Employee Ownership is an increasingly popular business model in Scotland, both as an effective succession option as well as a vehicle for engaging staff and boosting productivity. Co-operative Development Scotland (CDS), the arm of Scotland’s enterprise agencies which promotes economic growth through collaborative and employee ownership business models, reports that there are around 110 employee-owned companies in Scotland, with 7,500 employee-owners generating a combined turnover of around £950 million.
CDS has launched the first The Employee Ownership Podcast on download on iTunes and the CDS blog site . Each week, it will feature the experiences of business owners who have already sold their companies to their staff, and expert insight from specialist advisers and members of the legal and accounting professions.
Here, Clare Alexander, head of Co-operative Development Scotland, dispels some of the common myths about employee ownership.
Myth 1: The process of becoming employee owned is a complex transaction
While additional elements such as setting up a trust are required, an employee ownership transaction tends to be more collaborative than a standard business sale as everyone’s interests are aligned. All parties want what is best for the business and its workforce, therefore less time and resources are spent resolving potential conflicts and the transaction is typically completed more efficiently.
Myth 2: Employees cannot afford to make the investment
Typically, when a business becomes employee owned, the majority of shares are bought on behalf of the employees by an Employee Ownership Trust. This is usually financed by contributions from the company itself, or a loan that is then paid back by the company. Employees don’t carry any personal liability for the debt assumed by the company in an employee buyout. Furthermore, when the trust pays out bonuses the first £3,600 is free from income tax, so is very tax efficient for employees.
In cases where employees have the opportunity to invest their own money in company shares, this is a relatively small amount of the share capital, is usually voluntary, and will likely be undertaken using one of the HMRC recognised tax effective schemes.
Myth 3: Employee ownership is only an option for retiring family business owners or entrepreneurs with no heir
While this can be a common reason behind employee ownership, some owners may opt for the model despite having a suitable successor in order to reward the loyalty of staff and root the business in the local area. The seller may trigger an employee buyout a long time before they intend to withdraw from the company, remaining involved in the day-to-day running of the business for years before retiring.
Myth 4: The vendor will have to sell their business at a lower price
As they don’t have to negotiate with another business, the seller holds a great deal of control over the process. There is no reason that a carefully considered employee buy-out can’t deliver a fair price in line with the company’s market value. When tax advantages are considered, many sellers believe that they achieved a better deal when selling to an Employee Ownership Trust, than they would have achieved by pursuing a trade sale.
Myth 5: Employees will be more interested in keeping company profits for themselves than investing in the long-term health of the business
Employees are well informed and understand the importance of investing in the businesses for the long-term. Decisions on bonus and share distributions are carefully considered in this context.
Evidence shows that priority is given to investment in businesses’ long term success, for example in purchasing new equipment to improve efficiency while bonus and dividend payments being paid at a realistic level.