Pandemic will speed up staff ownerships
THE disruption of the Covid-19 crisis has been of sufficient magnitude that many companies have had to rethink business plans and strategies in ways unimaginable less than six months ago.
Through our ongoing dialogue with firms we see first-hand how difficult the last few months have been. Indeed, it is safe to say that the challenges that have emerged are the likes of which have never been seen before. Many businesses have been resourceful, interrogating new opportunities and exploring different business models – seeking out solutions so they come out the other side in better shape for the challenges that lie ahead.
One approach the pandemic has shone a light on is employee ownership.
Employee ownership is exactly what it says on the tin – it refers to the ownership of a company, either in part or in whole, by some or all of its employees.
It generally takes place in one of three ways: direct ownership, where employees become individual shareholders with a majority stake in their company; indirect ownership, where shares are held on behalf of employees in a trust; or a combination of both direct and indirect. Instead of the traditional method of selling a business to one or a group of buyers, an employee ownership trust is established that purchases the shares from the owner, usually resulting in strong tax benefits for the seller. This last point is especially pertinent following the announcement earlier in the year of the reduction in thresholds for entrepreneurs’ relief from £10 million to £1m – no capital gains, income or inheritance tax liabilities would arise on the disposal of a controlling interest in a company to an employee ownership trust.
Barclays has a track record of supporting employee ownership. Last year, we helped the 15-strong team at East Kilbride-based engineering consultancy firm Grossart Associates to procure the business from its owners who were planning for their retirements.
The owners were concerned the sale of the business to a trade player could create commercial disruption and could not guarantee that it remained based in Scotland. By establishing an employee ownership trust, the financing of which was delivered by Barclays, staff were able to take over the business without investing their own money. In return, the owners were able to achieve a fair price while maintaining some control over the future direction of the company.
As the full economic implications of the pandemic materialise, business owners may be looking at alternative methods to recapitalise that don’t involve taking on more debt or the buyout of the company at unacceptably low values.
Employee ownership offers a viable solution that delivers benefits to both the owner and their employees. There is also growing evidence that shows employee owned businesses are more resilient to the financial implications of Covid-19, largely due to increased productivity and performance of staff wishing to give back to the business they now own a stake in.
During such turbulent economic times, transparency between employees and management can be vitally important for maintaining staff morale, which in turn can also positively impact productivity and performance.
Transparency is a key component of an employee ownership trust. Senior managers of an employee owned business have a duty to keep the trustees of an employee ownership trust informed of important business decisions. The trustees then have a role in analysing these decisions and responding in a way that looks after the best interest of the employees. If managed well, this business model can help a company emerge through difficult times stronger than before with increased staff esteem.
For business owners wishing to explore the employee ownership model, either as a complete buyout or method of recapitalisation, it is simply a matter of speaking to your bank relationship manager or accountancy firm to begin the process.
It may well be the workable solution many are looking for, and I predict more and more employee owned businesses will emerge as we get to the other side of the pandemic.