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Selling your business? Have a look at employee ownership 15/11/2018

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An employee ownership exit means vendors will never knowingly be undersold

Employee ownership is becoming an ever-more popular way for owners to sell their business. In recent months, firms as varied as book producers[1], landscape gardeners[2] and a niche operation doing luxury conversions of VW campervans[3] have taken the decision to go down the route pioneered by John Lewis. Even shadow chancellor John McDonnell seems to want to get in on the act[4]

By 2017 there were more than 300 employee-owned business employing more than 200,000 people in the UK.[5] That, however, has hardly scratched the surface. There are more than 5m UK SMEs.[6] A significant proportion of these change hands each year.

Employee Ownership Trusts are a great way to structure this, with tax advantages for the vendor and the employee. They have the benefit of a low-cost transaction with a high probability of boosting employee engagement and productivity.

Who does the EOT fit?

There are four main areas where EOTs are relevant:

● Succession planning. Almost a quarter of family firms in the UK anticipate a change of ownership within five years. The majority of these business leave family control.[7] An EOT, however, provides the opportunity to plan for the succession.

● Growth planning. Because employee-ownership structures engage employees in a more meaningful way, this can result in increased efficiency and lower cost, producing higher growth. A recent study found that revenues of top 50 EO businesses grew by 3% more than like-for-like non-EO businesses.[8]

● Start-ups. EOTs can produce a very dynamic business environment, in a situation where entrepreneurs want to share the risk and reward.

● Public sector spin outs. These are prevalent within local government and the NHS, where the employee-ownership element can catalyse a change in culture and engage employees in a new commercial environment.

The bottom line

EOTs can also be more profitable than alternatives. One reason is the compelling tax incentives offered by the EOT. These benefit owner-vendor and employee-buyer alike:

For the vendor: There is a total capital gains tax (CGT) exemption on all gains made when a majority interest is sold to an EOT. A vendor can therefore make more from an EOT sale than they could from a trade sale, even if the latter commands a higher multiple. So, even if the trade sale price is higher, it is how much the vendor retains that matters.

For the employee: The company is allowed to pay annual tax-free cash bonuses of up to £3600 per employee. Because it is a bonus, not a dividend, the company does not have to be in profit.

There are other financial benefits from an EOT. Transaction variables are under the control of the sellers and time to complete is significantly less than third-party sale alternatives. What’s more, commercially-sensitive information is not disclosed to potential buyers who may also be competitors.

Tapping expertise

ThinCats has links with advisers with expertise in this area, and itself has an experienced credit team able to understand the specifics of each business, and assess the viability of a buy-out plan.

EOTs look set to grow: providing an attractive succession plan for owners and promoting growth after the transaction. If you’re a business owner, or an adviser, and think this could be a good fit for you or your client, we would be delighted to help you explore the potential of this innovative structure.

 

Want to find out more about employee ownership?

Read our whitepaper, which outlines what an Employee Ownership Trust is, where they can provide a positive solution, what are the qualifying conditions and what are the benefits. 

Structuring and funding an employee buy-out - download the paper Structuring and funding an employee buy-out - download the paper

 


[1] https://www.scotsman.com/business/companies/media-leisure/falkirk-book-firm-palimpsest-moves-to-employee-ownership-1-4794090

[2] https://www.hortweek.com/why-employee-ownership-growing-benefit-business/landscape/article/1492225

[3] https://www.eastlothiancourier.com/news/16967795.jerba-campervans-becomes-one-of-scotlands-first-employee-owned-businesses/

[4] https://www.thenews.coop/131801/topic/politics/worker-ownership-agenda-mcdonnell-welcomes-thinktank-report/

[5] Employee Ownership Association

[6] http://researchbriefings.files.parliament.uk/documents/SN06152/SN06152.pdf

[7] https://www.telegraph.co.uk/finance/businessclub/8561623/Quarter-of-family-firms-will-change-hands-in-five-years.html

[8] The Ownership Effect Inquiry, Final Evidence Report, June 2018

Posted By: The ThinCats Team

Category: Businesses

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