Could employee ownership be the best way forward for your business?

Get the right exit strategy for your business

It's been a tough few years for businesses and their owners. The Covid-19 crisis was as sudden as it was deep. Strategies were derailed and plans were dropped – including the succession plans of many business owners who had previously been looking forward to a restful retirement.

With economists forecasting a decline in appetite for acquisitions in the coming months, what options exist for business owners looking to retire?

One option has been the perfect solution for many business owners: the sale to an Employee Ownership Trust (EOT). There's no need for an expensive marketing campaign, and the exit strategy can be tailored to fit with the business and the aspirations of the owner. Employees benefit greatly from the continuity and security, and customers are happy that it’s business as usual.

Is employee ownership right for you?

A recent survey found that 76% of Scottish employee-owned companies surveyed believed their ownership model helped them get through the Covid-19 crisis. Because employees are owners with ‘skin in the game’, the adaptability of employee-owned firms during Covid-19 allowed them to react swiftly and redeploy resources efficiently to ensure their sustainability.

Co-operative Development Scotland (CDS), the arm of Scotland’s enterprise agencies that supports employee-owned businesses, can help you decide if employee ownership is right for you and your business.

To help you decide if employee ownership is the right exit strategy for you, we'll review all the business succession options available to you. If employee ownership is identified as a possible exit solution, we'll run an employee ownership feasibility study for your business.

The report will examine potential ownership structures, as well as the options for governance, management, funding and how a transition would occur.

What are the benefits of employee ownership?

Employee ownership gives workers a meaningful stake in their organisation, together with a genuine say in how it's run.  It roots business in Scotland, drives performance and boosts economic wellbeing. You, your business and employees will benefit from:

• A competitive price and pain-free exit for the owner
• A secure future for the business
• Low-risk transfer of ownership and leadership
• Better employee engagement
• Increased productivity and innovation
• A greater ability to attract and retain high-quality talent

What is the Employee Ownership Trust (EOT)?

Employee ownership has been around for decades. Indeed, John Lewis Partnership has been owned by its employees since 1929. However, in 2014, the Finance Act introduced a new model for employee ownership - the Employee Ownership Trust (EOT).

The EOT is designed to encourage more business owners to consider a sale to their employees as a succession option. And, subject to certain conditions, it also brings some tax advantages to both the owner as seller, and the employees. 

If the vendor sells a controlling interest to the trust then he or she faces no Capital Gains Tax on the sale (in most business sales the sale would be subject to Capital Gains Tax above the Business Asset Disposal threshold of £1 million, with that first £1 million being taxed at the 10% tax rate if all the criteria are met). In addition, if the company is controlled by an EOT, then it can pay a bonus to employees - of which, up to £3,600 per annum is free of income tax.

10 reasons to sell to an EOT

• Get the fair market value for your business
• Preserve your company location and culture
• There are no suitable buyers available
• Avoid the hassle of a commercial sale
• Keep existing management
• Flexibility in structure
• The owner wants to keep some shares
• Maintain ties with your local community
• Safeguard a family legacy
• Owners can exit gradually

Next steps

Free exit planning advice

As owners approaching retirement re-evaluate their ownership in the light of increased business risks due to Covid-19, their requirement for exit planning advice is likely to increase significantly. However, with the merger and acquisition market slower than normal and the UK formally in recession, the exit options are likely to be limited.

CDS can provide free advice, including an ownership succession review and an employee ownership feasibility study.

Find out more about employee ownership and our support. 

Selling your business masterclasses

Planning for succession is one of the biggest challenges a business owner will face, but giving the topic early consideration can mean better results for you, your employees and your business. 

To help you decide whether an employee buyout could work for you, we're hosting a series of ‘Selling your Business’ webinars over the coming months, exploring succession options including employee ownership.

If you're a business owner considering an exit from your company, these workshops are an excellent opportunity to hear from succession and employee ownership specialists, as well as employee-owned companies themselves.

View the full programme