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10 Reasons why employee ownership makes sense

Updated: Apr 19, 2023

(1) Selling a controlling interest to your employees qualifies for full CGT relief and lower professional fees saving on average 20% of your sale proceeds compared with selling on the open market.

(2) If there is a downside when selling to your employees, it’s being paid less consideration upfront, however if you can wait for the remainder of your sale proceeds, they represent a great investment. You can charge interest on the outstanding sale proceeds and charge a warrant on a percentage of the company’s shares giving you a further 30 to 34% uplift on the original sale price. The internal rate of return can range from anything between 7% and 15% depending on the debt structure and profitability of your business. Both these financial benefits provide a huge advantage when compared with selling on the open market where you’re exposed to trade competitors and a long and expensive adversarial process.

(3) Employee ownership preserves jobs and pays to be ethical. (4) Employees receive tax free bonuses up to £3,600 per annum and can be incentivised with (5) share options aligning productivity with company objectives.

(6) Employee ownership benefits from an immediate acquirer with no exposure to a competitive marketplace. (7) The sales process is flexible and less complicated resulting in lower advisor fees. In contrast to selling on the open market (8) the owners are able to tailor the deal structure according to their needs avoiding onerous earn outs.

Employee ownership offers a unique opportunity for employees to be involved with improving sales and the effective management of costs. While selling on the open market can leverage synergies for the acquirer, (9) statistically employee-owned companies are more productive when compared with none employee owned firms.

Employee ownership leaves your business intact providing a legacy for the departing owners. (10) Vendors can choose their level of involvement with the business moving forward, either stepping away entirely or continuing to have input as a trustee or consultant.

Comparison of a trade sale with employee ownership

Businesses that are suited to employee ownership are generally mature with profit levels able to service the debt and employee incentives within a reasonable payback period. Ideal candidates will have a good management team in place or a promising management team. An influencing factor in the decision-making process will be a strong ethical affinity between the owners and employees.

Contact us directly for a free consultation and initial assessment of your business on 01384 274 778 or 075 888 925 88.

Due to the day-to-day pressures of running a business, exit planning tends to take a back seat and as a result many owners fail to adequately prepare their businesses for succession.

If employee ownership is a future consideration, there’s several issues you should address now rather than later:

  • Leadership transition will reduce dependency, enabling owners to step away, ensuring a successful future for the business.

  • Profitability needs to be optimised several years prior to transition maximising valuation and enabling your business to pay for your exit.

  • Any cash reserves left in the business qualify for full capital gains relief and

  • If debt is reduced several years prior to exit, the vendors will walk away with more of the sale proceeds.

Should you choose to sell on the open market first, you will also need to reduce perceived risk for a future acquirer.

For more information check out our EO Timeline which illustrates the process including preparation planning. There’s also more information in ‘Preparing for EO’ and our EO Guide contains more information about the transition to employee ownership.

Watch our video explainer 'What is an EOT?'

Contact us directly for a free consultation and initial assessment of your business on 01384 274 778 or 075 888 925 88.

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