Employee Ownership – benefits of this growing business structure
Employee Ownership is not right for every team neither is it right for every company. On the other hand, if it is right, the benefits of employee ownership can prove to be financially rewarding.
The benefits enjoyed by businesses who have successfully transitioned to employee ownership may help identify if this path will work for you. It then also informs the choices you have as a business owner when planning your own exit strategy.
What is employee ownership?
Limited companies have shareholders who invest cash in a business and are issued shares in return. By way of financial reward, they can receive dividend payments for those shares. They may have been the original creators of the business, or have invested after it established.
Employee ownership a business restricts the ownership of its shares to only those people who work for the business. Dividends are still issued, but as all the staff are now shareholders, it is they who benefit from the dividends.
An Employee Ownership Trust (EOT) can be created to legally acts as a pseudo board of directors. With representatives from all aspects of the business they make the decisions necessary and in the best interests of the business. This might include changes to employment T&C’s, declaration of dividends or rewarding success.
Howe does employee ownership come about?
Generally speaking, there are 2 main catalysts behind the decision to move to employee ownership.
The first is simply the desire for the current business owners to retire. For this they either need to find a buyer on the open market or conduct an MBO. Increasing in popularity is the move to employee ownership. Whichever of these it is, payment is made to buy the shares of the company from the current owner. Finance is often raised.
The second scenario is philanthropic. Where the company owner, for reasons of their own, begin gifting shares to employees. This might be when an entrepreneur has no line of succession in their family. Alternatively, they want to reward the staff who have been loyal to them from the start and who have enabled them to reach the position they are in.
Does your company culture support employee ownership?
What comes first, the chicken or the egg? For a business to transition to employee ownership there seems to be on prerequisite to success. Culture.
Whilst a business needs to retain a hierarchy with talented people fulfilling the necessary roles from high to low, the culture has to be a collaborative one.
Consider even the smallest of businesses with a dozen employees in total. The person on the shop floor has to trust that the person managing finance has the best interest of the company at heart. The person responsible for sales has to trust that production care about quality control. Everyone has to believe that their collective efforts are working in the same direction but also that they can question and challenge each other openly and without consequence.
The intangible benefits of employee ownership
It might be a difficult concept that employees, who won’t necessarily have business experience, could improve business performance. The reality is that there there are common factors that contribute to the success of employee owned companies;
Recruitment is serious and not just an exercise putting bums on seats and playing a numbers game. Remember, the company culture has evolved. Successful businesses recruit people for their ability to fit the culture, mindset and goals set out. To a large extent, the skillset can be taught.
It’s about people alignment, not individual egos. As a consequence of this, you will often see long probationary periods for new starters. It can take time to know if a person ‘gets it’ and settle in. Some simply won’t make the change from a traditional culture well.
The employees own the shares of the company and the success of the company determines profitability. Profitability determines the ability to pay dividends.
That dividend may have previously been paid to faceless people who didn’t work in the business. Now the link between business success and personal reward is much more obvious. People naturally work smarter, more efficiently and reduce downtime when they know their own rewards are reliant on it.
The open culture, the Employee Ownership Trust and the appreciation of direct reward all a catalyst for creativity. Ideas and innovation increase as everyone in the business knows they will be heard fairly. They may not turn into reality, but they will not be dismissed out of hand.
As the employees ‘hold the purse strings’ actions can be quickly taken. In a heatwave, approval to install air conditioning can be made before the weather changes. It could just as easily be a decision to change suppliers, drop a problematic customer or support a local charity.
There are several reasons why employee ownership is the fastest growing form of business ownership. The Employee Ownership Association (EOA) reports that companies operating this way are more likely to be debt free, with a 3.3% increase in employees and a 4.6% increase in sales year on year. Not to mention increased productivity levels along with increased EBITDA. In a recent article, from the FSB, Deb Oxley of the Employee Ownership Association describes the impact this has on businesses;
“Giving staff a stake in the business is the most powerful thing any employer can do”
She further describes the positive impact on mental wellbeing. By giving ownership to employees, by encouraging more care and the realisation of the impact of their contributions, employees have a sense of achievement and as a result are more highly engaged.
In the UK there are around 300 businesses in employee ownership, with over 20,000 employee owners, spanning several industries. This is growing at a rate of 10% year on year.
Who is employee owned?
We can all name the John Lewis and Waitrose Partnership has being an example of an employee owned business. Here are a few more you may be familiar with plus the sectors they operate in;
- Unipart, logistics
- Hyperion, insurance
- PA Consulting, management consultants
- Lindum, construction
- Wilkin & Sons, manufacturer of preserves
- Erith Holdings, demolition
- Riverford Organics, food box delivery
- Richer Sounds, retail of hi-fi equipment
- Rowlinson Knitwear, school uniform manufacturer
And some of the global names we know like Huawei, Great Lakes Brewing Company, Schweitzer Engineering Laboratories and Le Monde.
Will employee ownership help solve the UK skills gap?
A report from The Ownership Dividend found that more employee ownership companies could improve the UK’s productivity ‘problem’.
SMEs have expressed concern that this business model may not suit businesses of a certain size yet there is a need for wider awareness of this option, particularly as part of an exit strategy.
Aside from the internal benefits on employees in terms of their performance, likewise, consumers also have a part to play. With 41% of consumers who took part in a survey agreeing that they’d be more likely to purchase from employee owned-firms.
A good accountant will explain the tax benefits of this business structure. Let us know if you need an introduction.