As companies seek ways to adapt to an evolving social and economic landscape, traditional business models of ownership and operation are being re-evaluated. In light of ongoing uncertainty with the new tax regimes, business owners face increasing pressure to future-proof their companies.
The Employee Ownership Trust (EOT) has emerged as an attractive option for those shareholders and sellers seeking long-term stability while preserving company culture and legacy. Now, more than ever is a critical time to consider transitioning to an EOT. It offers financial advantages such as 0% Capital Gains Tax (CGT) while ensuring business continuity amid potential economic shifts and sales are usually at full commercial value.
Since introducing the EOT legislation in 2014, the employee ownership sector has grown by over 90%. The sector has transformed from being dominated by large businesses to a diverse ecosystem primarily comprised of small and medium-sized enterprises. By June 2024, according to the Employee Ownership Association (EOA), there were 1,650 EOTs in the UK, representing a 37% growth over the previous year.
The success of John Lewis, a pioneer in employee ownership for over 100 years, exemplifies the potential of the EOT model. John Lewis has fostered a culture driven by shared goals and collective responsibility by transferring ownership to employees. This approach proves that employee ownership can be a profitable and highly sustainable long-term business model. As Peter Block, an author, consultant and speaker in the areas of organisational development and community building aptly put it, “Ownership is not about entitlements, it’s about responsibilities.” Inspired by these examples, many businesses are now exploring the benefits of EOTs to secure their future.
Purposeful Capitalism and EOTs
The EOT model is closely aligned with the concept of purposeful capitalism, where businesses aim to balance profit with social impact. By giving employees, a stake in the company, EOTs help embed a culture of shared purpose and accountability, fostering an environment where long-term success is prioritised over short-term gains.
In most employee ownership structures, shares are typically held by a Trust. This allows employees to enter and exit the company without the need to constantly reissue shares. As beneficiaries of the Trust, employees focus less on short-term gains to drive shareholder value and more on the long-term profitability and sustainability of the business. Since no single person owns the shares, the company culture shifts towards balancing profitability with employee well-being. This structure also helps reduce succession planning issues, as the business is designed to operate under a long-term model.
Key Learnings and Benefits of Transitioning to an EOT
Data from the Employee Ownership Association (EOA) evidence that employee ownership has tangible benefits for businesses, including a 20% increase in performance and revenue boosts of up to 43% post-transition. Research shows that employee-owned businesses are 25% more likely to see profit growth over five years after becoming employee-owned and are 50% more likely to invest in R&D. This highlights how the EOT model aligns long-term strategic goals with immediate business needs, facilitating both stability and growth.
Aligned Interests: Employees become co-owners, ensuring they have a vested interest in the company’s success. Eric Keane of Intelligent Finishing Systems (IFS), an EOT since 2018, adds a nuanced perspective on the impact of an EOT on management teams: “One side of me says that an EOT can make a management team feel nervous, the other side of me says it makes them feel comfortable and secure. It means different things to different people.” This insight highlights that the EOT model while offering stability, can affect individuals differently depending on their role and expectations within the company.
Cultural Preservation: The company’s culture is maintained as management rather than shareholders drive decisions, and employees are engaged more in the business’s long-term future.
Positive Impacts on Employees: The EOT model not only boosts business performance but also improves employee well-being. Further data from EOA shows that employee-owned businesses are 73% more likely to see increased satisfaction, motivation, and work-life balance among staff. Additionally, they invest 12% more in training, skills, and on-the-job development, with average wages often £2,700 higher compared to non-EOT companies.
Tax Benefits: Selling to an EOT can provide seller tax advantages, including 0% Capital Gains Tax (CGT) and tax-free employee bonuses of up to £3,600 annually. A sale to an EOT can, in fact, be the best and most lucrative exit strategy.
Improved Morale and Productivity: Jamie Dowdall of Mayflower Stone, an EOT since 2022, noted, “After the first profit share, morale improved as employees embraced the idea that their efforts directly affect their financial rewards.” Nigel Roberts of Benbow Group, an EOT since 2022, echoed this sentiment, observing that “employees started to see the benefits of their efforts more clearly, which enhanced their engagement and overall morale.”
Employee ownership has led to transformations across various sectors, with businesses adopting a people-powered approach that contributes not only to profit but also to greater innovation, adaptability, and sustainability. This model prioritises people over profits and demonstrates that aligning employee interests with the company’s long-term success enhances both morale and performance.
Busting the Myths of Employee Ownership
A common misconception is that transitioning to an EOT is a gift rather than a commercial transaction. EOTs operate on a commercial basis, usually selling at full market value, with the added advantage of 0% CGT. This tax incentive makes the EOT model financially attractive to sellers often more than even a trade sale.
While the complexities of setting up an EOT may seem daunting, these challenges are very manageable and straightforward with the right advisory support. EOTs empower employees and make leadership more collaborative, but businesses remain professionally managed by senior teams, with trustees ensuring the company is run effectively. In this sense, Peter Drucker’s quote, “The best way to predict the future is to create it,” resonates deeply with the ethos of (EOTs). This philosophy aligns with the proactive nature of EOTs, where businesses aren’t simply handed over to a new generation of owners but are shaped by the employees who inherit them.
Practical Steps for Setting Up an EOT
Transitioning to an EOT can be broken down into straightforward steps:
Initial Consultation: Seek professional advice to understand the financial, legal, and operational implications of the transition and how your business will fit.
Valuation: Obtain a fair, independent valuation of the business. This will usually be at full commercial value, although often paid over a period of time.
Trust Establishment: Set up the Employee Ownership Trust with a clear governance structure, appointing trustees to manage the trust. Sellers can sit on the Trust, but an Independent Professional Trustee is strongly recommended.
Sale Agreement: Finalise sale terms, which may include vendor loans repaid over time, typically 7-10 years.
Employee Communication: Ensure employees are informed and engaged throughout the process to align them with the company’s new ownership structure. Think evolution not revolution initially in that it takes time for the benefits and changes to filter through.
Ongoing Management: Continue to build and train the senior management team, with a focus on long-term business growth and success. Sellers can stay highly involved and still have a Senior position if they wish and ultimately Senior Directors will tag team succession (handover roles) in an EOT much like old-fashioned Partnerships.
These steps help ensure a smooth transition, reducing the financial risk and safeguarding the company’s legacy. Jamie Dowdall of Mayflower Stone shared how transitioning to an EOT allowed him to maintain the company’s relationships with suppliers and manage cash flow, ensuring a sustainable future.
Freedom Day: In Employee Ownership Trusts (EOTs), “Freedom Day” marks the moment a business transitions to employee ownership, a significant milestone for employees who, through the EOT structure, become owners and beneficiaries. Increasingly, however, “Freedom Day” can also refer to the date when the sellers have been fully paid the initial purchase price of the EOT as this has often been loaned to the Trust over a period to create a commercial value and enable the buy-out. This second “Freedom Day” when all seller loans are cleared is pivotal, as it removes financial constraints, allowing the company greater flexibility to reward employees.
Once the sellers are fully paid, many EOT businesses begin to offer substantial benefits to employees, often aiming to place them in the upper quartile of pay within their industries. Enhanced perks like gym memberships, improved life insurance, better pension plans, and tailored employee benefits packages become feasible. Without shareholders pushing for dividends, EOT companies can and should also reinvest more effectively than traditional private firms. Surplus cash that might otherwise go toward dividends can be allocated to strategic investments, such as purchasing freeholds or creating diversified stock portfolios under wealth management. These low-risk investments further secure the company’s future, positioning it for sustainable, long-term growth. After this second “Freedom Day,” EOT companies can focus on building employee benefits and pursuing long-term strategic initiatives often delayed in traditional private firms due to shareholder pressure.
How Employee Ownership Transforms Workplace Culture
Employee ownership significantly impacts workplace dynamics by fostering a sense of ownership and responsibility. This is the revolution, as employees begin to see how their contributions affect the company’s success and profit-sharing, motivation and engagement naturally increase. Nigel Roberts of Benbow Group observed how the shift towards a more transparent and accountable workplace created a much stronger bond between employees and the company.
The EOA also notes that employee-owned companies often see improved productivity and higher staff retention rates, fostering a more motivated workforce. While leadership remains with the senior management team, employee input through mechanisms such as councils and board representation drives a more collaborative decision-making process. Management can be aligned and motivated alongside the EOT via incentivised pay structures.
Strategies for Overcoming Challenges
While transitioning to an EOT offers many benefits, it comes with some challenges. Key strategies to ensure a successful transition include:
- Securing a Fair Valuation: Engage experienced advisors to obtain an accurate valuation of the company.
- Structuring Payments Sustainably: Vendor loans, repaid over time, can reduce financial strain.
- Selecting Trustees Carefully: Appoint trustees who will manage the trust effectively and ensure transparency.
- Employee Representation: Create a governance structure that includes employee representation to maintain accountability.
- Senior team: aligning retention strategies beyond share ownership by offering senior leaders the right performance packages and upper quartile pay.
Cash flow management post-transition is crucial, as illustrated by Jamie Dowdall’s experience: “Sometimes income is viewed as a straight-line scenario. As soon as we signed, the value dipped, which meant we had some cash flow problems.” His advice is to plan for flexible payment terms to ease any financial strain during the transition period and the good news is the EOT legal structure allows for this approach with payments subject to cashflow.
Eric Keane further emphasises the transformative nature of an EOT: “An EOT is a team-driven business model. This includes clearer roles and responsibilities, better pay, and greater transparency. The EOT can decide what the pay bonus will be.” His experience shows how the EOT model not only boosts employee motivation through profit-sharing but also creates a transparent, accountable workplace where employees understand their role in the company’s success.
Reshaping Long-Term Strategy and Decision-Making
Insights from those who have successfully transitioned to an EOT can provide practical guidance and encouragement for others. Nigel Roberts emphasises the potential advantages: “For the right business, if you want to secure the future path of the company, then I would recommend it. It is as good as it sounds.” His experience conveys the importance of careful preparation and strategic planning while reinforcing the long-term benefits of employee ownership and organisational stability.
Under an EOT, decision-making shifts from being shareholder-driven to a more collaborative process, although management still very much sits centre stage. This shift encourages long-term thinking, focusing on sustainable growth and collective success. Employees not only enhance productivity but also help shape the company’s future direction, making employee-owned companies more resilient and adaptable. The Board of Directors and management set the strategy, ensuring the business remains fully commercial while benefiting from employee ownership principles.
EOTs offer competitive sale values, vendor loans structured over time, and tax benefits, including tax-free bonuses, which enhance employee morale and retention. The collaborative approach fostered by EOTs leads to increased innovation and adaptability, ensuring the company remains competitive in dynamic markets.
Creating a Sustainable Future with EOTs
Simon Morton of Eyeful Presentations is passionate about the Employee Ownership Trust (EOT) model, which he explores in his book Employee Ownership: From Boss to Benefactor. He emphasises the importance of having a plan for managing time as leaders step back, highlighting the need for a team-driven approach for successful succession. Morton believes EOTs should prioritise strong culture and strategic planning over just tax benefits. He also notes, “The EOT has been great for Gen Z recruitment, who are focused on values, culture, and making a difference beyond financial success.” Reflecting on his own experience, he explains that after selling, he had to set aside his ego, which allowed the business to thrive under new leadership, leading to significant growth three years later.
With an estimated nearly 2,000 Employee Ownership Trusts (EOTs) expected to be in place by the end of 2024, there is little evidence of EOTs being resold. This is partly due to the tax implications—resales are subject to full Capital Gains Tax (CGT) and any distributions to employees are taxed under PAYE. Culturally, EOTs are designed with long-term goals in mind. Avondale advocates for transitioning to employee ownership with a focus on a 100-year legacy, where senior teams collaborate on succession planning. It is important to note that Employee Ownership is not a traditional share scheme and should not be seen as such. Instead, it represents an exciting, fully commercial business model that reduces the pressure of delivering short-term shareholder returns. This allows the business to focus more on sustainable growth and the well-being of the team.
Transitioning to an Employee Ownership Trust allows business owners to protect their legacy, ensure financial stability, and reward loyal employees, as well as realise full commercial value for their company. For the right business, the EOT model offers long-term organisational stability, with the possibility of a 100-year legacy. It fosters a culture of collaboration and shared success, fundamentally changing how businesses align their purpose with profit, and ensuring a thriving future for all stakeholders.
Avondale is proud to be employee-owned.
Contact us about Employee Ownership Trusts (EOT)
If you would like more information about our Employee Ownership Trust service offering or recent case studies, please browse our website, Alternatively, if you would be interested in a free consultation with one of AVEOT’s experienced advisors, please call us at +44 (0)1737 240888 or submit the form on our Contact Us page.
