Once seen as a left-field business model, employee ownership is now on the rise across the UK.
Figures from the White Rose Centre for Employee Ownership show there 250 new employee-owned businesses created between January 2020 and June 2021. An estimated 100 more transitioned in 2021 and growth has continued in early 2022.
It is estimated that there are a total of around 730 businesses in the UK currently employee owned.
Some of the UK’s most high-profile companies are employee owned, including John Lewis, Unipart, and Aardman Animations.
In Wales, employee ownership has seen a new wave of conversions in recent years, particularly among the SME social business sector. Food brand Tregroes Waffles, North Wales TV production company Cwmni Da, and Educ8 Training Group have all transitioned to employee-owned.
Most recently, Pembrokeshire-based Melin Tregwynt made headlines when the owners of the 110-year-old wool mill decided to hand over the reins to their 42 employees.
The John Lewis model
So why is employee ownership seeing such a rise in recent years?
Paul Cantrill, specialist advisor for employee ownership at Cwmpas (formerly Wales Co-operative Centre), said the turning point came in the Finance Act 2014 after the Conservative-Lib Dem Coalition Government brought in various tax reliefs to incentivise and encourage more businesses to adopt the John Lewis model.
The John Lewis model gives each employee part-ownership of the company along with a share of its profits and a say in how the company is run.
The legislation brought in tax advantages for both outgoing and incoming shareholders under employee ownership and that moved the model into the mainstream for business sales.
“What we ended up with was a new legal instrument called the Employee Ownership Trust (EOT), which meant that if owners of businesses sold a majority of their shares to a trust, then that transaction would be completely free of capital gains tax,” said Mr Cantrill.
Tax incentives were also brought in for employees. Where a company has an EOT that owns the majority of shares, the employees will get a £3,600 a year tax-free bonus arrangement.
“The legislation gave legitimacy to employee ownership, and placed it in the world of tax and business sales which added credibility for a lot of potential owners who were interested in the model,” Mr Cantrill added.
Employee ownership in Wales
Cwmpas estimate that there are around 40 businesses in Wales that are employee owned.
But this figure is both growing and accelerating with five Welsh businesses transitioning in March this year alone and more owners coming forward who are interested in the model.
However, this is mainly growing among businesses in the SME sector who have up to 250 employees.
Mr Cantrill said: “In the scale of UK commerce, they are quite small but of course within Wales a company that has 200 employees, for example, would be considered quite a large company because the units of employment in Wales are generally much smaller.”
The Welsh Government has made it one of their strategies to double the number of employee-owned businesses which it is working with Cwmpas to achieve.
Chief executive Derek Walker said this works because employee ownership fits many Welsh Government policy agendas.
“It shares wealth, it’s good for productivity, and it anchors these businesses in Wales so they’re not going to be bought off and moved elsewhere,” he said.
Succession and selling
According to the Employee Ownership Association, 70% of employee-owned businesses see the business model as a socially responsible thing to do.
For many Welsh businesses adopting the employee-ownership model supports their triple bottom line.
“One thing that’s quite important to the owners that we have discussions with at the early stages is the whole issue around values,” said Mr Cantrill, citing Cwmni Da and Melin Tregwynt as examples.
For Melin Tregwynt’s owners, employee ownership suited their succession plan to leave the business in capable hands while still preserving the legacy, heritage and skills it had taken over 100 years to build up.
Mr Cantrill said: “It was important to the owners that their employees who lived and worked in the local area remained employed in the company. Had the owners sold the businesses to independent buyers, there was no guarantee that those skills, values and heritage would have been preserved or that the companies would stay in Wales.”
There is little disruption to the business for the workforce when it does transition to employee ownership and no redundancies, added Mr Cantrill.
He said: “In some rural areas of Wales, if you lose your job, it’s quite difficult to find another one without moving and preserving local employment is helped and assisted by the employee ownership model. It helps companies carry on their trade and protects against being asset stripped or moved to other parts of the UK or overseas.”
Not all owners leave following a company buyout. Some use the employee ownership scheme to offload some of the responsibility of running the business to employees.
Mr Cantrill said: “We certainly see this in the creative world with owners who have a trade or skills, like architects for example. A lot of owners we deal with have found themselves business owners by accident and want to concentrate on the creative side of the business.”
But it’s not only altruistic reasons that drive owners to consider employee ownership.
Mr Cantrill points out that business owners can also get a good market price for the company.
He said: “Getting a good market price arrangement is important and employee ownership gives owners the opportunity to get that from employees. Quite often it’s done through patient payments, where payments are deferred over a number of years. An amount is also paid up front, and funding needs to be raised by a bank loan or grant to assist with that transaction.
“But all the transactions that I’ve seen have all done well at market price. There might be a small element of discounting, but these businesses are not being given away. Overall, it’s a comfortable arrangement for the owner, because they’re selling to people they know and have worked with and they can exit the business when they want to and on the terms which suit them.”
Workforce productivity
There are a number of reports and studies showing a positive impact on workforce productivity in those businesses where the employees have a say and share.
“There was a government report produced several years ago that looked at the performance of companies that were employee-owned and all the evidence suggests that, pound for pound, an employee-owned company will be more productive, profitable and have a longer retention of employees,” said Mr Cantrill.
Employee-owned companies are considered more competitive with high standards of employment.
Private consultancy firm BIC Innovation is a recent example of this after the company quadrupled its workforce since becoming employee-owned in 2018.
The company, which has offices in Bridgend and Anglesey, grew from 13 employees to 51 over three years after adopting the Employee Share Scheme model.
Direct and indirect ownership
The Employee Ownership Trust (EOT) is just one model a business can adopt to become employee owned but that has become the most popular model by owners.
According to the Employee Ownership Association, EOTs represented 1 in 20 of all private company sales in January 2021.
By June 2021, 567 businesses in the UK were employee-owned via an EOT.
“The caveat of selling your shares to an employee ownership trust is that they can’t be sold above market price, because of the free capital gains tax relief. Otherwise, people would be picking prices out of air and reducing their tax accordingly,” said Mr Cantrill.
He added: “A particular advantage of an employee ownership trust is that, under UK law, it is possible for companies to gift funds or shares to the trust and the trust can then use that money to buy and own those shares. The priciest price can be topped up by loans if necessary. There’ll usually be an element of some of the money being paid over several years.”
The EOT model is an example of indirect ownership where shares are owned and managed on behalf of all the employees by the trust and the corporate trustee, usually a company.
While direct ownership means employees buy shares in the company themselves. BIC Innovation operates a direct ownership share scheme which means employees are given the opportunity to buy shares in the company after 12 months of working there.
Then there are some businesses, such as Wavehill Research, who have opted for a combination of both direct and indirect ownership, where senior managers own shares in the company alongside an employee ownership trust.
“They might have them through options, such as executive management incentive options, share options or they might have them by direct share ownership,” said Mr Cantrill.
Timing and funding
The process of transferring ownership can take as long as six months up to three years, said Mr Cantrill, as many businesses take a while to understand, prepare and work out how the model will work for them.
“It isn’t a quick fix and a long term plan is needed. We can work with some companies for two or three years before they actually become employee-owned. But once you have heads of terms for the sale, which sets out how the sale will work, in general terms then it’s over to the lawyers who determine how long it takes to get all the legal work done. This doesn’t take more than six months,” he said.
While Cwmpas offer employee ownership support and advice to businesses for free under a Welsh Government-funded subsidised programme, external finance is needed to make the transaction and pay legal costs.
“As more companies go down the EOT route, we’re finding that legal fees for employee ownership trust work are actually coming down. It was always going to be specialised work but we have got quite a few lawyers in Wales now who are capable of doing this work,” said Mr Cantrill.
Funds can be raised from bank loans or investment from the Development Bank of Wales, which has supported Welsh businesses like Insight HRC, the Urbanists and Cwmni Da become employee-owned.
However, there is more to be done on attitudes of banks towards investing in employee-owned businesses.
Mr Walker said: “Work has been done to speak to the finance sector in the banking industry but they still don’t understand the business model. They don’t see enough of these types of businesses, so banks think employee ownership is inherently more risky. We try to work with financers to raise awareness about the model and by raising awareness, it’s more likely that they are going to be open to offering finance.”
