More and more firms are seeing the benefits of employee-owned business models.
John Lewis famously considered changing its employee-owned model, which was met with much discontent from its own workforce and the general public. Since, the term ‘employee-owned’ is has taken common place in business discourse, but few know what it really means or what benefits it can have for an employer.
An employee-owned model is characterised by - you guessed it - a company’s employees owning shares in the business or the right to the value of shares in the firm.
The UK government introduced an Employee Ownership Trust (EOT) in 2014, with a long-term plan to incentivise companies to move to the model. Since, over 700 organisations in the UK have adopted this model.
Why might an employer decide to go for an employee ownership model?
Employee ownership (EO) expert Chris Maslin of Go EO changed the accountancy practice he founded to an employee-owned model, as he felt he had come to the end of his time growing that business. He says: “There are plenty of reasons for choosing this model. The owner needs to understand they're selling the business, so whilst they can potentially still work there, it won't be their business anymore, and their power will be reduced. People can sell for many reasons.
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“From retirement/poor health, to boredom/wanting to do something new. The employee ownership model is a way to help retain the business legacy and protect employee jobs. Selling to a trade buyer is typically the other main option considered, but this often involves your business being absorbed into the bigger organisation, your brand gone, and staff redundancies.”
In this sense, an EO model can be a way to grow the business whilst maintaining a brand’s legacy.
Asif Ghafoor, CEO and co-founder of public electric vehicle infrastructure company Be.EV set up the employee-owned business to grow rapidly. Ghafoor says he is a firm advocate for employee ownership, believing that it incentivises staff, with everyone benefitting from having a stake in the company. He comments: “When Adrian, my co-founder, and I made the decision to make Be.EV employee owned, we wanted everyone to feel that we trust them with the business. I look at a lot of companies and see the owners sweating the staff to death, and there is no real reward for their efforts.
“Business equity is a great incentive - if Adrian and I end up with 20% rather than 50% it doesn't matter. The rest of the team has helped bring the overall value up, and it’s a big prize for everyone involved if we’re successful.
“Once someone is in our business, we’re committed to them, and we want to receive the same commitment back. I have high expectations of my staff, but I also reward the work they do.”
Is it just to appease staff or are there any financial benefits, especially in today's economic climate?
In an EO model, company shareholders are encouraged to sell their shares to a trust held on behalf of employees. Employers might be tempted to opt for this model due to tax breaks – such as selling shares free of capital gains tax and being able to pay tax-free bonuses to employees of up to £3600 per employee per year.
Maslin continues: “There are financial benefits for everyone. Certainly the founder can do very well out of it financially. However if they get too greedy so there's little in it for the staff, it can backfire. For the deal to be successful, it really needs to work for everyone. This means firstly choosing a realistic sale price that's affordable for the business, and also carefully considering the leadership/power structure post sale. Change is always unnerving, so care needs to be taken to ensure a smooth transition.”
Is employee ownership only for hippy founders?
Misunderstood, an EO model can appear to be something that serves staff primarily, with founders and other stakeholders losing out. This, however, seems to be largely a misconception.
Maslin continues: “Not at all! Indeed, a common misconception is that making your company employee owned must be a philanthropic move by the founder. You as the current owner can sell your shares for up to independently assessed fair market value, and that sale is free from capital gains tax! We would however say that over-egging the valuation is a dangerous move, as if the staff can't see them getting anything good from it financially for many years, they may decide to jump ship, meaning it might not work for anyone!”
There are multiple reasons why a business might want to switch to an EO model, including some appealing tax breaks. Beyond this, an employee-owned business model can do wonders for business growth as it motivates staff and gives them a sense of belonging, increasing their engagement overall. This, in-turn, can provide business growth that may not have been seen otherwise.