How To Incorporate Employee Ownership Into A Business Succession Strategy

Many businesses are turning their attention to how they can put together succession strategies to thrive in 2022 and beyond. For the vast majority of companies, becoming employee owned may just be the development needed to secure the success of the business moving forwards.

Ed Nurse, head of corporate and commercial law at BHW Solicitors, a leading law firm in Leicester, explains more about an EOT business and the many benefits associated with this structural change.

For those that are unfamiliar with the term, Employee Ownership essentially provides the employees of a business with more input by transferring the control and ownership of the business to a Trust which benefits all of the employees.

And there are many reasons why a business may want to become employee owned.

When you look at it from the perspective of the business owner, in addition to giving the obvious sale that most business owners want to achieve, transferring to employee ownership will provide opportunities for continued growth and succession while retaining the very spirit of the business that was present from the beginning.

It is often important to business owners, while progressing the business, to preserve the ethos and family feel that helps a business stand out from the crowd.

From the position of the business itself, the biggest benefit is the added security that becoming employee owned can provide. For example, if a new owner were to come into the business, employees could be nervous about whether their job roles will remain protected and secure.

Additionally, employee ownership can be fantastic for driving engagement from employees in comparison to what existed previously, helping to place a business in a stronger position thanks to the additional support and buy-in of its employees.

It’s important to remember that an EOT isn’t just great for the financial gain of the business, but it can also contribute towards feelings of positivity that are imperative for growth.

The benefits of EOT’s cannot be discussed without mentioning the tax benefit to the business owner. Ordinarily, if you are selling shares in a company, you would pay Capital Gains Tax. However, with a sale to an EOT, as long as you are selling a controlling interest in the company, the buyer is an employee ownership trust and you meet the other conditions (most companies do), then you won’t pay capital gains tax – the effective tax rate will be 0%.

Is an EOT right for my business

When asked if I would recommend a transfer to employee ownership to businesses looking for growth in 2022, I would absolutely say yes.

Becoming an EOT can work towards cementing your businesses within the local community, providing it with a firm base for development and nurturing strong customer relationships.

Additionally, you can support your supply chains as well as your consumers, which, depending on your suppliers, can further embed you into the local community.

What we have seen recently, is an increase in people that are more prepared to go down this road, especially because of the state of the labour market. In fact, according to the official Employee Ownership Association, there has been an increase of 250 new employee owned businesses in the past 18 months alone, clearly demonstrating the benefits.

More and more employees are reconsidering what they want from their workplace and how they view work rewards, which can also be attributed to the pandemic and the impacts that the business environment faced as a result.

Essentially, people are looking for more out of their jobs and are eager to find out more about how it can better reward them for their work and service.

And so, employee ownership can come in as a wonderful opportunity for individual employees to have a greater say in the running of the business, which goes so much further than standard benefits and instead, makes people feel connected to something, which is one of the biggest demands in the post pandemic environment.

Structuring a transition to employee ownership for guaranteed success

In regard to structuring your transition to employee ownership, I recommend you seek early engagement with professional advisers who can work closely with you to ensure that success is ensured from the outset.

Ideally, you need to decide why you want to make this change and what you want to achieve from it. It’s important to remember that becoming an EOT is a long-term commitment.

Secondly, you should consider how you will deal with the engagement from the employees and make strategic selections on who you would be relying on more once the changes are underway.

You want to create something where the ultimate end game is not simply the date on which you sell, but more about the point at which the business is able to be run by the employees and without a reliance on the previous owners. Reaching this level of independence is what defines a truly successful transition to employee ownership.

Converting to employee ownership isn’t about “day one” but more about creating something sustainable, something that can last long into the future, generating positive outcomes and benefits for the employees and the business as a whole.

By being employee owned and promoting the benefits, not only can you nurture and develop the relationships with your existing employees, but also attract new talent, which, for the growth of many businesses, is essential.

To find out more about becoming employee owned, please contact Ed by emailing ed.nurse@bhwsolicitors.com or calling 0116 289 700.