As businesses consider succession planning choices we look at the merits and challenges of employee ownership.
This year's employee ownership day falls on 28 June. The popularity of employee ownership is growing – at nearly 10% p.a. per the Employee Ownership Association. Employee owned businesses are wholly or significantly owned by their employees, either directly or indirectly. This means employees aren’t just doing a job but are genuine owners and stakeholders in their employer.
More businesses are looking to employee ownership as a means of managing ownership succession.
The government commissioned report The Ownership Dividend, published in June 2018, highlighted the benefits of employee ownership, including:
There are other forces at work too, which have steered more business owners to think beyond the traditional exit routes of trade sale, IPO and private equity deal and consider an employee ownership trust or another form of management equity buy-out.
Brexit uncertainty has been prevalent for a while and shows little sign of abating. Some owners have simply decided now is the time to step back operationally and hand over to those who have greater appetite to venture into the unchartered waters ahead.
The funding landscape has also opened up, with more credit teams now willing to consider lending to fund such a business transition.
Nevertheless, it is perhaps worth noting that Scotland seems to have the highest incidence of full employee ownership transition. This may, in part, be down to generous government funding support from Co-operative Development Scotland (part of Scottish Enterprise) that is not yet replicated elsewhere. Wales Business Fund has now provided some employee ownership funding support, but companies in England are less fortunate when it comes to central funding.
Employee ownership should not be viewed as a last resort for succession planning, but as a model for sustainable, scalable, successful businesses where employees are the custodians, drivers and beneficiaries.
When considering the merits of a transition to employee ownership the fundamental questions around good business should be examined, in the same way as for other more traditional exit planning avenues.
Is cash flow strong, are emerging managers equipped with the commercial skills to step into the shoes of the vendors and how can the business best support the buy-out, service and repay any borrowing and ensure continuing success?
Sometimes this practical test gets a little overlooked as vendors focus on the attractions of a potentially tax-exempt sale of shares.
The remaining management team’s attitude to debt can be an important consideration, as may be the vendors’ willingness to provide personal guarantees to lenders.
A robust feasibility review is often the first step to take to enable potential vendors and the board to plan effectively, not just for those looking to sell their existing stake but also for those future custodians who will own the business going forward.
See our fact sheet to find out more about different forms of employee ownership.
If you are considering employee ownership, KPMG can assist with:
If you have any queries, or would like to discuss how KPMG can assist you, please get in touch with your normal contact or email email@example.com.
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