Employee ownership may be the answer for businesses

Selling to your workforce is worth consideration, says Bruce Farquhar

There is one area of the Scottish economy that is quietly booming. Amidst talk of the succession crisis with the “silver tsunami” of business owners who reach retirement age and want to exit their business, an increasingnumber have found a solution that fits their aspirations perfectly.

Many business owners are now considering a sale to an Employee Ownership Trust (EOT).

There are many reasons why a sale to a trade buyer is not attractive, a management buyout isn’t desirable or feasible, and in some cases, despite being a good going concern, there just isn’t a buyer. A sale to the employees is often the ideal answer.

Employee ownership may well be the only topic over which politicians across the spectrum find agreement. The EOT was introduced as part of the Finance Act in 2014 as a specific vehicle to encourage more businesses to consider employee ownership. Business owners who sell a controlling interest in a company to an EOT may qualify for exemption from Capital Gains Tax for the transaction, a significant saving. There are benefits for employees, too. Employees in companies that are majority owned by an EOT can be paid an annual bonus, tax-free up to £3600.

The Scottish Government has also been proactive in its support for employee ownership. A specialist team, Co-operative Development Scotland that operates within Scottish Enterprise in partnership with Highlands & Islands Enterprise, offers guidance to business owners currently exploring succession options. If employee ownership is the chosen route then there may be further support available to assist companies in making the transition.

Employee owned businesses tend to outperform conventionally structured firms on just about every business metric. Firms owned by employees may be more productive, with happier staff and customers than their peers. Innovation levels are higher and wastage is reduced. It’s easy to see why the structure appeals.

Increasingly, a sale to an EOT is becoming the first option on the list of potential succession solutions for business owners considering retire-

ment. The advantages are clear. The owner will achieve a fair price for the business. The seller can dictate the pace of their own exit, not something over which they would have much control in the event of a trade sale. They will also have a fair degree of influence over how the company looks post-ownership transfer. Indeed, it’s possible to incorporate certain stipulations into the legal documentation. For example, the vendor can insist the business will retain the company name or include guidance on the composition of the company board.

From a legal standpoint, an employee ownership transaction is often a smoother, more collaborative deal. The parties involved tend to be working towards a shared vision. This contrasts starkly with a trade sale where the buyer and the seller strive to attain the best deal for themselves. This can become quite adversarial.

Owners of Mediascape, Angus and Shona Knight, could easily have sold their successful audio-visual business to a larger player in the sector. However, they were aware that it was the loyalty and commitment of their workforce that contributed to the company’s enviable market position. They were reluctant to jeopardise the employment of the individuals and were well aware that a trade buyer may have taken the client list and relocated away from their Glasgow-based HQ.

Anderson Strathern’s Corporate Team helped Angus and Shona sell their business to an EOT and they are now able to exit the business when it suits them, secure in the knowledge that their jobs are there as long as the company remains successful. The deal was completed in the early part of 2018 and already there are signs that employees have risen to the challenge of becoming company owners.

There remains a lack of awareness and knowledge about employee ownership and the importance of receiving the appropriate expert legal advice is critical to achieving a positive outcome.

Our experience in advising on succession options and EOT transactions tells us it’s not an option that will fit with every business. However, it’s interesting to note that of our clients who have taken this path, every single one is confident they made the right choice. A properly constructed sale to an EOT can fit well with the aspirations of the company owner, inspire and incentivise the employees, and provides a stable platform for the future growth of the business. Bruce Farquhar is chair of Anderson Strathern and a partner in the firm’s Corporate Team