Paul Webb of Goodman Derrick LLP discusses why retailing businesses are starting to embrace employee ownership.

 

There is a growing interest among company owners in considering a sale to an employee ownership trust (EOT) in order to realise value locked up in the business, whilst retaining overall ownership in a trust on behalf of all employees.

To encourage employee ownership, it has been possible since 2014 for business owners to sell a majority stake in a company to an EOT and incur no tax on the sale.

An independent valuation expert determines the sale price. And, to the extent that the EOT does not borrow to pay the whole price immediately, the deferred portion is effectively paid to the selling founders out of the profits of the business in future years.

In addition to the capital gains tax exemption, the company is subsequently able to pay tax-free cash bonuses; up to £3,600 a year per employee.

This package of tax measures encourages business owners to establish employee-owned businesses that can uphold and develop the culture and energy which was critical to the business’s success.

A feature of the model is that founders may continue to be involved in the business following disposal – for as long and in such capacity as is agreed – and can continue to receive remuneration at market rates.

Available tax reliefs might trigger interest in a sale to an EOT. However, business owners should genuinely wish to facilitate ownership of the business by employees.

Since it is likely that the selling owners will be paid out over a period of years from the ongoing profits, unless they have a real interest in seeing the business flourish over future years, they might find the clean break of a trade sale a preferable exit opportunity.

According to the Employee Ownership Association, there are 350 businesses in the UK adopting the employee-owned model. The biggest and best known of these is John Lewis, whose employees have been ‘Partners’ since 1929.

The JL partnership constitution begins; “Because the Partnership is owned in trust for its members, they share the responsibilities of ownership as well as its rewards – profits, knowledge and power.”

This attraction has proved critical for other retailers which have more recently embraced the employee ownership model. Guy Singh-Watson transferred a 76% shareholding in online food company Riverford Organic Farmers in June 2018 to an EOT.

“To sell Riverford as a tradable chattel, whose purpose would be to maximise short term returns for external investors, feels to me a bit like selling one of my children into prostitution,” he says.

Julian Richer also sold 60% of Richer Sounds to an EOT in May 2019. He emphasised the structure would avoid a third-party investor “changing the strategy”.

“My hard-working colleagues … should receive any benefit from running the business once my time is up,” comments Richer. “They know the business, and especially our rather unusual culture, extremely well. The business is therefore far more likely to flourish under their own steam because of this.”

Apart from the tax advantages introduced in 2014, why are retailing businesses now starting to embrace employee ownership?

Deb Oxley, CEO of the Employee Ownership Association, states that employee-owned businesses have higher levels of employee engagement. Also, they create more trusting environments which enable employees to work more effectively.

“This culture differentiates these businesses as attractive employers for future staff; helps retain the best talent; and directly supports better wellbeing,” says Oxley. “This, in turn, unlocks the discretional effort from employees that leads to higher levels of productivity.”

Company founders may give little weight to these considerations if they wish to cash in and move on. But often founders have a profound connection with the business. They will seek to ensure that it continues to flourish after they have ceased full-time roles.

The tax advantages of the EOT model provide an attractive backdrop against which business owners will increasingly consider whether sale to an EOT, enhancing the employee engagement and enthusiasm which founders have nurtured, provides the best route for the future success of the business, and a lasting legacy for the founders.

 

 

Paul Webb is a partner in the corporate team at Goodman Derrick LLP, the London law firm.
www.gdlaw.co.uk