Selling your business to an employee ownership trust

How does it work in practice?

The number of companies moving to employee ownership is growing quickly, as is the number of advisers with knowledge in this area.  Many company owners are taking this path as a route to ownership succession.  Why are they doing it and what’s involved?

Why employee ownership?

For many company owners planning retirement, the starting point is to sell to a third party.  While this may work for some, many struggle to find a buyer with the right match of values and culture, and it’s a common concern that their business won’t thrive as part of a larger group.  Depending on the sector and business, it can be hard to find a buyer at all.

It’s often in these circumstances that employee ownership comes on to the agenda.  Whilst some companies will decide it’s not for them, a growing number are deciding that it’s the best solution.  And not only does it address the issues highlighted above, it is far more positive than that.  Employee ownership, properly structured, creates a strong platform for future success.

Whilst the tax reliefs associated with employee ownership trusts (see below) may add to their attraction, we see a tendency for companies to self-select on the basis that they feel that employee ownership will be good both for business and employees, with the tax reliefs a bonus.

How does a sale to an employee ownership trust work?

In essence, it involves 5 key steps:

  1. Company establishes an employee ownership trust (EOT)
  2. EOT enters into a contract with the current shareholders to buy their shares at a fixed price (based on an independent valuation)
  3. EOT receives a payment from the company, from the company’s built up cash and profits
  4. EOT uses this payment to a down payment of purchase price to the selling shareholders
  5. The rest of the purchase price is paid in instalments, funded by further payments from the company to the EOT

Naturally, there will be plenty of detail behind this to think about, for example who will be the trustees, and what will be the terms of the purchase contract.

What’s involved in practice?

For an company owner, a preliminary stage will be evaluationis employee ownership the right solution for us?  This involves an honest appraisal of the pros and cons, understanding how it all works and the people issues  (see below).  We also recommend that you talk to other companies that have become employee-owned and go to one or two events run by the Employee Ownership Association www.employeeownership.co.uk

A company which then chooses employee ownership is likely then to go through two main stages:

Design: how is employee ownership to be structured, how will employees be engaged in the process, how are the retiring owners’ shares going to be paid for?

Legal Implementation: production and signing of all the legal documents, including trust deed and share purchase contrac

What are the people issues?

Thinking carefully about these is essential.  Questions to think about include:

  • How can the employees be successfully engaged in becoming owners?
  • Support from the company’s leadership will be key: how will this be addressed?
  • Are the retiring owners going to remain involved in running the business?  If not, will they be able to let go? 

What are the tax reliefs? 

For the sellers: Where an EOT acquires control of the company, the sellers can claim a full exemption from capital gains tax

For the employees: employees of a company controlled by an EOT can be paid an income tax free bonus each year (maximum £3600 per employee)

How do I find out if it might work in our company?

If you would like to explore how employee ownership might be introduced in your company, please contact us for an initial discussion.

We are happy to meet at our offices without charge or commitment and will be very pleased to hear from you.

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New to employee ownership trusts? Ten key do’s and don’ts

With around 350 UK companies now owned by employee ownership trusts (EOTs) now may be a good time for us to take a step back and consider some key do’s and don’ts.

For employee-ownership to grow at scale, it’s clear that the number of professional advisers with suitable experience (accountants, lawyers, corporate finance advisers, tax specialists…and often also those with expertise in employee engagement and leadership coaching) needs to increase.

Later this year we plan to release learning material which will help both companies and advisers who feel they are on the nursery slopes, but meantime have the following core suggestions for advisers and/or the companies they are helping:

  1. Do make sure you fully understand the tax requirements of the EOT legislation.  The tax reliefs it offers require compliance with a range of detailed conditions, and one slip can have major adverse consequences.
  2. Don’t encourage company owners to choose employee ownership unless they genuinely believe it is right in the long term for their company.  If they are primarily motivated by the tax breaks, see employee ownership mainly as a stepping stone to a third party sale or are not committed to seeing their company continue to grow under successful employee ownership, it may not be the right solution. 
  3. Do look into the financial side carefully.  As well as requiring a full and independent valuation of the shares to be sold, it is wise to ensure that the company has carried out careful cash flow planning so that it can confidently fund its EOT to pay all agreed instalments of purchase price.  If the new management see that the sale price is an unsustainable multiple of profits, this may be bad for morale as they will see less potential upside for themselves. Remember also that any payments by a company to its EOT must be funded from its distributable reserves.
  4. Do involve your leadership team and wider employees as early as possible Some companies involve them in aspects of the planning, others do not and present employee ownership only once the EOT has taken over the ownership. Either way, clear communication is absolutely key.
  5. Do look at what other employee-owned companies have done. They will generally be willing to share their experience and knowledge.
  6. Do consider joining the Employee Ownership Association.
  7. It sounds obvious but do ensure that all the paperwork (eg the trust deed establishing the trust and a purchase agreement between trustees and sellers) has actually been signed before any money is transferred.
  8. Do keep it as simple as possible.  Leaving all the shares in the EOT permanently will help with that.  If you decide that some of its shares should be passed to individual employees, ensure that you have strong reasons for doing it this way as it is likely to result in significant extra administration. But sellers keeping a small (ideally <25%) stake going forward may reassure employees that you are still committed to the business, as well as providing the sellers with some upside on a future sale.
  9. If any key directors are to retire, do ensure that your company has an effective plan for leadership succession. If you expect your next generation of managers to step up to the plate, while they have no interest in promotion and their main interest is leaving the office at 5pm every day, the transaction is unlikely to be a success.
  10. Do think carefully about the long term, aiming to create an employee ownership structure that will stand the test of time

Celebrating Employee Ownership with Richer Sounds

 

 

 

Richer Sounds has recently become a high-profile addition to the growing number of UK employee-owned companies.  Julian Richer the founder owner has transferred 60% of the company shares to an employee ownership trust, handing control of the company to his employees. It felt like the ‘right thing to do’ for this unorthodox ethical capitalist.

Julian founded the company in 1978 and believes having reached the age of 60, although not ready to retire yet, it was time to consider the future of the firm.

David Robinson, chairman of Richer Sounds, said: “It’s incredibly exciting times and allows our colleagues to feel even more connected to the company. They have a real stake in the success of the business and can take pride in knowing that they are shareholders, building for the future.”

www.richersounds.com

If you would like to explore how employee ownership might be introduced in your company, please contact us for an initial discussion.

We are happy to meet at our offices without charge or commitment and will be very pleased to hear from you.

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Celebrating Employee Ownership with Woodford Heating & Energy

 

 

 

Woodford Heating and Energy provides mechanical and electrical building services for the London construction market.

Owned by an employee ownership trust since February 2019 it has approximately 150 employees and works with a further 100 or so self-employed sub-contractors.

Woodford’s key clients includes Bouygues, Redrow and Crest Nicholson and recent projects include the installation of central heating, hot water and all related infrastructure in 406 apartments comprising a new development in White City.

www.woodfordheating.com

If you would like to explore how employee ownership might be introduced in your company, please contact us for an initial discussion.

We are happy to meet at our offices without charge or commitment and will be very pleased to hear from you.

GET IN TOUCH

Celebrating Employee Ownership with West Beer

 

 

 

West an independent Glasgow based brewery became the first employee-owned beer maker in the UK earlier this year.

Petra Wetzel who founded the brewery 13 years ago plans to make the company fully employee-owned over the next 25 years by drip-feeding the shares of the company into a SIP for her employees, starting with 10% this year.

It’s refreshing that a brewery founder has chosen to help her team benefit from their joint endeavours, where many brewery founders sell out to the big boys to enable them to retire on their wealth.

I want to share what we’ve achieved over the last 13 years with the people who have helped make it happen’  Petra Wetzel

 

www.westbeer.com

If you would like to explore how employee ownership might be introduced in your company, please contact us for an initial discussion.

We are happy to meet at our offices without charge or commitment and will be very pleased to hear from you.

GET IN TOUCH