Is employee ownership the best option for your business?

On average, only one in five small to medium businesses sells on the open market, and management buy-outs are equally rare due to funding difficulties. Winding up a business results in inevitable redundancies and typically achieves only a net book value.

When leaving a business, it's important to carefully consider your options. Instead of employee ownership, you could consider selling to an outside investor or to private equity, a management buy-out, or winding up. However, these options have significant disadvantages. On average, only one in five small to medium businesses sell on the open market, and management buy-outs are equally rare due to funding challenges. Winding up leads to redundancy costs and typically only achieves the net book value.

Is employee ownership the best option for your business?

In contrast, employee ownership preserves confidentiality, provides a ready buyer, requires less intense due diligence, and offers a flexible timeline for the owners to exit the business. Vendors can tailor the transaction terms, and the sale price qualifies for full capital gains tax relief.

Businesses suited to employee ownership are typically mature with profit levels that can service debt and employee incentives within a reasonable payback period. Ideal candidates have a strong management team or promising management potential. Ethical affinity between owners and employees is a significant factor in the decision-making process.

Our 60-point EOT feasibility review includes a comprehensive valuation with recent transaction comparisons. It's a great starting point before committing to expensive advisor fees. This review allows owners to compare potential open market offers with different employee ownership repayment models to inform their decision-making process.

When selling businesses on the open market, most owners prioritise the offer with the best deal structure over the highest offer. Shareholders often prefer offers with most of the consideration upfront and shorter earn-outs.

If deal structures, debt, and tax implications from outside acquirers are unattractive, some owners decide to sell to their employees instead. Recent outside offers can also reinforce a fair market valuation (FMV).

Selling to employees from the outset means less disruption, no competitor involvement, tailored transaction terms, and greater job security for your employees. Different types of employee ownership include direct share ownership, indirect share ownership through a trust, or a hybrid of these models. Retaining shares can also cater to direct ownership by senior management.

Most employee-owned businesses use a simple arrangement where employees are beneficiaries of a trust holding shares on their behalf. Well-known examples include John Lewis, Riverford Organics, Aardman Animations, and Richer Sounds.

Mandating transition to employee ownership may not achieve objectives if current financial performance can't support an EOT or if fair market value doesn't match aspirations. Our 60-point EOT feasibility study can help you determine if employee ownership is suitable and, if so, which structure best suits your situation.