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Insight

Step down and step up – the rise of employee ownership post-Covid

29/06/2020

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United Kingdom

As the dust settles on another vibrant EO Day, we look at how employee ownership really is the answer to help businesses build back better in the post-Covid world.

Many managers have reported employees stepping up during Covid disruption.  Why that has happened and how to maintain the feeling that everyone is pulling together is something which is less of a mystery to those who work with companies transitioning, or who have transitioned, to employee ownership.  Whilst empirical data can be hard to pin down, the buzz in a staff meeting where everyone owns the business is difficult to ignore.

A trust model of ownership allows current shareholders to sell at least 51% of their holding in the company to an employee ownership trust (the "EOT") which holds the shares for all the employees from time to time.  There is an attractive tax break for individual sellers, made even more attractive given that the lifetime limit on entrepreneur's relief was reduced to £1m earlier this year. 

Funding is often more straightforward with a sale to an employee ownership trust than with a typical exit, with retained and future earnings of the business typically funding the purchase price.  Full payment will usually be made by the EOT to the sellers over five to seven years.

For employees, the ability to release founders or owner/managers' capital (to fund their retirement in due course) without becoming subject to the whims of new external owners can be liberating.  

A special regime for employee owned businesses allows cash bonuses of up to £3,600 per year per employee to be paid free of income tax in the UK (but subject to national insurance), which is an immediate benefit.  The opportunity to share in the wider productivity of the business and to shape its direction is the real incentive though. 

Employee owned businesses spend more time talking with and listening to employees; they take decisions over location in a community, future investments and ethical choices differently.  There is no one model, but employee owned companies reflect their employees and can champion their own unique attributes. 

Mary Erb, a partner at Fieldfisher Manchester, has helped companies and founders to determine if employee ownership is right for them.  Increasingly it is:  Mary and the Fieldfisher employee ownership  team have seen over 50 UK companies of different sizes transition to employee ownership across a wide variety of sectors, such as architects, financial advisers, engineers, construction, recruitment, health, food/beverages and professional services.  This is not to say that a move to employee ownership is the easy option.  It takes effort, organisation, determination and a willingness to engage and explain the concept of employee ownership, the structure of a transaction and the EOT vehicle to employees – but the results are rewarding for all.  

So, in a post-Covid landscape, employee ownership might well be an obvious response to owners wishing to step down and an excellent opportunity, for a workforce who has demonstrated the willingness, ability and desire to lead the business through hard times, to step up. 
 

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