Employee Ownership Trusts - Are they the way forward?
We’ve been looking at different ways companies can be formed and managed, and came across Employee Ownership Trusts (EOTs). EOTs were first set up by the UK government back in 2014 following the Nuttall Review of Employee Ownership – this confirmed that employee-owned companies perform better and have a more committed and engaged workforce. The following article will take a general look at EOTs and highlight some of the pros and cons for businesses that move to this model.
What exactly is an EOT?
An EOT is a trust that enables a company to become owned by its employees and can be set up by a company’s existing owners, perhaps as part of their exit or succession planning strategy, or by founders starting a new business which they wish to be employee-owned.
EOTs allow business owners to sell their shares to a trust on behalf of their employees, effectively making the employees the majority shareholders of the company.
Despite this current initiative being relatively recent, the oldest EOT business in the UK is the John Lewis Partnership. That company was set up in the late 1800s and transitioned to full employee ownership in 1950 by the founder's son, John Spedan Lewis. Today, there are now approximately 1,300 employee-owned companies.
Pros of employee ownership trusts
There are several key advantages for businesses that decide to be co-owned by EOTs. They are as follows:
• Improved employee motivation; one of the key advantages of EOTs is that they can significantly boost staff motivation. A simple explanation for this is that it’s a bit like owning anything, if it’s yours, you tend to care for it a lot more – so when employees have a direct stake in the company's success, they are more likely to be invested in its performance and will often go the extra mile.
• Retention and attraction of talent; along with motivation, when firms are operating within an EOT, staff tend to have a greater personal investment in the company and, as a result, will most likely stay within the business. Not only that, it can be quite an attractive feature when recruiting.
• Tax benefits; Businesses that are co-owned by EOTs can pay tax-free cash bonuses to their staff of up to £3,600 per employee, per year. Also, the sale of a controlling interest in a company to an EOT is exempt from Capital Gains Tax.
Cons of employee ownership trusts
Before a company enters into an EOT arrangement, there are potential downsides to consider:
• No money immediately; unlike a market sale, money from an EOT is paid over a period of time – and sometimes the waiting can be considerable for shareholders.
• Things can get complicated; EOTs can introduce complex governance structures as decisions often need to be made collaboratively. This can lead to slower decision-making processes and potential conflicts among employee shareholders.
• Loss of control; by transferring ownership to the EOT, business owners will no longer have the same level of control over the direction of the company.
Want to know more?
If you’re interested in EOTs and want to find out more, check out Isca Ventures - http://www.iscaventures.co.uk. Isca Ventures provides independent and specialist corporate finance advisory services, with offices in Exeter and Bristol. They specialise in exit planning and company sales, management buy-outs, acquisitions and fundraisings.
Another great source of information is the Heart of the South West Growth Hub -https://www.heartofswgrowthhub.co.uk/. It’s a HotSW LEP-funded (voluntary partnerships between local authorities and businesses) outfit that offer free business advice and support services for startups and established businesses – covering Devon and Somerset.
Is an EOT something you are or have considered? Perhaps you’ve created one, or are an employee in a firm that is EOT-owned. Let us know in the comments below – we’d love to hear from you.