How to achieve employee ownership for your business

If you want to retire, or to sell your business, you need to decide how to organise your exit from the business. Many business owners find that an employee buyout is an attractive option.

With an employee buyout, ownership of the business passes to the employees, either directly or through a trust. Unlike a management buyout, all the employees are involved.

Read more on employee ownership.

Advantages of employee ownership

• Employee ownership can be the best way of preserving the business and ensuring that employees retain their jobs.
• The business becomes managed by the employees, for the benefit of the employees.
• Completing the process helps ensure that the new owners of the business - the employees - are highly motivated and achieve improved business performance. There can also be a greater drive for innovation.
• Employee ownership can be a very effective way of organising your exit. It is usually less disruptive than alternatives, particularly as employees avoid the uncertainty of other kinds of sales.
• Employee ownership can also be completed without disclosing confidential information to competitors.
• Different financing options can allow the business to be sold for a fair price, even if the employees could not normally afford to buy it outright. Some business owners choose to sell their business to the employees for less than the full market value. See financing employee ownership.
• There may also be tax advantages if the buyout is structured in the right way, for example, tax-free bonuses for employees.

Read more on the potential disadvantages of employee ownership.

Employee ownership, while offering a range of benefits, also presents some potential disadvantages: 

• Setting up employee ownership can involve complex legal and financial aspects, requiring professional advice and additional costs.
• There is potential for conflict and disputes due to differences in opinions and priorities amongst employee-owners.
• There is a risk of underperformance if employees lack specific business experience.
• Introducing a new employee ownership model could disrupt the company culture and create challenges in decision-making.
• Employee ownership can potentially offer tax benefits, but potential regulatory changes could cause tax implications.
• Employees' financial security is tied to the success of the company, which could potentially lead to financial insecurity if the company faces challenges. 

Read more on the advantages of employee ownership.

There are several possible alternatives to employee ownership and a number of advantages and disadvantages to these:

• You may want to keep your business in the family. You need to be sure that you have a suitable successor. See transferring a business to a family member.
• You could decide to carry on yourself - but this only postpones the succession problem. And working on after you want to retire is unlikely to be in the best interests of your business or yourself.
• You could bring in new management from outside. But you would still own the business and retain ultimate control of how it is run.
• Perhaps the most common method of exiting a business is a trade sale to another business. This can be time-consuming and disruptive, and involves disclosing confidential information to competitors. See value and market your business for sale.
• Floating the business on a stock market can be an option if you have a strong track record and good growth prospects, though it's often a drawn out and costly process. See floating on the stock market.
• Rather than selling your business to all the employees, you could opt for a management buyout. This can be more disruptive than an employee buyout and demotivating for employees, who do not participate in the buyout. An employee buyout can include all the employees and the management.
• You might decide that the business is worth more if you close it down and sell off the assets. Of course, this means that employees lose their jobs, and your reputation could suffer. An employee buyout can sometimes save a business in this position.

Ideally, you should think about the alternatives and plan your exit well in advance. It is a good idea to consider your exit strategy when starting up a business.

Changing from a business controlled by an owner-manager to a business owned by its employees can represent a big shift in culture. Employees may never have considered the possibility of becoming owners, or feel that it is too risky for them. They may also be reluctant to get involved in decision-making when they see that as your job.

Getting employees involved in the buyout

It's essential to involve employees in the whole process of moving towards employee ownership. Communication is essential, you should look for ways to share information with employees, such as newsletters and regular meetings. You should also make sure you consult employees on key issues, particularly where this is a legal requirement. See inform and consult your employees.

The more time you have, the easier it is to create an ownership culture like this. You also have more options for the way the buyout is financed and organised. For example, employees could be gradually awarded shares, or a trust could be formed to assist the process. See financing employee ownership.

Typically, final planning of employee ownership takes anything from two to 18 months. Changing the way your business operates can be the most important - and challenging - part of the process. See more on change management.

Employees can own a business in various ways, either directly or indirectly. The choice is often determined by the size of the business and the number of employees. 

Co-operative model

A relatively small buyout might choose a co-operative model with an Industrial and Provident Society or a share company structure.

Read more on co-operative models.

Employee Ownership Trust

Another common method is to set up an employee trust that holds shares on behalf of the employees. This can be a very flexible solution. The trust might hold the shares forever, or distribute them to individual employees, or a combination of the two. It can buy shares back from employees who want to sell (for example, when they retire).

Putting shares into an employee trust can have tax advantages if the deal is structured in the right way. Using a trust may also be a good way of raising bank finance to acquire the shares. See financing employee ownership.

Direct ownership

Employees can also own shares directly in their own individual names. One way is for employees to acquire shares over time, perhaps as bonuses or part of their remuneration. Some share schemes offer tax advantages to the company and employees. See set up employee share schemes.

Alternatively, the shares in the company could initially be bought by an employee trust which later distributes them. Or some shares could be owned directly by individual employees, while an employee trust owns and keeps the rest.

To establish employee ownership, there are several steps that should be followed.

1. The first step is to check that employee ownership is a realistic option. What are the objectives of the owner - and what do the employees want? A rough assessment of how much the business is to be sold for and its future prospects is important. Would a buyout be financially viable?
2. If employee ownership seems a possibility, more detailed plans need to be developed. The business plan is likely to need updating to take account of the planned changes and to help raise any financing. The proposed structure needs to be decided, taking into account the tax consequences.
3. You'll probably also want to agree a preliminary timetable. At the same time, you should start developing plans for once the buyout has been completed. Involving employees is a key part of this process. Read more on planning for employee ownership.
4. Finance and price - the price and terms and conditions of the deal can then be negotiated in detail. At this stage both owner and employees will need specialist advice, though they may well have involved advisers much earlier in the process. See employee ownership: help and advice. At the same time, financing can be arranged.
5. Final stage - once everything is ready, final documents are signed, financial arrangements are put in place and the deal is completed. The new owners take control of the business. Read more on running the business after an employee ownership.

Financing of the employee ownership process depends on the financial viability of the business and how the buyout is being structured. The right solution may involve a combination of several different options.

Shares through an employee trust

If shares are being bought by an employee trust, the trust may be able to borrow from a bank - particularly if the business has strong, predictable cashflow and good asset backing. The trust then uses future business profits to pay interest and make loan repayments.

Specialist lenders

As well as banks, there are also a number of specialist lenders that finance employee ownership.

Alternatively, the owner of the business can help finance the business by agreeing to accept payment over time rather than all at once. Owners who have faith in their business and support the idea of employee ownership are often willing to do this.

Employees themselves can also help finance the buyout. They can finance the gradual acquisition of shares by taking shares or share options as part of their remuneration. Or they can invest their own savings.

As the financing structure can also have important tax consequences, you may want to take specialist advice. Read more on employee ownership: help and advice.

Once implementation of employee ownership has been completed, the business normally continues to be run as a profit-making enterprise. In many cases, the same managers continue to run the business, and the same employees to work in the business - even though the employees are now the owners. But both employees and managers need to understand their new roles.

Employees are likely to need training in their new role as owners. For example, they may be responsible for voting to elect directors to the board of the company. In a relatively small buyout, employees may be taking on new supervisory or management roles and need to learn new skills. See skills and training for directors and owners.

Managers and directors also need training and support. They need to understand the crucial importance of good communication within the business to avoid conflict. They also need to maintain a culture of employee participation, which should have been developed when planning for employee ownership.

Managing ownership

If shares are owned by an employee trust, the trust must have trustees - some of whom are likely to be employees. The trust may run an internal market in shares, allowing employees to buy or sell shares in the business. Or the trust might distribute dividends to employees.

The trustees will need specialist advice. Read more on employee ownership: help and advice.

There are several organisations that provide help and support for employee ownership:

• Employee Ownership Ireland supports businesses in Northern Ireland and the Republic of Ireland in their journey to employee ownership.
• Employer Ownership Association (EOA), the association of employee-owned and trust-owned businesses, offers information and advice.
• Co-operative and Community Finance offers loans for employee-owned businesses.
• Co-operatives UK can put you in touch with member development bodies offering hands-on advice and support.

Seek professional advice

In addition, both the business owner and employees will need professional advisers such as solicitors and accountants to help negotiate the buyout. If an employee trust is being set up, the trustees also need advice. If you can, it makes sense to get advice from specialists with prior experience of the employee ownership process.

See choose an accountant for your business and choose a solicitor for your business.

Owner, employees and trustees all need independent advice as their interests are not necessarily the same.