Helping Lancashire businesses: Employee-owned co-op solutions to business succession

Are you looking to retire or move onto the next challenge? You may have built a business from scratch or successfully stewarded your family business, but have no obvious person to take over from you, or release that value?

A trade sale is the most likely solution suggested by your accountant, but what about converting your business into an employee-owned cooperative?

John Atherton, a seasoned cooperative business consultant, explains why this approach may be beneficial to you and your employees.

What is an employee-owned co-op?

An employee-owned business (EOB), is a business where the employees in whole or part own the business, rather than external investors, family members or executives.

A co-op is a business that is democratically owned by its members, to meet their shared needs. In this case the employees. I’ve done a video explainer here that goes into a bit more detail.

To be a co-op form of employee-owned business:

More than 50% of the business (shares) must be held by employees either directly or indirectly.
All employees should be able to become shareholders/members.
Their voting rights as shareholders should be democratic (one member, one vote) not based on the number of shares they hold.

Why consider a co-op as a business successions solution?

The Employee ownership association has recently published a report with some great findings. In the last 12 months, the sector grew by over 30% (roughly 330 new EOBs). There are at least 1,650 employee-owned businesses in the UK with around 400 fully cooperatively owned.

Some findings, employee-owned businesses are:

8% – 12% more productive than other businesses.
Over 50% more likely to be expanding their workforce.
More likely to offer flexibility in contracted hours (61% vs 36%) and allow employees to work remotely (84% vs 47%).
Share more of the value that employees generate with dividends/bonuses more than twice as large in EOBs than non-EOBs.
Employees are five times less likely to be made redundant in the last three years compared to non-EOBs (that figure goes up to eight times less likely for smaller firms).

For co-op employee-owned businesses in particular:

They tend to place more emphasis than other types on encouraging fully democratic employee participation with 94% enabling employees to influence strategic organisational decision-making.
Co-ops are the most likely to have policies providing flexibility in contracted hours (93%); and implementation of remote or hybrid working (93%).
Co-ops are the most likely to have increased their focus on environmental sustainability issues and giving back to the local community.

So the benefits, at least to the employees and the longer-term success of the business is I hope is a little clearer.

Why as an owner should you sell your business to your employees?

There are tax advantages to both the outgoing owner and the employees when using certain employee-owned trust models (seek proper legal and financial advice):

There is no capital gains tax payable on the sale price for the shares to the trust.
Employees of the company can be paid an income tax-free (but NI contributions still apply) bonus in each financial year, up to £3,600 per annum.

But only a business is not just about the money. As an owner, what’s your legacy? Yes, you could just sell to the highest bidder or competitor. But they may radically change the culture, cut costs or asset strip. They may offshore the jobs or move the business completely out of the local area.

By converting the business into employee ownership, you are leaving your business in known hands, for the benefit of current and future employees.

A few examples

Employee-owned businesses operate in many sectors and at many scales from small partnerships of five people right the way up to the tens of thousands:

John Lewis Partnership The well-known and original example, the business is 100% employee-owned through a Trust and has been for more than a hundred years.

Riverford Organic Farmers 77% of the company is owned by an employee trust, benefiting all Riverford co-owners equally. Guy the founder, has retained 23% and continues to play an active role; he eventually aims to hand over all shares.

Conversations are not just for private sector businesses, Leading Lives a 400 person strong social care business and Rochdale Boroughwide Housing are examples of a tenant and employee owned co-operative.

Inspired, where should you start?

Converting to an employee-owned business, particularly at scale can be complex. Below are some questions to consider and help inform that first conversation with an adviser.

- Who actually owns the business? Are you the sole owner, or do multiple shareholders need to be considered?
- What is being sold? Typically this is the whole company/owners shares, rather than specific assets.
- Why do you want to sell? Is this due to retirement, releasing value, to move onto a new challenge?
- Is the business in financial difficulties? Converting to employee ownership won’t solve the underlying problems. It would not be in the best interests of the employees to take on the risk of extra debt to finance the buyout.
- What’s the valuation expectation? If your sole decision is the highest price, it will be a challenge for employees to match a trade sale valuation or bid from a large/highly capitalised bidder. The converted business is likely to need to take on debt to purchase the business. The ability of the business to pay back debt out of retained earnings needs to be taken into consideration.
- How quickly do you wish to sell? Although there may be financial options to raise all the capital required and conclude the buy-out quickly, it is worth considering your appetite for a longer term, more patient release of value and transfer of funds from the newly converted business.
- Do you wish to retain a relationship or stake in the businesses over the longer term? A number of models assume the creation of an employee ownership trust or the potential for the owner to retain a role as trustee, director or honorary president in the business longer term or for a set period of time once the conversation takes place.

Employee ownership options

- Direct ownership – using one or more tax-advantaged share plans, employees become individual shareholders of a majority of the shares in their company.
- Indirect ownership – shares are held collectively on behalf of employees, normally through an employee trust.
- Hybrid ownership – a combination of individual and collective share ownership.