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What is employee ownership and how can it shape the future of your business?

In the changing landscape of business ownership, employee ownership (EO) has emerged as a compelling alternative in the UK. It aligns with values, empowers staff, and fosters a sense of purpose. In this model, the business is sold to the staff who have contributed to its success. Daily operations are guided by collaboration, allowing for flexible decision-making and shared responsibility.

How does employee ownership work legally and operationally? What does it mean for staff? How does it impact founders? In this post I’ll be diving into all of these points so you can get a feel for what it’s like to become an EO business. For clarity our business is an EOT so Employee Ownership by Trust model.

For context, back in March 2022, my business partner and I decided to sell our marketing agency, NOVOS, to the staff using an Employee Ownership Trust (EOT) model. This post focuses on explaining what an EOT business is and how it operates. If you want to understand why we chose to become an EO instead of pursuing a traditional sales route, I recommend reading my post from the week we sold the company, which is available here.

How does an Eot work legally?

Instead of selling shares to individuals, the founders sell them to a trust, which holds the shares for the staff. This approach avoids the complications of individual ownership, such as issues with staff turnover and new employees joining.

For us, our legal business entity was Statement Group Ltd which was then taken over by a new entity Statement Group Trust Ltd.

How does employee ownership work operationally day to day?

The day to day running is largely left to myself, my business partner and our 2 fellow Directors. We’re referred to as the board of directors.

We have an internal people committee with 6-7 members. They meet monthly to discuss staff concerns and ideas. The committee is led by a staff member.

The Statement Group Trust Ltd has a board called the ‘Trust board’ consisting of 3 members (more if the company is larger). One member is a selling shareholder (either myself or my business partner). Another member is the staff member who also leads the people committee. The third member is an external representative.

The trust meets quarterly, but can meet more frequently if necessary. They discuss matters from the board of directors and the people committee, aiming to make decisions in the best interest of the staff. Day-to-day decisions like changing client reporting templates or taking on new clients are handled by the board of directors. However, the trust is responsible for making bigger decisions that impact business profits and staff, such as investing in new services or moving to a more expensive office.

Every 2-3 years the members of the Trust board are rotated and new members replace them.

What does it mean for the staff?

For individual staff members they get a tax free bonus of up to £3.6k each year.

Instead of holding shares as an individual, each staff member is allocated points based on 2 factors. These factors are salary banding (representing seniority in the business) and years of service to the business (longevity at the company). We’ve placed a higher weighting towards longevity compared to seniority. These points are totalled up and calculated as a percentage with each individual having a percentage score of the overall amount (this process is optional and can vary by EO business).

Each year the Board of Directors gives the Trust board 3 different scenarios for profit sharing pots based on how successful the business has been that year.

Once the trust decides, each individual’s percentage is used to dictate how much of the profit share they get as a bonus. As a quick example if we free’d up £100k of profit to be shared between the staff and one member of staffs percentage was 10% then they would be entitled to a £10k bonus, £3.6k of which would be paid tax free.

Over time the selling shareholders are paid off and more and more of the profit is free’d up to share across the staff. Beyond finances, the staff also get to be part of a business with a purpose that they can have a voice of shaping.

What does it mean financially for owners?

As a selling founder, you may receive less money compared to a traditional sale to a larger company. This is mainly due to the multiplier used to determine the value of your business.

A buying business can assign a higher value to your business if you have complementary clients and services that fit well into their larger business. However, for EO businesses, the value is determined by independent market rates researched by a third-party firm.

From a legal standpoint once it’s sold the business essentially owes the founders the amount the business sold for.

The founders can withdraw this money from the business tax-free on a regular basis (monthly, quarterly, or annually). They are now considered employees and receive a basic salary instead of dividends.

This procedure differs from a traditional M&A sale. The traditional approach usually involves a lump sum payment and additional payments over the next few years based on founders meeting certain (often unrealistic) targets. However, this varies for different people and depends on the initial negotiations.

Through the employee ownership route, naturally the founders still have a considerably vested interest in the success of the business otherwise they won’t get any of their sale money in the coming years.

For example, if the business is sold to the staff for £5m and it generates £1m profit annually, the ‘earn out period’ would be approximately 5-7 years, considering the need to retain profits for cash flow.

Each year, the profit sharing pot can be distributed among the staff once the founders are paid off. If the business has £1m profit and 100 staff members, individual profit shares could range from £5000-£10000.

For founders the EOT model is very appealing when it comes to succession planning and thinking about the longevity of the business you have built.

Employee ownership is an empowering business approach. It aligns with values, empowers staff, and fosters purpose. Decision-making is collaborative. With employee ownership, staff receive tax-free bonuses and have a voice in shaping the business. Founders remain invested in success. Staff directly benefit from profitability, fostering motivation for the business in the long run.

EO is a UK-led initiative which is gaining traction across other major countries, you can read my Forbes article here about the current landscape in the US and Australia.