Need to know:
- Transitioning to an employee ownership trust (EOT) transfers control of a business to employees, while also giving tax incentives to the shareholders.
- There is also the opportunity to deliver an annual bonus that comes under the tax-free allowance, which is currently £3,600 per employee per year.
- Trustee board meetings will be required to update on strategy, business performance and approve material items that impact employees, such as the annual employee bonus payment recommendation.
Many employers, when considering a potential sale or the future of their business, often opt to follow the employee-ownership (EO) route, which involves employees owning at least a minimum of 51% of shares. Employee-owned trusts (EOT) have gained more interest in recent times: the White Rose Centre for Employee Ownership's survey, EO sector growth snapshot, published in June 2021, highlighted that there were 148 new UK EOT businesses in 2020, a 30% increase on the previous year.
Where to start
An EOT transfers control of a business to employees, while also allowing complete capital gains tax exemption for the shareholders when selling the business.
When Seetec's chairman and business owner Peter Cooper retired in January 2020, his vision was that the training provider should help people take ownership and responsibility over their lives. Therefore it was a logical step for its 2,500 employees to take on ownership, says Ann-Marie Conway, associate director for employee ownership.
“Once the trust was approved and the business moved to majority employee ownership, Seetec took the view that it knew the business best and would manage the next steps," she explains. "The first key transition was formation of an employee council, which is made up of 10 elected frontline employees from across the business and an elected employee trustee director who sits on the group executive board. The council influences strategy and direction, using their employee voice to improve services and create a successful working environment.”
Many organisations appoint a new management team or repurpose existing management when setting up an EOT.
Talbots Law transitioned into an EOT model in November 2021, which involved the formation of a new trustee legal entity and the appointment of a number of trustees to the board. Dave Hodgetts, chief executive officer (CEO), explains: “The process entails the original shareholders selling a minimum of 51% of their shares to the trustee. A general principle is that ownership must benefit all employees equally and this is certainly how Talbots Law has applied it.”
There are several options when selling to an EOT: some shareholders decide to only sell a majority of their shares while keeping hold of the rest, and others sell 100% of their shares.
In the event of the latter, some key members of staff are allowed to buy new shares at a low price after the transaction has completed to gain a stake in the business, says Richard Cowley, director of employee ownership specialists RM2. “These can then grow over time. The commercial reality of businesses is that they are reliant on key staff, and this gives them a meaningful and direct share while also being an attractive retention technique,” he explains.
Reasons for employee ownership
Improved staff retention and productivity are key reasons organisations make the move to employee ownership. Matt Stephens, CEO and founder of employee engagement firm Inpulse, explains that one of the biggest reasons he chose an EOT was because employee-owned organisations can sometimes outperform others. “We have complete independence to plan what’s best for clients, plus this move helps us attract and retain our staff," he says. "As managing director I keep a shareholding, so I’m also fully invested as well as able to look at new business opportunities.”
Many employers want to ensure that the entire team benefits from its future success. Gay Flashman, CEO of digital media agency Formative Content, explains that her business partner and managing director Paul Muggeridge wanted to map out a clear and independent future to enable them to continue to deliver work underpinned by their values. “We'd been approached over the years by larger employers wanting to invest in Formative, but we were concerned about the impact that might have on our culture and independence," she explains. "We are now in the process of running elections for the Formative Content employee council. We believe this is another very positive step for our team to get more involved in shaping the [organisation] as we grow and progress.”
EOTs can often be a more gentle way for owners to exit their organisation, as there is less risk overall and selling can be an unpredictable process. The model helps to address succession issues, says Matthew Emms, partner at accountancy and business advisory firm BDO. “This can be useful in circumstances where the owner is within a few years of retirement and there is no one within the family or organisation who is willing or able to continue it," he says. "It also avoids the potentially unpalatable option of selling to a competitor or third party.”
Different models
There are several different employee ownership options that employers can choose from, as it comes in different forms and operates across a spectrum of participation.
Liz Hunter, director of equity reward, people services and tax at KPMG UK, explains: “There is direct employee ownership, where employees hold shares or have rights to acquire shares in the business, with this ownership opportunity provided selectively or on an all-employee basis. There is also an indirect ownership business model via a tax-advantaged statutory trust, which is the EOT. Under this arrangement, employees do not own or have rights over shares personally, they are instead beneficiaries of the trust, which owns a controlling shareholding in the business.”
There is also the hybrid model which involves a combination of an EOT and a direct equity incentive plan, which helps to attract, retain, and incentivise employees in the form of compensation, often through business shares.
The benefits of an EOT
Embedding an employee ownership culture can bring a lot of benefits to businesses, often empowering staff.
Ensuring Seetec employees have a stake and a say in the business’ future means that it not only works in the best interests of its customers, but also the staff themselves, says Conway. “Employee ownership strengthens collaborative working between employees and management, with colleagues feeling empowered to speak up. There is greater engagement and pride in the business, building a culture of working together, and employees taking responsibility for finding solutions to challenges.”
Seetec used its employee ownership champions network during the first lockdown to ensure the employee voice was heard by the senior leadership team to deliver support where it was needed the most.
Another benefit of an EOT is that it can engage and reward employees at no cost to themselves.
Inpulse's Stephens, who passed 75% of the shares to staff, says that the aim is to empower employees, clients and the business long-term. “For us, after seeing how our employees dealt with all the changes brought about by the pandemic made us consider ways of involving them more in the business," he explains. "The EOT was a perfect move to ensure our team is fully invested in our business' future. We couldn’t and wouldn’t have done this without full trust and belief in each one of our team.”
Collective ownership can bring higher motivation, retention and productivity, in addition to financial reward. “The move to an EOT is free for employees and there is no up-front cost for individuals, says Hodgetts. "There is also the opportunity to deliver an annual bonus that comes under the tax-free allowance, which is currently £3,600 per employee per year.”
One of the most important benefits of being an employee-owned business is the fact that employees have a stake in it, says Emms. “Greater employee engagement and commitment can result from this. Employee ownership is as close as an employer can get to reflecting the culture and business model of a traditional partnership structure. Employees usually take a more active and constructive interest in the business. The higher the proportion of employees that are stakeholders within the business, the greater the commercial benefits are likely to be,” he explains.
