Employee ownership

Co-operative Development Scotland explain that employee ownership is the exit plan that allows you to exit your business at your own pace, safeguard jobs and improve employee engagement. It allows you to achieve a fair price for your business and there can be tax advantages in selling your business to your employees.

In November 2017 Auchrannie Resort, Arran became an employee owned company. On their website they say:-

“We are proud to be the first and only Scottish hotel/resort to become employee owned. Auchrannie will therefore, always remain an independent, locally run organisation with community values at its heart.”

Hebridean Jewellery Limited sold to employees in July 2011 and founder John Hart commented at the time: “We are delighted that the business is now owned by our former employees as it could not be in better hands.”

So- what is different in companies with Employee Ownership?

Fundamentally, all employees have a direct and/or indirect share ownership stake, there are unlikely to be significant external shareholders and there will be organisational structures that promote employee engagement. This can include access to information, employee voice, a commitment to staff training and a strong ethos.

Employees have a say as shareholders and may also have a say at board level either through an employee council and/or a board representative.

Baxendale Advisory Limited are a lead consultancy in Employee Ownership and they maintain:

“…that having a stake in the business you work for increases quality, profitability, sustainability and employee engagement. Employee ownership is the perfect answer to succession challenges, leads to greater business performance and fosters trusting cultures.”

Why sell to employees?

Key advantages of an organised sale to employees are that the terms of the buy-out are largely within the owner/s control and the sale avoids the commercial risk of disclosing confidential information to other potential trade buyers.

Also, some owners prefer an employee buy-out because it recognises the contribution employees have made to the success of the business, continuity of the business can be achieved for customers and suppliers, it can avoid the closure of premises etc. that often occurs following a trade sale, and the business ethos is more likely to continue intact.

How does employee ownership work?

There is no one model of employee ownership. The employees could have an individual shareholding, or hold shares indirectly using an Employee Ownership Trust.

Direct ownership by employees can cause problems if some employees want to sell and others don’t. Also, there will be a limited market (only the other shareholders) for those who want to cash in the value of their shares.

Indirect ownership by an Employee Ownership Trust, can facilitate the market for those who want to cash in the value of their shares. Trust ownership means that employees of the company know that the shares in the trust are held on a permanent basis on their behalf, have a collective voice through trust, in how the company is owned and governed, and can benefit from the profits that would otherwise be paid out to investors.

In contrast to direct ownership by employees once the original share acquisition into the trust has been financed there is no further need for finance and the trust model provides a stable and long-term method of ownership. Overall, there is clearly a collective voice on the part of employees, through the trustee of the trust. The trustee can act as a “custodian” of the company's employee ownership ethos.

Many companies combine trust and individual share ownership in what's often called the hybrid model. The Employee Ownership Trust purchases the shares from the owner often with the help of a bank loan and vendor finance and then holds the shares on behalf of the employees. There can also be scope for individual share ownership via a tax efficient share incentive plan.

The Trust will organise an annual share valuation and then there will be a “deals day” to allow those who want to trade their shares within the internal market.

The company’s management still run the company, with the board of directors responsible for the success of the business.

As there could be employee representation on the board, during the buy out process training of employees can be important, both on the rights and responsibilities of ownership and, for some, on their new roles as directors or trustees.

When can Employee ownership work?

Employee buy-outs have a good record of succeeding!

In fact employee ownership can work at every stage in the business lifecycle be it start-ups, helping growth, achieving management succession, achieving ownership succession or business rescues.

The concluding endorsement comes from Galloway & MacLeod Limited (Grain Millers and Agricultural Merchants) who made the transition in December 2010. On their website they say:-

“As an employee owned company, our values are demonstrated by the commitment of our employees to go the extra mile in pursuit of customer satisfaction. Each employee has a vested interest in ensuring Galloway & MacLeod continues to grow and remain at the forefront of the markets we serve.”

Graham Bell is a partner and head of corporate at Wright, Johnston & Mackenzie LLP.