Employee ownership as an exit strategy – what are the advantages?

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Employee ownership as an exit strategy is certainly not a blunt instrument and there are many differences in both the structuring and scale of ownership amongst the current membership of the club. The Government certainly seems to like the notion of employee ownership and in 2014 they provided certain tax advantages for transactions where a controlling interest in a company is transferred to an Employee Ownership Trust (EOT). Those tax advantages include a total exemption from Capital Gains Tax from the vendor’s perspective, and an annual tax free allowance for bonuses paid by the EOT to employees. Several business owners who I have spoken to have had their interest piqued by these advantages.

So, what sort of situation might a transfer to employee ownership suit?  I’ve put down a few thoughts below, but of course there is a myriad of factors to consider.

Are you in the right sector?

In his letter, Mr Parfett says that ‘The model is most prevalent in professional services, high- value manufacturing, health and social care, and retail and distribution — in fact, in most businesses where it is people and the services they deliver that make the difference…’ and this is a key point I think, as this sort of arrangement is going to work best where an increased sense of engagement in the workforce is going to directly improve a company’s competitiveness.

Legacy matters?

Some owners may not wish to pass the business to a trade buyer who may look to exploit synergies which might in turn have negative implications for, say, the brand they have spent years developing, or the workforce to whom they feel a sense of duty even beyond a sale. They would be far less likely to have such concerns with a sale to an EOT.

Financing a deal

Whilst the main UK lending banks have made a return to lending against future cashflows, the amount they might be prepared to lend is not likely to satisfy the vendor’s price expectations and so some vendor debt may also be expected to feature as part of a deal. Over time, the idea would be that the company makes contributions to the EOT which are used to service the debt from the bank and the vendor. From everyone’s point of view it’s therefore vital for there to be confidence in the management team that will be driving the business forward, and there is no reason why that management team couldn’t be subject to some separate incentive arrangements, such as share option plans.

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