This article was originally published on the 1st of May 2019.
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….for everyone.
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 business exit strategy.
Looking for a handy checklist that will walk you through all that’s needed when preparing your business for sale? We’ve created one with all you need – and you can download it here.
What is an employee owned business?
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. You can hold shares in public companies, who are listed on the stock exchange, or you can hold shares in private companies, who are not.
For Employee Ownership a business restricts the ownership of its shares to 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.
In actual fact, not all shares need to be owned by employees, but a majority is required. So when Julian Richer, Richer Sounds, decided to make a gift to his employees, it was 60% of his own shareholding.
Julian is quoted as saying, “I have always planned to leave my company in trust on my death for the benefit of the colleagues in the business. Having hit the ripe old age of 60 in March, I felt the time was right, rather than leaving it until I’m not around, to ensure that the transition goes smoothly and I can be part of it.” (source employeeownership.co.uk)
An Employee Ownership Trust (EOT) can be created to legally act as a pseudo board of directors. Representatives are drawn from all aspects of the business. This ensures all decisions are made in the best interest of the whole business. Voting decisions might include changes to employment T&C’s, declaration of dividends or rewarding success.
Employee ownership is a growing business structure in the UK
Generally speaking, there are 2 main catalysts behind the decision to move to an employee ownership structure. The first is simply the desire for the current business owners to retire. Most commonly for this to happen 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 route is taken, payment is made to buy the shares of the company from the current owners and 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 one prerequisite to success – having the right culture.
Employee ownership doesn’t change the traditional structures of a business. There is still a need to have people in management and leadership positions just as much as people on the shop floor and production lines. For this hierarchy to work effectively the culture amongst all staff 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.
The person on production has to trust that the leadership are making the right strategic choices.
The entire workforce have to collectively believe they are all working to the same goals and they also need to be able to challenge decisions.
Lessons from the 2020 pandemic
Cast your minds back to March 2020. Greggs the bakers were amongst the first promising full pay for staff who needed to self isolate, rather than sick pay. Contrast this to Virgin who immediately put staff on 8 weeks unpaid leave.
Both of these decisions were announced before the government announced the furlough scheme. What does that demonstrate about the culture of each organisation?
Throughout the 2020 pandemic we have seen a new description of key workers. Supermarket staff, public transport operatives and cleaners are all elevated above those working in restaurants, cinemas, gyms and estate agents. The true key workers were identified.
The roles key to surviving the 2020 pandemic are different to those which prevented the Whalley Bridge Dam collapse in 2019. Whose to say that the office cleaner who has 30 years service with the same business hasn’t picked up a thing or two during that time.
Why make these points? Well, the concept that employees with no leadership experience can own a business, is sometimes difficult to accept. The pandemic demonstrates that we all have an important part to play. But to get the best out of any employee, they need to feel looked after, listened to and respected.
The 6 benefits of employee ownership for your company
The reality is that there are common factors that contribute to the success of employee owned companies;
Recruitment is a serious business. It is no longer a numbers game, just putting enough bums on seats. Having the wrong people in your business can be costly. The effects of having the wrong people in your business is plainly and succinctly described by Donald Moore, Chairman of Rownlinson Knitwear on The Business Mastermind podcast.
Remember, under employee ownership the company culture has evolved. It is open and collaborative. Supportive and accountable. Any recruitment should be made on a persons ability to fit and thrive within that culture. 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. We’ve seen 12 month probationary periods, but it can be even longer.
It can take time to know if a person ‘gets it’ and if they will settle in well. Some simply won’t make the change from a traditional culture.
Having extended probationary periods allows you the time for full assessment and re-alignment. Vital is the ongoing reviews with the new staff throughout that time. They need to know which behaviours are no longer acceptable, and you need to know they can adapt.
The construction company Lindum Group have been nominated as one of Britains best employers multiple times. Attending the black tie event in London were 18 company representatives, one of which was Brian O’Rourke. In an interview with LinconshireLive.co.uk he reflected;
“I actually worked for Lindum Group while I was still at school. I started on site properly the day after I finished my exams in 1985. Initially I was a subcontractor working alongside my dad. I came on the books in 1999.
“I started as a labourer and have worked my way up to being a contracts manager. I really like working for Lindum and have actually had other members of my family come onto the books too.
“I am part of the share ownership scheme, which means I buy shares in the company every month. This really makes me feel part of the business.
“I definitely feel like I’ve been looked after during my time here.”
2 Direct rewards
The employees own the shares of the company and the success of the company determines profitability. Profitability, in turn, determines the ability to pay dividends.
In a standard company those dividends are paid to faceless shareholders who don’t always work in the business. The size of the dividends can be a catalyst of frustration. For instance, in 2019 Astrazeneca paid out £1bn in dividends to shareholders whilst also making job cuts.
This may well be a sound business decision, but as an employee facing redundancy, the feeling is different.
Under employee ownership the link between work and reward is straight forward.
Work well – grow profits – receive a dividend payment
Staff also begin to appreciate business more. They begin to learn that cashflow is important. That not all profit can be paid out as dividends. That some has to be reinvested.
The business benefit is that people naturally work smarter, more efficiently and reduce downtime. When they know their own rewards, the cash in their pocket, is reliant on their work, they give 110%.
Unipart Logisics are on record with rm2.co.uk as saying;
“Our customers see the advantages of ‘Performance through Engagement’. Not only do they get reduced cost and the elimination of waste, but they also benefit from hundreds of innovative ideas. This is a result of having employees that are truly engaged in helping to grow their business by generating ideas and solving problems. It can bring considerable customer benefits.”
3 Staff Involvement and Innovation
Direct employee reward is a great catalyst for creativity , if the company culture is open and inclusive. Like a spider’s web each of these aspects are closely connected and effect each other.
Let’s take a stereotypical scenario. Perhaps an office junior recognises the need for an improvement and makes the suggestion known. More long serving staff or senior ranking staff reject the suggestion. They may see the benefits, but the cost of implementation is too onerous for them, personally. Worse still, they may feel a junior making such a suggestion undermines their more senior position.
The result is that nothing changes. Worse still, if this junior employee has their suggestions rejected frequently enough, they stop making them.
In the spiders web of employee ownership, culture has to be first. Change the culture to one where suggestions will be listened to, evaluated and tested before either being adopted or rejected.
Once the culture is accepting, employee owned businesses begin to see is a flow of ideas emerging. Perhaps beginning with procedural or production improvements which are cost saving. There will then be a move into more radical change ideas. Moreover, a lack of innovation has a detrimental effect on company value
Unfortunately, these ideas don’t happen by themselves. By changing the company culture you have removed a road block. To promote more ideas, innovation requires a working culture with flexibility and freedom. This is one of the reasons why it flourishes in employee owned businesses.
For Arup Group an innovation fund provides structure. Employees with development ideas are given the money and time to test those ideas during working hours. For other companies, innovation is encouraged by formalising a time for brainstorming. A straightforward suggestion box will only take you so far. You need to encourage and tease involvement and improvements out of staff.
And, yes, there may well be an overhead costs to putting these structures in place, but payback will come soon enough.
Guy Singh-Watson of Riverford Organics reflected in an interview with The Observer;
“I don’t think you get most of what staff can offer by motivating them just with money. All the research tells us that’s rubbish. With a lot of planning and work, we can achieve a lot more.”
4 Business Responsiveness
How many times have you had to wait. Perhaps not in your business, but as a customer yourself. You’ve made a request and the person you have been dealing with sends it up the line. Weeks later, a response comes back down the line to you. At which point, the need may well have passed.
Something as simple as a heatwave can really highlight this.
- staff request desk fans
- request goes to purchasing
- management authorise the purchase
- agreement goes back to the staff
- fans are ordered for delivery
- and by the time they arrive, the weather has changed and staff morale has hit rock bottom.
Because the employees effectively “hold the purse strings” actions are much swifter in their execution. In our fan scenario, it is possible to have costed, approved and installed a full air conditioning unit in the time it takes some businesses to order desk fans.
Desk fans are pretty insignificant but they do demonstrate reaction times. This about the other business processes you action;
- changing suppliers
- moving to a new computer or phone system
- dropping a problematic customer
- resolving a customer complaint
- whether to support a local charity
How many times have you lost business because your business was unresponsive. Or lost out to competitors because your technology let you down.
If your business was employee owned, giving your staff a greater degree of decision making, would you have won more business because of their responsiveness?
5 Tangible results
The previous 4 items are quite touchy-feely. Here we look at the hard facts.
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 an FSB interview, 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”.
Here are some more facts;
- Successive governments have encouraged employee ownership as a beneficial business structure through tax incentives. Provided certain rules are met, the transfer of a controlling stake in a business to an Employee Ownership Trust gives vendors relief from any Capital Gains Tax (“CGT”) that might otherwise be paid.
- In the UK there are around 300 businesses in employee ownership, with over 20,000 employee owners, spanning several industries.
- They now contribute £30 billion to GDP in the UK.
- Productivity in the first year of employee ownership status inreases by 6.9% on average.
- When surveyed, 75% of those employees are more motivated and committed to their business under employee ownership.
- The combined sales through this company structure has varied between £19.2m and £22.7m over the past 7 years.
- Employee Ownership Trusts can be used to pay income tax-free bonuses to staff.
- 66% of employee owned businesses have no debt.
6. Job Security
One final benefit is that of job security.
For many businesses that go down this route, it is important to preserve the business for all time. Not only do the original owners of the business want to see that their current staff have secure jobs for the future, but also for generations to come.
As a result, it is sometimes written into the employee ownership trust that a business can never be sold. One such company is Rowlinson’s Knitwear, a family business operating since 1935.
In an interview with insidermedia.com, production director Chris Rowlinson reflects on the fact that the company can now never be sold,
“It seemed to us that the interests of everyone were best served by our family taking this action”
“In doing so we could secure the longevity and security of the business, which is our first concern. It just seemed the right thing to do in a business so strongly driven by ethics and our desire to support our employees.”
Examples of UK businesses that are 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
- Lindum, construction
- Wilkin & Sons, manufacturer of Tiptree 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 improve UK productivity?
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. If you are looking for an introduction to a good accountant, let us know.
Whilst there are some significantly large businesses in employee ownership, the growth of this structure seems firmly within the SME market.
It would appear the changes in attitude and the benefits we have listed are more easily accepted in businesses of a smaller scale.
- Direct reward
- Staff involvement and innovation
- Business responsiveness
- Tangible results
- Job security
Once the culture and ethos are embedded and staff have seen the benefits to themselves and to business growth, it becomes much clearer how the business can scale. And the growth is sometimes phenomenal.
As an alternative to a straight, open market business sale, employee ownership is perhaps not top of the list. Asking your staff to buy your company from you is a difficult conversation to have as you settle into retirement. This is where the Employee Ownership Trusts and a supportive bank are valuable.
It might just be the right choice for your business.
As with a lot of business decisions, it is good to start with a benchmark of current company value. Start yours here and let’s open up the debate.