A recent survey by Moore Stephens found that a third of all SME owners are planning to retire or sell their business within the next five years. Yet many have no clear succession plan in place. When asked about the type of exit they would prefer, nearly 50% of responders were uncertain of the way forward.
Employee ownership can sometimes be overlooked in discussions about business succession. Considering the very many benefits such an exit can confer, we think it should always form part of the conversation around an exit, even if, ultimately, such a transaction may not suit everyone.
So, to redress the balance, here are our top 5 reasons employee ownership may be the right exit option for you:
The thought of ceding control to a new owner can be one of the hardest things for a business founder to come to terms with. With many succession options, passing on the business means an inevitable and immediate passing on of control. Not necessarily the case with employee ownership, where a former owner can choose to retain influence over the future of their former business.
If you were to ask our clients the reasons they chose employee ownership above other succession options, many would cite protecting the company culture. For the vendor, there can be real concerns that new ownership = changes to the company culture. With an employee ownership transition, this is much less likely to be the case, and indeed its very common for a vendor to build in formal measures to protect the company’s culture under the ownership of its employees.
An owner who is initiating a transition to employee ownership is able to flex the terms of the transaction to suit their own circumstances in a manner that its not always possible where a third party buyer is involved. Decisions about what proportion of the company will be transferred to employees, how this will be paid for and over what period and the timing of when the business will move to employee ownership can all be tailored.
- Tax savings
We couldn’t write a blog about employee ownership without mentioning the considerable tax breaks that exist for businesses moving into this sector. For owners selling shares to employee ownership trusts, there is potential to receive proceeds entirely free of tax. And businesses with employee ownership can sometimes share profits on a tax free basis with their employees too.
- Knock-on benefits
Once a business has become employee owned, surprising things can happen. The workforce often becomes more productive (EO businesses report 4.5% year on year productivity increases), absenteeism and staff turnover may fall, levels of employee engagement tend to increase, innovation can thrive and profitability improve as employees start to appreciate that they are business owners. All this adds up to enabling the former owner to sail off into the sunset (or not, see 1.), knowing that they have built a legacy that can thrive under its new ownership.
Convinced? We’d love to hear from you.