There has been a remarkable increase in the number of businesses transferring ownership to employees since the start of the pandemic. So, what’s driving that and what’s the big attraction of this particular model?
The latest research on this shows there are now 384 employee ownership trusts in the UK compared with just 127 in 2020. The number of new trusts has jumped 800% since 2019, when there were just 41. The sale of a company to an EOT is now a very popular exit strategy for controlling shareholders who are looking at their business succession planning, as we’ll hear shortly.
An employee ownership trust is a specialist form of an employee benefit trust that was introduced by the government in 2014. Shareholders are encouraged to sell their shares into a trust which is held on behalf of the employees of a company. John Lewis led the way on employee ownership in the UK and now has over £11.7 billion and a workforce of over 80,000 partners. The other famous example is the hi-fi business Richer Sounds which used to be 00% owned by its founder Julian Richer – in 2019 sold 60% of its shares to an Employee Ownership Trust.
So, why are these structures so attractive? To help with that I spoke to one of the lawyers in our share plans team, Fleur Benns, who joined me by phone. I started by asking what benefits employees enjoy:
Fleur Benns: “I think looking at the employees of the company that's held by the Employee Ownership Trust there are a couple of couple of benefits, really. There’s the very tangible cash benefit in that a company that is owned by an Employee Ownership Trust is able to make cash payments to its employees that are tax free and that that is up to a maximum of £3,600 per employee. Now, there are certain rules around how those bonuses are paid but that is clearly a really tangible benefit for employees, especially when you think that a lot of these Employee Ownership Trusts own companies within the healthcare sector, or the childcare sector, where these are real people-businesses and often where people are quite low paid, relatively speaking, so that tax free cash bonus of £3,600 per year is a very valuable tool in retaining those employees. These sorts of businesses obviously have a high turnover of staff and so you need these retention tools, and that's very valuable one. I suppose the other benefit is that they are part of a share owning body, they are indirect shareholders in the company for which they work and I think that has a really positive impact on morale incentivisation and, generally, people feel more engaged with their work, and their employer, if they have a sort of stake in that business. So, I think for employees there are those two definite benefits that can come out of an Employee Ownership Trust structure that they wouldn't get in other structures.”
Joe Glavina: “What about the advantages from the company’s point of view?”
Fleur Benns: “Well, from the company's point of view, obviously, you have an engaged workforce. There are indirect owners in the company and, therefore, if these are properly set up and consideration is made as to employees’ views so they really do feel that they have some say in how the company is run, or the ethos of the company, then that leads to increased retention, as I mentioned, recruitment and that sort of overall performance of the employee body. So, I think the company gets that benefit of a more engaged workforce.”
Joe Glavina: “So what’s HR’s role here, Fleur? What’s the communications piece?
Fleur Benns: “Well, again, I think it all goes back to that employee engagement. The employees aren't holding shares themselves, the company is owned by a trust that is holding the shares on their behalf, so they're not direct shareholders, and I think HR’s role in this is to really sort of communicate the benefits of that indirect share ownership with the employees. Now some Employee Ownership Trust-owned companies will set up an employee committee, or an employee board, that feeds into the main board that is running the company so they have a voice in that running of the company, or there is an employee representative sitting on the board and, again, the employees’ views will be fed through that employee representative and I suppose it's the job of HR really to sell those benefits and encourage people to become involved, to step up to be on that board, or to be to be part of that committee, and really become involved with the company that they're working for.”
Joe Glavina: “So why are EPTs so popular at the moment and have you noticed that within your own client base?”
Fleur Benns: “Yes, we have definitely noticed that uptick and I think slowly that realisation that selling to an Employee Ownership Trust is a real sort of alternative exit for shareholders. When I say an alternative, that's an alternative to a traditional M&A or trade sale, or an IPO, and so because of the tax benefits associated with the sale to an Employee Ownership Trust, and the fact that these trusts are perhaps you what you would term a ‘friendly buyer’, so there is less of a due diligence process to go through, less administration, it's a smoother sale process, perhaps, and a more cost-efficient and swift sale process than you might traditionally have under a normal M&A and it suddenly becomes quite attractive to selling shareholders because you don't have to sell all your company to an Employee Ownership Trust, they only have to hold more than 50% of the ownership of the company. One of the major shareholders could sell to the EOT and the other shareholder could remain if a company is jointly owned, or as part of a sort of retirement plan, or succession planning, a company owner could sell, for example, half their shares to the EOT but still remain involved in the company for a few years going forward. So, you know, there are real benefits that selling to an Employee Ownership Trust can offer that, perhaps, a more traditional exit route doesn't, and I think that's why we're seeing that increase in interest.”
The share plans team has written about this in some detail in an analysis piece for Outlaw called ‘Employee ownership trusts have advantages if structured right’. They explain how Employee Ownership Trusts work, and whether they are a suitable model for your business. You can find that article on the Outlaw website.
