Planning the transition to employee ownership

21 April 2021 Andy Ryder View all News

To move to an employee ownership model is to significantly change the core of your business. Transitioning to employee ownership, such as through selling a controlling stake to an Employee Ownership Trust (“EOT”) , requires careful planning and consideration.

Fortunately, Shorts is here to help highlight the key issues and areas you need to consider.

Why sell to your employees?

The first question, naturally, is whether selling your business to your employees is the right choice.

The consensus among experts is that Employee-owned businesses have higher staff retention, better employee engagement and, according to research, higher sales growth.

When the correct conditions are met, one of the best ways to sell your business is through an EOT.

Employee ownership gives each employee a tangible stake in the success of the business, boosting team morale and motivation. EOT owned companies can also reward employees with tax-free annual bonuses of up to £3,600.

Furthermore, when you sell your controlling stake to an EOT, you are completely exempt from Capital Gains Tax.

Understand your reasons for the move

EOT reasons

As a retiring/exiting shareholder, it is recommended that you reconcile your objectives with that of the business.

By setting well defined objectives from the outset and planning for them accordingly, you can ensure your transition period is significantly smoother.

You should be clear about what you hope to achieve, be these financial, personal, or corporate goals; you should also have a good idea of when your eventual exit will be.

Finally, but most importantly, you must decide if you want to exit completely or retain partial ownership.

Direct vs Indirect Employee Ownership

Employee ownership models can be split into two broad categories; these are direct and indirect ownership.

Direct Ownership means individual employees own shares in their own name, while Indirect Ownership means the shares are owned by a trust on behalf of the employees. An EOT is an example of indirect employee ownership.

Understand your share value

stocks

When selling to an EOT, you are guaranteed the market value of your shares based on independent assessment. You must decide how much of your business stake you will be selling, and over what period this will take place.

At this stage, it is also very important to consider how the EOT will be funded.

Normalise employee decision making

Employee ownership means the Company’s employees will have a greater say in the company’s ultimate direction through Employee representative(s) on the EOT board

“When the people making the decisions bear the consequences and responsibility for those decisions and share the rewards, better decisions happen.”*

* Extract from Entrepreneur Voices on Careers by the Staff of Entrepreneur Media, Inc.

Robust succession planning

leadership

While the employees will own the majority of the business through the EOT, in most situations, some (often significant) input will still be required from the previous owners in the running of the trading business, ensuring the transitional period is as smooth as possible. One of the most important factors in securing the future of your company is planning succession, and ensuring all stakeholders agree to a plan.

How suitable is your existing management structure? If further recruitment is required, it is good to know early rather than late.

It is often encouraged for selling shareholders, who were previously company directors or other senior managers, to remain involved in day-to-day management for a while afterwards. They may also be retained as Trustees so their knowledge and experience can help guide decisions in the best interests of the employees.

This way, they can ensure the company continues to run smoothly and protect the assets for the trust while leadership succession is implemented over time.

Summary

According to the Employee Ownership Association, “Employee ownership is an incredibly effective ownership model. It has seen unprecedented growth in recent years as business owners, professional advisers, the public sector and politicians become increasingly aware of the positive effects and the advantages it brings.”

Planning is essential to your company transition to employee ownership. Shorts is proud to be a member of the Employee Ownership Association, and our dedicated team includes EOT experts who specialise in assisting exiting shareholders with planning and completing the sale of shares to an EOT.

Speak to our team today for advice on all things EOT.

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