As businesses of all shapes and sizes increasingly embrace employee ownership (EO), one of the key questions that arise what I the right model for me and my business?
Moving from a traditional ownership model to one in which employees have a significant stake in the business can be a complex process, with obvious financial decisions around how to fund the sale/purchase. However, with the right approach, it’s possible to finance an EO transition in a way that supports the company’s growth and long-term success.
At the initial stage discussions will revolve around which is the best ownership structure for the exiting owner, the business and the future employee-owners. There are 3 routes to explore:
Direct employee ownership, where employees become individual owners of shares; Indirect employee ownership – where shares are held collectively on behalf of all employees via an Employee Ownership Trust (EOT); or a hybrid model, combining both direct and indirect share ownership.
In this feature, we will explore the different models and the funding options available for businesses transitioning to employee ownership.
Direct Employee Ownership
Employees become individual owners of shares in their company, often using the tax advantaged share plans that are available. Using this model, employees normally acquire shares in their business through; buying shares (using a tax efficient Share Incentive Plan (SIP), via free shares (shares are gifted, often tied to business performance and bonus schemes) or through Share Options (HMRC tax advantaged schemes buying shares by exercising options when they can be afforded or when certain criteria are met).
Indirect Employee Ownership
Shares are held collectively on behalf of all employees, usually through an Employee Ownership Trust (EOT). Many companies use an EOT to hold the shares, often paying the exiting owner for those shares, over a period of time (this is called deferred payments). The EOT model is one which provides every employee with the same rights without the obligation to purchase shares directly using their own money.
Hybrid model, combining Direct and Indirect Employee Ownership
Shares are held in a combination of collective indirect ownership and individual direct ownership. Usually an EOT will hold the majority of the shares in order to provide a stability of ownership. Alongside this an SIP running in conjunction, providing a mechanism for distributing the remaining shares to employees.