Moneymatters Employee ownership

Q— I own a small company, hope to retire in the next few years, and see employee ownership as an option. Can you tell me more?

— It can be an effective solution to business succession and is often characterised by greater productivity.

In an employee buyout, ownership of the business passes to the employees directly or through a trust.

Unlike a management buyout, all the employees are involved. Usually there is little change to the management structure.

Q— Why become employee owned?

dvantages include:

This set-up is potentially unstable as a majority of employees could vote to alter the ownership articles and decide to sell the company to external parties.

Shares owned by an employee benefit trust on behalf of the employees.

This is a very simple set-up and the ownership is very stable. The company doesn’t need to finance any share purchases or worry about the administration of a share scheme.

However, the employees will not benefit from any capital gains in the shares, and ownership may not feel real for the employees.

This is how John Lewis the retailer is set up.

Shares are held by employees directly and in a trust.

Usually more than 50% of shares in this model are held by the employee benefit trust (more usually 70 to 80%), and this will give the company more stability.

The direct ownership of benefit of the employees.

Every employee benefit trust ( EBT) must have trustees who carry out the trust purposes in accordance with the trust deed.

In the ownership structure, if the majority of shares are held within the EBT, power will rest with the trustees to take major decisions based on the interests of the employees as a whole.

These trustees may seek the opinion of employees in making decisions but have the discretion to take action guided by the trust deed.

The trustees usually include at least one elected employee trustee and an independent trustee such as a lawyer or accountant.

Where the owner is exiting over a number of years, he or one of the directors would also usually be a trustee. It is usual for the EBT to have the right to appoint one or more directors.

Q—What is the management structure?

— Employee-owned companies usually have a regular management structure, but with employee participation where appropriate.

Normally there is a board and a management team.

The board has responsibility for strategy, policy, senior management appointments and other similar issues.

Operational decisions are made by the management team.

In smaller companies there will often be an overlap between board and management team.

The directors of the company and, in particular, the managing director, are accountable to the shareholders of the company who are the employees.

In many employeeowned companies there is an employee representative body as well. This is often known as an employee forum or works council.

Should you wish more information on this subject contact your accountant or lawyer and seek their professional advice.

H e n d e rs o n L og - gie is jointly hosting an e m p l oye e - ow n e rs h i p seminar with Blackadders and Co-operative Development Scotland on November 8 at 8.30 am at Discovery Point for those interested in hearing how employee ownership works in practice.