Most people know of the high-profile employee owned companies like Lush and the John Lewis Partnership. Following new tax incentives introduced in 2014 by the government there has been a steady rise in employee owned companies and it is being used as an alternative solution to a trade sale or management buyout, to provide an exit for business owners.
Recently the founders of animation business Aardman, the studio responsible for Morph, Wallace and Gromit and Chicken Run, turned over control of the business to an employee-owned trust which the vendors believe will ensure the studios’ independence.
The owners sell a majority stake of the shares in the company to an Employee Ownership Trust (EOT)
The owners can choose to stay on in the business and continue in their existing roles or can take the opportunity to retire and pass on the leadership of the business to the next generation.
Employees do not hold shares directly but all are entitled to benefit from the Trust which holds shares on their behalf based on certain criteria; length of service, hours worked, level of remuneration.
The EOT safeguards the interests of the employees but does not get involved in the management of the business – the employees have a voice through an employee forum or staff counsel.
The overall benefits:
• Creates a platform for sustainable growth
• Maintains the company’s independence and protects the business legacy and ethos
• More relaxed sale process, which crystallises market value
• Tax free bonus payments for employees up to £3,600 per employee per year
• Vendor has no CGT to pay
• Recognises employees who have driven success
• Encourages innovation and entrepreneurialism amongst staff
• The business is better at recruiting and retaining talented committed staff
Financing for the deal
The feasibility of the buy-out is dependent on funding. The EOT will not have any funds to buy the shares or pay any upfront consideration. The funding comes from the trading company through capital contributions from existing cash and by way of deferred consideration using the future profits. The trading company may also be able to borrow funds from external funders to help fund the upfront consideration.
Employee ownership could be a solution for your succession plans
The employee ownership model not only helps to ensure independence for the business, it also shares the rewards with the people who contribute to its success.
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By Alison Watts, Corporate Finance Director