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Employee ownership guide

Could switching to employee ownership help your business? Learn more with Carole Leslie, a specialist adviser at Co-operative Development Scotland, and get the information you need in our series of short videos.

Explore the basics of employee ownership in this video guide from Co-operative Development Scotland, the arm of Scotland’s enterprise agencies that supports employee ownership and co-operative business models. Get advice on making the transition, funding, business structures and more.

Read more on successful succession planning 

Employee ownership explained

What does it mean to be employee-owned?

Basically, an employee-owned company is completely or significantly owned by its staff – that is, the people who work there hold the majority of shares, either directly or indirectly.

Get an overview of how a business can transition to staff ownership in our intro video:

Key points

In any employee ownership transaction, there are two parties: the business owners (vendor) and the employees (buyer).

A price is agreed when the parties find a balance between what the vendor would like to sell the company for and how much the buyer is willing or able to pay. The owner and employees work together to ensure the price is fair and suits the interests and aspirations of both parties.

Most employee ownership transactions take advantage of legislation that allows business transfers to be completed free of capital gains tax.

They do this by establishing an Employee Ownership Trust (EOT) to represent the buyers. Once the trust is set up, the vendor sells their shares to the trust for the agreed price.

Seeking specialist advice ensures the process flows smoothly and helps you achieve the best possible outcome for all parties.

Why consider employee ownership?

In our next video, you can take a look at the many advantages of employee ownership for vendors, staff and the local economy:

Key points

Benefits of employee ownership include:

  • Vendors receive a fair market price for their business and can decide how much involvement they want in the business when the deal is complete – so they can exit at their own pace.  
  • Payments can be staged to suit the vendor's personal financial needs in a tax-effective way.
  • Employees share fully in the profit distribution and benefit from knowing the business is secure and won’t be closed or relocated.
  • Keeping jobs and skills in the area is good for the local economy.

How to fund an employee-owned company

There are several ways to obtain funding for an employee buyout. Explore the options in this video:

Key points

The main sources of funding for employee ownership include:

  • Vendor financing – The owner replaces the equity they have in the business with debt. The company then repays this debt with a mixture of available cash reserves and future surplus cash. Most employee ownership transactions involve an element of this type of funding.
  • Mainstream lenders – External funding can come from banks or commercial organisations, which are showing increased interest in supporting employee-owned companies.  
  • Specialist lenders – These lenders cater for employee-owned companies, and so they understand different company dynamics and the need for patient capital. 
  • Employee investment – Some employees are willing to contribute their own money. There are a number of tax-effective ways to encourage this.

Different employee ownership models

There’s no single business model for employee-owned companies — rather, it’s important that the structure supports the purpose of the business and aspirations of its staff.

Learn more about the different types of employee ownership and their advantages in our next video:

Key points

There are three main types of employee ownership:

  • Direct – Employees own the shares themselves and receive dividend payments from the profit
  • Indirect – Shares are owned by an Employee Ownership Trust on behalf of the employees
  • Hybrid – A mixture of direct and indirect ownership, where there is an employee share scheme but a trust also holds some of the shares

Benefits of employee ownership

Research shows that employee-owned businesses are more productive and their staff enjoy greater wellbeing. Find out more in the final video in our series:

Key points

In an employee-owned company, staff have more information and insight into how the business is run and benefit more directly from its success. This leads to greater engagement, productivity and innovation.

Businesses owned by their employees report fewer staff absences and less wastage, and it’s often easier for them to attract and retain top talent.

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

Find out more

Interested in exploring employee ownership for your business? Get in touch today.

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