How do you say goodbye to the business you’ve built up over many years? This is the question that faces many business owners when they seek to retire or move on from their current business. There are a number of options available, such as selling the assets, selling the business or a management buyout. But these have their limitations, especially for a business owner that want to protect the jobs of their employees and provide certainty for suppliers that have served them so well. Employee ownership, along the lines of the John Lewis model, provides an effective solution. This is especially true today, as the Government is committed to encouraging employee ownership through preferential tax treatment.
So what are the limitations of a sale?
Selling assets owned by the business such as buildings, plant, equipment or stock is unlikely to realise the full value of the business. Selling the business as an ongoing concern requires you to provide information with a high degree of transparency. You may not want everyone, including competitors, to know all this information. Management Buy-Outs often put huge financial pressures on the company as it struggles to pay back its loans. For a business owner that wants to ensure continuity for their business, job security for staff and an effective way to release money from the business, employee ownership can be their best option.
What are the options for co-ownership?
Some companies are owned by their employees who become direct individual shareholders through tax-advantaged share plans, such as a Share Incentive Plan. However, this could be difficult to achieve at the point that you wish to sell the business. Many companies use the indirect ‘John Lewis model’ of employee ownership where the business is held in Trust, and employees are the beneficiaries. There are also combined schemes with some of the shares in Trust and some owned by employee shareholders, and co-operatives which are run for the benefit of members, which can include staff and customers.
The John Lewis model
The John Lewis Partnership is the largest employee-owned company in the UK, with a turnover of £10bn. All 93,800 permanent staff are Partners that own the John Lewis and Waitrose business. Shares are held in Trust and employees share in benefits and profits. The structure allows the organisation to be commercial and democratic. In spring this year John Lewis announced a staff bonus of 11% of salary, in some years employees have received as much as 17% of salary, equivalent to nine weeks wages. The model has helped create a strong business run by a highly motivated workforce. But don’t be fooled into thinking employee ownership is only for big players like John Lewis, many other companies, large and small, have adopted this model and seen the benefits.
According to a study by Cass business school, employee-owned businesses enjoyed higher growth and job creation during the recession than companies in conventional ownership. Employee owned businesses typically outperform companies where employees do not have an ownership stake or the right to participate in decision-making. Cass concludes this advantage is derived from “taking a stakeholder rather than a shareholder view of management”. The Employee Ownership Association reports that employee-owned companies consistently outperform FTSE All-Share with a 9.9% boost to share values.
The implications of moving to indirect employee ownership
In the past, business owners would have had to pay Capital Gain Tax, when selling their business, but now, where a business owner sells a controlling interest to an employee ownership trust there is a complete relief from Capital Gains Tax. As you might expect there are a number of conditions to be met.
There are different vehicles to use, where shares are held collectively on behalf of employees through an indirect scheme, most frequently through an Employee Ownership Trust. This enables the buying and warehousing (or holding) of shares from the owner. Employees can then receive or purchase shares in a tax efficient manner through the Share Incentive Plan. The Share Incentive Plan also uses a form of trust.
Tarrant Green & Co. can advise on the pros and cons of releasing capital from your business through employee ownership. We can help set up the required structures and ensure that you optimise the tax advantages of this scheme. In addition, we can provide advice on business valuation, buyout funding, management structures and phased release of capital. This can be a really effective way to realise the true market value of your business whilst at the same time providing stability for employees and future growth for your company, even when you step back from it to pursue other interests.