Why family businesses should consider employee ownership when succession planning.
"Albany Pumps was a family owned company with a rich history dating back to 1904. When approaching retirement I chose employee ownership as the best way to secure the company for its loyal workforce and put in place a structure that will ensure it thrives long into the future."
Martyn Swaffield - former chairman of Albany Pumps
Perhaps the best-known employee owned business in the land is the John Lewis Partnership; a business synonymous with strong profits, happy staff and generous employee dividends.
Of course, the key element about that business is that it is owned by its employees rather than shareholders. So why would a family business like Albany Pumps opt to become employee owned?
Thomas Wainman, a solicitor specialising in advising family businesses explains: "Employee ownership is not a model that would suit every family business but is a perfect solution for some. We have helped numerous business owners who are planning for retirement and do not have a family member willing to take on the running or ownership of the family firm."
"In all those examples, our clients have had an emotional attachment to their business and the staff who work there. Employee ownership has provided them with a positive alternative to a trade sale or winding up as, by selling to the employees, the new owners are usually people who share the founder's values. Not only that, the outgoing family owners still achieve a sale for value that provides funds for the retirement of the founder and/or for other family shareholders."
The main advantages of employee ownership for family businesses:
1. Succession option – many of our clients have opted to pass their business to employees as an alternative to a trade sale, MBO or winding it up. Occasionally they gift the shares to employees (as with the John Lewis Partnership), though usually they sell the shares.
2. Tax efficient for the business owner – Since 2014, business owners are exempt from capital gains tax on the disposal of their shares into a prescribed employee ownership trust (provided certain conditions are met including that majority ownership passes to employees).
3. Tax efficient for the employees – there is also the possibility of the employee owned business paying a bonus of up to £3,600 per year to each employee free of income tax.
4. Commercial management – most employee owned businesses continue to have a board of directors and a professional management team alongside the employee trust. Most appoint employee representatives to the trust and sometimes to the board to ensure a healthy shareholder representation.
5. Direct or indirect ownership - the business owner's shares can be held indirectly by employees in a trust (often an Employee Ownership Trust), pass directly to employees, or a combination of the two.
1. The seller won't get the going rate for the shares - although some business owners gift shares to employees, is it more usual for shares to be sold to the employees at a market valuation.
2. It is only an option for retirees with no heir – although majority ownership has to pass for certain tax advantages, employee ownership can take many forms and sometimes a business begins a transition to employee ownership by setting up a share incentive scheme, with the owner retaining majority ownership either as a precursor to a future sale or in the long-term as an employee incentive strategy.
3. Raising finance is impossible for employees – a common funding option is for the sellers to receive the sale proceeds over a fixed period. Although finance can be difficult to raise for a group of employees, it is possible with several of the main retail banks having a specialist lending arm for employee ownership and other specialist funders for employee ownership out there.
4. It is a complex transaction with high fees – it is the case that certain extra elements are required such as setting up a trust to hold the employees' shares. However, employee ownership transfers tend to be more cooperative and less adversarial than trade sales, so a typical transaction is likely to save time and fees as a result of the positive approach taken by the parties involved.
Naturally, every business is different and so specific advice should be taken for each business.