Employee-Owned Businesses: Why are more businesses converting?

• Company Commercial

You may have noticed that employee-owned businesses are hitting the headlines more and more recently, with many business owners choosing to follow the footsteps of the John Lewis Partnership, Richer Sounds and Riverford Organic.

Just this month, Prima Bakeries Group, a worldwide producer of Cornish Pasties, also reported that it has successfully transitioned to be an employee-owned business involving more than 150 employees.

Most definitely on the up, reports from the Employee Ownership Association show there to be a 37% increase in these business types from 2022 to 2023. The top five sectors choosing to become an employee-owned business (EOB) are professional services, manufacturing, construction, wholesale and retail trade, and information and communication.

What is an Employee-Owned Business?

EOBs are owned by the employees. This means that they hold a controlling stake in the business and therefore are entitled to have a say in how it is run.

Introducing or adapting to this structure could be at any stage in the company’s lifecycle, however, we are most likely to see it being adopted where the current owners are looking to sell, retire or where the employees want to be more involved in the running of the business. Business succession is often a key driver. Either party can start the conversation and the structure will depend on the specific circumstances and the objectives the business wishes to meet.

An employee-owned business is not a separate legal structure and is a transition of an existing business.  Companies limited by shares may have a more straightforward route to becoming an EOB, while charities and other structures may have a more complex transformation.

What are the Benefits of Becoming an Employee-Owned Business?

The benefits of becoming employee-owned will be different for every business or organisation. However, they could include:

1. Improved employee engagement and well-being
2. More committed employees
3. Reduction in staff turnover
4. Encouraging a more entrepreneurial and innovative approach

How Can Your Employees Become Owners?

Employees can become owners in several or a mixture of ways. This could include:

1. Share incentive plans, with employees holding shares in the business directly
2. Employees holding shares through an employee benefit trust (where shares are held collectively on behalf of employees)
3. The formation of a cooperative (where employees are represented and take part in running the decision by voting).

Is it Right for my Business? Questions to Consider from the Outset:

1. How many employees are in favour of becoming an employee-owned -business?
2. What stake is it proposed that the employees will have in the business?
3. How would the structure benefit the business?
4. Is there a qualifying criterion for employees to be involved, such as a minimum time for which they have been employed?
5. How will the conversations be continued?
6. Should employees hold shares directly, indirectly through a trust, or a combination of the two?

Selecting the right structure is a big decision and GA Solicitors’ commercial lawyers and solicitors can help to advise you on the possible structures available.

What are the Alternatives to an Employee-Owned Business?

If you are looking for an exit strategy, then you could also consider alternatives such as a management buy-out, a merger with a like-minded business or a third-party sale.

First things first:

Putting the right team in place from the outset is key so engage with your commercial solicitor, accountant, tax and financial planner to ensure that the structure is right for you. If you need help picking the best advisors, then we can also provide some recommendations.

If you would like to discuss your succession or business growth plans and find out how our experienced corporate and commercial solicitors in Plymouth can assist you, then please call today on 01752 203520. You can also email me directly via james.peterson@gasolicitors.com.

If you are considering a management buyout as an alternative option, then read this useful article to find out about the advantages and disadvantages.

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