You may well have seen the recent news that Richer Sounds‘ founder Julian Richer has sold his business to his employees. The news comes following a number of high-profile transitions in the last 18 months, with Sawday’s, Riverford Organics and Aardman Animations all making the decision to convert to the employee-ownership model.

Mr Richer described the decision as “doing the right thing”, so what is making an increasing number of founders consider employee ownership? Well, there is no one size that fits all but, in our experience, owners are often concerned to preserve the ethos and values of their business and see no better future owners than the employees who helped create it.

At a wider level, the employee-ownership approach also breaks down the traditional capitalist model, allowing those who work for the business to have a financial interest in its success and this “disruptor” aspect is attractive to many entrepreneurs.

A sale into employee ownership can be a good fit for many owner-managed companies, particularly for those that are deeply rooted in their communities. It can work for businesses of any size (albeit it is perhaps an easier transition where companies have a smaller shareholder base). And it can be attractive for companies which wish to retain control of their independence, ethos and values and which are attracted by the concept of allowing all of those who contribute to a company’s success to share in its rewards.

Rewarding employees with ownership of a business encourages loyalty and commitment, helps with talent retention, and is a strong motivator for delivering excellent customer service, meaning the brand ethos is represented at every level of the business.

Evolution not revolution

At a recent Employee Ownership Association event, one founder commented that employee ownership allowed the business to continue without significant change, meaning that succession planning at shareholder level felt like evolution rather than revolution.

The loyalty aspect of employee ownership also works both ways. Many business owners feel a responsibility to the people who have worked to make it a success and are concerned that sale to trade could result in job cuts or the relocation of the business away from its community.

The decision fits with their core values; with the added benefits of showing customers that they are a responsible employer, or that they are actively supporting the community in which they’re based. There appears to be a growing attraction for entrepreneurs to take this route, and to be seen as doing something different and challenging as a way of being recognised as a pioneer in their sector.

How employee ownership works

The sale to employee ownership is like any other corporate finance event, in that there is a significant amount of work to be done to actually purchase the business from the previous owners and to ensure the structure of the new employee ownership business is well founded. I sometimes sense that employee owners wish more had been done in the lead up to transition to employee ownership to map out matters such as how future profit share will be allocated to employees or dictating what matters should be considered by the employee council.

The reality is that only so much can be dealt with in advance and, once a business has become employee owned, to make it work well requires focus, planning and a significant time commitment on the part of management and the employee owners. That process itself can be part of transition, with employees, perhaps for the first time, being involved in structural business decisions.

There is no doubt as well that the employee ownership sector is creating its own momentum. The conversion of household names like Richer Sounds and Aardman Animations to the model should give owners considering employee ownership increased confidence. The reality, of course, is that employee ownership has been around for many years, championed by businesses such as John Lewis and Arup but seen as an outlier rather than a mainstream sale or succession planning route.

Government incentives

The government’s support for employee ownership has been consistent for a number of years (with all political parties’ advocates of the model). The introduction of tax reliefs in 2014 has assisted, but in our experience is not the primary driver, and broadly means that any sale will be free of capital gains tax for the selling shareholders and profit share to future employees will be income tax free up to £3,600.

Employee ownership is not right for everyone, but it should be one of the routes mentioned to founders alongside a trade sale, a management buy-out and a listing to allow owners to make an informed choice on the best option for their company.

Our anticipation is that other factors, such as an increasing number of baby boomers looking to sell their businesses, owners wanting to partially exit over a period of time, and businesses wanting to retain the independence that has allowed them to thrive, will all see an increasing interest in the model.

Although the concept is growing in popularity – driven, as we have seen, both by government incentives and companies such as Riverford, Aardman Animations and John Lewis using the model – employee-owned businesses are still uncommon in the UK. The potential benefits of the employee ownership model are very significant, and we see plenty of support out there for those considering this new business model. With several household names now reaping the rewards of the employee ownership model, we expect the increase in uptake to continue.

Ben Watson is partner at UK law firm TLT

Further reading

Employee Ownership Trusts could prove valuable for succession planning