Business leaders need to ensure that management team buy-in is secured from the start
While we cannot be certain exactly how many businesses in the UK are employee-owned, we can be sure that it is becoming more popular; it is currently the fastest growing form of business ownership. But according to businesses that have already made the transition to employee ownership, achieving consensus to do so is not always easy.
To coincide with Employee Ownership Day on Friday, businesses are being encouraged to consider taking the first step to employee-ownership so they can start to realise the benefits that this dynamic and motivating business model can bring. According to the Employee Ownership Association (EOA), employee-owned companies contribute 4 per cent of UK GDP, which equates to about £30 billion annually. The sector is also growing at a rate of 9 per cent each year and is expected to increase its contribution to UK GDP to 10 per cent by 2020.
In the past few weeks an engineering business in Northampton, Axillium, became the latest UK business to become employee-owned when it completed the sale of its shares into a newly formed employee benefit trust. The company’s founder and managing director, Will Searle, has since commented in the media that he regards the move as a “key enabler” for the company’s growth plan, helping to “develop ongoing company loyalty and reinforce a supportive, highly motivated environment and culture”.
For many businesses, however, the path to employee ownership is not a straightforward one. While the thought of empowering the workforce to take commercially sensitive decisions about pricing and shift patterns might seem like a good idea, it can strike fear into some management teams — particularly if they have been used to taking decisions in a more autocratic way. Business leaders need to ensure that management team buy-in is secured from the start. The key thing to bear in mind is that employee-owned businesses will still need a strong and effective management team to guide decision-making.
A common reason given for deciding not to make the transition to employee ownership is concern about what would happen to shares if an employee leaves the business. This can be avoided altogether by opting for indirect share ownership, which is what is in place at John Lewis where the shares are held in trust, which removes the need to buy back shares when employees leave.
Making the transition to employee ownership can also be done in stages, or by way of deferred payments, to alleviate any pressure on cash flow or bank finance available. For example, a proportion of the shares might be purchased initially and placed in an Employee Ownership Trust. The remaining shares could then be purchased at a later date.
As a board member of the corporate trustee owner of Cambridge Weight Plan, which became wholly employee-owned in December last year, I can confirm that deciding to take such a step can also be relatively straightforward if it is in keeping with the cultural ethos of the organisation. In this case, the business first adopted employee ownership in 2010 when its owners recognised that this was the best model available to secure the long-term future success of the business for the benefit of its employees, consultants and distributors. The transition to becoming wholly employee-owned by selling the remaining shares into an Employee Ownership Trust was a natural progression and always the intention from the start of the transition.
Many businesses are drawn to the employee ownership model for the first time when planning for succession. At such times, the pressure to find a solution that meets the long-term interests of the business and enables the outgoing shareholders to realise value from their investments is considerable. The fact that a capital gains tax exemption exists directly applying to the disposal of shares that result in a controlling interest in a company being transferred into an Employee Ownership Trust, provides a valuable, added incentive. In addition, the income tax breaks on future profit related payments to the staff which can be achieved with this model add to the tax incentives available.