It also encouraged employees to acquire shares through tax advantaged share plans – a popular benefit from employee ownership.

As long as the business is 51% owned by the trust, there is no capital gains tax to pay. That legislation has helped a lot of people have a highbred trust between employee-owned and traditional shareholder(s), like Richer Sounds.

And if the shares are in an employee-owned trust, subject to rules and regulations, the employees can take a tax-free profit share of up to £3,600 each year.

Pros of employee ownership

The Nuttall Review was a game changer for businesses looking to transition to employee ownership. However, there are more benefits than just maintaining culture and tax perks.

Barry Horner is CEO of financial planning firm Paradigm Norton, who recently became part employee-owned in order to have a smooth and successful succession plan.

Horner explains: “As a firm, we have been looking at the issue of succession planning for about five years and we have been going through every option you would typically look at when you build a business up for over 20 years and nearly 70 employees. And then we grew from two founders to wanting more people to have shares, and a few of those were people heading towards retirement. That caused us to look at other options, from trade sales to everything else you go through in that process.

“We then found more about employee ownership and it was the perfect fit for the firm, for when it comes to culture and to maintain the legacy of what we have built. The main advantage is the ability to give employees the sense that they really do own the business. They might not have share certificates but between them, they do now own 80% of the shares of the company. They now have a genuine right to influence information and what happens within the business.”

Wilson echoes these sentiments: “From a succession strategy point of view, there are a number of pros. As a founder, when you are looking at your succession options, the traditional options are either a trade sale, MBO, or even wind up the business and release the assets – not the ideal situation for the employees. The great opportunity provided by employee ownership is that the owners can say that they do not have to go and look for a trade buyer.

“The opportunities presented by employee ownership are a good option on a succession basis. As the founder, you will know that the company that you built and have grown is going to remain in the same location and is going to look after their employees in the way in which the founder would have done. It is then all down to the employees to continue with this and maintain it.”

It is this universal support that has ignited a lot of interest in companies of all sizes looking into the possibility of employee ownership.

How does it work?

It might be all well and good having all of these benefits, but the main stumbling block for employee ownership has been the difficulty to adapt to the old government’s stiff regulations to make the transition. However, since the review and a growth in the number of legal experts in recent years, employee ownership is now a lot easier to implement.

Wilson explains: “It is easier to implement than a trade sale and not too dissimilar to an MBO. However, it shouldn’t be rushed, and due to the principles in which employee ownership is done, the process can go over an extended period of time. If you are growing as a business, it is a good idea to implement it over a few years. Employee ownership is not a ‘gift’, it is a sale, and so certain percentages can be sold over time. Money, hard cash is exchanged for the shares. But for the employees it increases engagement and interest in the direction of the
company.”

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