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:
- 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.
- 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.
- 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.
- 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.
- Do look at what other employee-owned companies have done. They will generally be willing to share their experience and knowledge.
- Do consider joining the Employee Ownership Association.
- 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.
- 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.
- 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.
- Do think carefully about the long term, aiming to create an employee ownership structure that will stand the test of time
To explore how employee ownership could work for your company, call me on 020 3818 9420.