Legal

What does employee ownership mean?

28 Oct 2019 By Ben Watson

There are several factors HR professionals need to understand when they work for a business where the workers are in control. Ben Watson reports

Employee-owned businesses are relatively uncommon in the UK, with only around 1,100 organisations currently using this model, despite the recent upward trend. However, the Employee Ownership Association is keen to increase this figure, and has asked for £2.2m in funding from the government to launch a pilot scheme to encourage more businesses into employee ownership (EO).

A key reason for the lack of uptake could be a simple lack of understanding about how EO works. There are few advisers that have the knowledge and experience to guide business owners through the process, meaning it's often left out of the options mentioned to founders alongside a trade sale, a management buyout and a listing. This could mean owners aren't making a completely informed decision on the best option for their company's future.

There are some misconceptions about EO that may also be contributing to the slow uptake of this model. Company founders may initially think selling their business to the highest bidder will be their best option but, by considering EO as an exit strategy, they could see their creation thrive and grow, rather than be lost amid an acquisition or merger. EO may not be the right option for a founder wanting to maximise their day-one sale proceeds, but as a longer-term option it may yield the same or more after-tax cash and cost less than a typical sale to a trade or private equity buyer.

Some founders may worry their staff aren't ready for the 'responsibility' of ownership or their senior management team doesn’t have the experience to take control over day-to-day decisions. With careful planning, however, these issues can be managed in the lead up to EO and become an opportunity rather than a challenge. Founders can also step back gradually, remaining a director if appropriate, rather than making an abrupt departure. 

Companies that have made the switch to EO are reporting positive outcomes, finding that the model gives a ‘whoosh’ effect in terms of performance. In the EO model everyone has accountability, as well as a greater sense of ownership and belonging, leading to increased motivation and reduced staff turnover, which can lead to greater productivity. 

There is also increasing availability of specialist finance for the EO model. Mainstream providers, like banks, are also becoming more aware and supportive of the model and the market for alternative funding providers is growing. 

Employee ownership is not just for retiring owners or entrepreneurs with no heir. Founders who opt for EO may do so because they wish to preserve the ethos and values of their business, and reward those who have worked to make it a success. There is also the potential added benefit to their brand as a whole. Demonstrating loyalty to its employees, particularly if the business is embedded in the community it serves, will likely boost both customer and supplier support. A sale to trade could have the opposite effect, potentially resulting in job cuts or relocation away from its roots. 

The potential benefits of the employee ownership model are significant and we see plenty of support out there for those considering this new business model. Over the last year, we've seen an increasing call for employees to be given a greater voice, such as recommendations for the appointment of a non-executive director to represent employees in the boardroom, or the creation of an employee advisory council. It seems companies are willing to learn from the employee-owned business model, even if they're not quite ready to go all in.

Top tips for HR 

  • Determine whether employee ownership is the right path for your business.
  • Establish whether you are eligible for EO and which model (a direct, indirect or hybrid approach) will work best for your business.
  • Decide whether bank funding will be required and whether this would be provided directly to the Employee Ownership Trust (EOT) or to the trading business.
  • Consider whether the company will establish a formal employee council – this is recommended for larger companies but can be overkill for smaller entities.
  • Confirm who will sit on the company's executive board following transition and whether this will include an employee director (this is optional and it should be noted that the executive board doesn't have to change at the point of the EO transition).
  • Consider the make-up of the trustee board of the EOT. This would normally include an employee and an independent, but could also include the seller.
  • Check whether the workforce is entirely employed and, if not, consider whether consultants will be disenfranchised if they cannot participate in some way.
  • Determine whether all employees will be eligible to benefit through the EOT or just those with more than 12 months’ service.
  • Plan a process of engagement with the board, senior management and employees and map out a realistic timetable ahead of the big day of EO transition.

Ben Watson is a partner at UK law firm TLT

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