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Employee ownership is a fast-growing form of business ownership in the UK. But what is it, and how could it benefit your company?

Employee ownership explained
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Employee owned businesses are totally or significantly owned by their employees. Broadly, there are three different types of employee ownership.

  • Direct – Employees own the shares
  • Indirect – Shares are owned by an employee trust
  • Hybrid – A mixture of both of the above: An employee share scheme is in place while a trust holds some of the shares

The process

Carole Leslie, a specialist adviser at Co-operative Development Scotland, says there are three elements to any employee ownership transaction:

  • Parties – The employee group (buyer) and the business owner (vendor)
  • Price – Reaching a balance between what the vendor would like to sell the company for and how comfortable the buyer is with the proposed amount
  • Process – The trust is set up and the vendor sells their shares to the trust. The trust then pays the vendor the agreed price

Why consider employee ownership?
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Most employee ownership transactions are set up to take advantage of legislation that allows business transfers to be completed free of capital gains tax.

“What matters is that the structure fits with the business purpose, and meets the aspirations of the vendor and the employees”, says Carole.

Seeking specialist advice ensures the process flows smoothly and you can achieve the best possible outcome.

Why should you consider it?

Employee ownership can present many benefits - both for vendors, and employees.

How to fund employee ownership
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It helps vendors receive a fair market price for their business, enabling them to exit at their own pace - whilst payments can be staged to fit with the vendor's personal financial needs.

It's also tax effective, and vendors decide how much involvement they have in business once the deal is complete.

For employees, there are many benefits. They have greater insight into the operational running of the business and share in profit distributions. With this increased awareness of revenue, costs and profit staff are more engaged resulting in a boost to productivity levels and a reduction in absences.

A study conducted by Edinburgh Napier University found that employees in employee-owned firms are also healthier, with higher levels of general well-being.

Three types of employee ownership
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There are a number of different methods of funding employee-ownership companies.

Vendor financing

Most employee ownership transactions involve an element of this type of funding. It involves the owner replacing the equity they have in the business with debt. The company then repays this debt with a mixture of available cash reserve and future surplus cash.

Mainstream lenders

These include banks and commercial organisations, who are showing an increasing interest in supporting employee-owned companies.

Benefits of employee ownership
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Specialist lenders

These type of lenders cater for employee owned companies, understanding the need for patient capital and different company dynamics.

Employee investment

There’s a number of tax-effective ways to encourage this.

Find out more

If you're interested in exploring employee ownership for your business, get in touch.

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