Many business owners have dedicated years, if not decades, to building their companies. But when the time comes to step away, an often-overlooked question arises: what happens next? 

For businesses without a formal succession plan, the question of leadership transition can feel daunting – and become a major problem.

Succession planning is often a complex process, and owners may lack a clear successor, whether because family members are uninterested in the business, or because finding the right person to take over has not come to fruition. Owners may want to be rewarded for their hard work, but be reluctant to sell to a competitor or an investor.

In these cases, employee ownership offers a promising alternative. This model not only preserves the legacy of the business but also empowers the workforce, aligning their interests with the long-term success of their company ensuring that the people most familiar with the company are responsible for its future.

What do we mean by employee ownership?

Employee ownership is when the employees take on a role as shareholders in the business, often ending up owning all or a majority of the shares. This is sometimes done with direct ownership of shares by individual staff, but more often through an ‘employee ownership trust’, where the shares are sold to a trustee, who holds them on behalf of all the staff in the business.

Benefits of employee ownership

• Continuity and stability 

Transitioning to employee ownership maintains the company’s identity, culture, and relationships. The workforce, who already know the ins and outs of the business, become the owners, ensuring minimal disruption during the transition - unlike an external buyer, who might seek to change the direction of the company. 

• Employee motivation and engagement 

When employees own a stake in the company, research shows they’re more likely to be invested in its success. Employee-owners often exhibit higher levels of engagement, loyalty, and productivity.  The feeling of ownership can foster a sense of shared responsibility, encouraging workers to innovate and contribute to long-term goals.

• Financial benefits for current owners, and for employees

Business owners who, individually or as a collective, sell a controlling interest in a trading company to an employee ownership can benefit from a Capital Gains Tax exemption. Additionally, employees can receive tax-free profit share bonuses of up to £3600 each year. 

Is employee ownership right for your business?

For business owners without a clear succession plan, employee ownership can offer an appealing way to ensure the company’s longevity while rewarding the employees who have helped build it. However, the decision requires careful consideration.

1. Is your business financially healthy enough to support the transition? Employee ownership requires the company to be stable and profitable enough to take on buying out the current owner(s), which may involve taking on debt. For a company to succeed as employee-owned, it must be financially sound and capable of carrying this burden without negatively impacting operations. 
2. Are your employees prepared for the responsibility of ownership? Employee ownership works best when the workforce is engaged and ready to take on a more active role in governance and decision-making. 
3. What are your long-term goals for the company? If maintaining the company’s mission, culture, and independence is important, employee ownership is a powerful option. 

If you are thinking about employee ownership as an option for succession planning, please contact David Alcock. 

We can help you think through the options and decide which is the best way forward for you.