Douglas Roberts: Is employee ownership the way ahead for your business?

Numerous studies and statistics show how employee-owned businesses outperform other businesses. They are typically 5-10 per cent more productive than those operating under more traditional structures.

The positive productivity, absenteeism and growth patterns for employee-owned companies are often referred to as “the John Lewis effect” – after the UK’s highest-profile employee-owned business.

As a result of such benefits, the popularity of employee ownership is rising quickly. In the UK, businesses structured in this way already turn over around £30 billion annually, and in Scotland around £925 million. Around 5 per cent of all Scottish businesses are expected to become employee-owned in coming years.

But employee ownership is still the focus of various misconceptions and myths – for example, that as an exit strategy it may mean losing out on a better sale price in the open market. Such fears are either unfounded or easily dealt with.

On the sale price issue, owners who sell more than 50 per cent of the company to employees directly or to an employee ownership trust receive valuable capital gains tax relief. Far from them losing out, this can increase their overall gains from the sale or enable them to offer a lower price to employees while still meeting their own financial goals. Staff, too, can receive tax benefits, on top of the longer-term incentives around having a stake in a business. They are eligible for a tax-free annual bonus of up to £3,600 – an excellent incentive to stick around and perform well.

As an exit strategy, employee ownership offers non-tangible benefits too. We recently provided legal advice to Harvey Map Services, a Doune-based professional mapmaking service for outdoor pursuits such as orienteering, hill walking and mountain marathons. With the founders starting to think about retirement, they decided to use employee ownership to secure its future.

In the words of co-founder Susan Harvey: “Having formed and developed this business into a market-leading company over the past 40 years, we didn’t want to sell to a competitor and see our life’s work absorbed into another company.

“We wanted a succession solution which gave the company, the jobs and the brand a good chance of continued independent existence following our retirement; employee ownership ticked all our boxes.”

To tick all these boxes, however, requires some specialist expertise. Firstly, there are critical decisions to be made around ownership structures, with three choices available:

l Direct employee ownership, where employees become individual shareholders;

l Indirect employee ownership, where shares are held collectively on behalf of employees, normally through an employee ownership trust;

l Hybrid ownership, combining an employee share scheme and some of the shares being held by a trust.

Each choice has pros and cons, and will be more or less attractive in different scenarios. Plus, there are practical and commercial decisions around the value of the business, raising finance from mainstream or specialist lenders, tax, the pace of the buyout, governance, and employee engagement and incentivisation.

Soif you do want to collect the rewards of employee ownership, get advice from experts in the specific structures available.

Douglas Roberts is a Partner in Lindsays’ Corporate and Commercial team.