Since tax reliefs for selling shareholders and employees were introduced in 2014, there has been a steady, gradual increase in the take up rate of employee ownership trusts (“EOT’s”) by UK SMEs. However, until recently employee ownership has continued to be something of a well kept secret, unknown to the majority of company owners and their advisers.
We see signs that this is changing. Recently a number of well known companies, including Aardman Animations (Wallace & Gromit), Riverford Organics and TensCare (drug free pain relief), have become employee owned, joining existing companies such as John Lewis and Arup. This has got people talking, and we are seeing increased interest among companies of all sizes.
For many company owners exploring succession, the traditional choices are rather limited and often unavailable. In many sectors (for example construction) there are few trade buyers. Senior leadership team members and finance providers are often unwilling and/or unable to invest in a management buyout. A company owner wishing to realise the value built up in their business will therefore need to look around for alternatives.
This is where an employee ownership trust can come in. It can buy the company, paying the retiring owner in instalments funded out of company profits with no capital gains tax payable. Employees can then be paid income tax free bonuses (up to £3600 each per year).
But employee ownership should not be seen as a fallback position. It will often have positive advantages in its own right. In a company with the right culture and leadership (or which has the potential to put these in place), it can be the foundation for further growth and increased productivity. It can also provide long term improved performance, maintaining independence and jobs, sharing the rewards of success with employees. As the Ownership Dividend reported in 2018, employee owned companies outperform their counterparts in a number of ways.
Advisers to SMEs, in particular accountants and solicitors, are far more aware of employee ownership trusts than previously. Banks and other lenders have woken up to the fact that this creates new lending opportunities and are actively seeking them out. Company owners are open to employee ownership for succession to a degree we have not previously seen. And government policy makers of all political shades are keen to encourage forms of business ownership in which employees have a stake, addressing the income and wealth inequalities that many argue are a blight on society.
As employee ownership trusts approach their fifth birthday this spring, we believe 2019 will be the year they become part of the mainstream.
If you or your clients would like to discuss this subject in more detail please contact:
Robert Postlethwaite email@example.com
David Reuben firstname.lastname@example.org
or call us on 020 3818 9420