Employee Incentive Schemes

We believe most businesses can benefit from employee ownership, but it can be particularly attractive if you are:

Looking to retire from a business you own

Starting a new business and want to attract top talent

Keen to give your employees a stake in the business

Wanting to ensure your business can stay independent long-term

To see whether employee ownership could be the right choice for your business, simply request an employee ownership feasibility study.

What are the benefits of employee ownership?

There are many reasons why employee ownership is such an attractive prospect for a wide range of businesses. Done right, employee ownership can be hugely advantageous for existing owners, employees and the overall business.

The following are some of the headline benefits of taking your company into employee ownership:

Getting a guaranteed sale price

Normally, there is no way to know for sure exactly what return you will get from selling your business until you place it on the market and see what buyers are willing to pay. However, with an employee ownership sale, the price will be set at a fair market value, so the owners will quickly know exactly how much they will receive from the sale, providing certainty.

Making a business sale tax-efficient

As mentioned above, as long as the right conditions are met, transferring a business into an Employee Ownership Trust (EOT) can allow the sellers to be exempt from Capital Gains Tax (CGT). Employee ownership therefore enables outgoing shareholders to see a significantly larger after-tax profit on the sale of the business.

Ensuring a smooth succession

Selling a business can be a challenging and unpredictable process, with the potential to damage the company if the sale is not handled correctly. Selling the business to its employees can allow for a gradual, carefully planned and managed process, without the need to deal with external parties.

Retaining the outgoing owners’ experience and expertise

The selling owners will often retain a percentage of the ownership of the business and take a reduced role, rather than leaving the business entirely. This can help facilitate a stable transition while keeping the previous owners’ experience available to the business.

Boosting employee engagement

While most companies pay lip service to employee engagement, making employees co-owners of the company gives your team a real stake in the business. This can significantly improve employees’ relationship with the business, leading to greater employee engagement, productivity and loyalty.

Keeping your company independent

When business owners wish to step back from a company, it is often the case that selling to another company is the easiest exit strategy. However, this approach frequently leads to redundancies and a sense that something you have put a huge amount of time and passion into has been swallowed up by a competitor. Employee ownership can allow your business to survive and thrive as an independent entity for many years to come.

How can you use employee ownership for transition planning?

There are various ways employee ownership can be used as part of transition planning.

Business owners who wish to entirely leave the business can place all of their shares into an Employee Ownership Trust.

Business owners who wish to retain a stake and some level of involvement with the business can retain a minority share in the business (a maximum of 49%). They can then stay involved, for example by retaining a seat on the board of directors or as a consultant, without being responsible for the day-to-day running of the company.

A key point to understand is that the new management team and key employees can still receive differential rewards when the business is transferred into an Employee Ownership Trust, just as they would in a management buy-out.

Business owners who wish to entirely leave the business can place all of their shares into an Employee Ownership Trust.

How do you set up an Employee Ownership Trust?

There are various legal procedures and transactions involved in setting up an EOT, but the basic process involves:

The current shareholders (the vendors) selling anything from 51-100% of the business’s total shares to the EOT. The sellers will usually pay no capital gains tax on the shares sold in the year the EOT acquires more than 50% of the shares

The EOT pays for the shares with proceeds from third party financing and a loan from the vendors loan.

The vendors will usually receive payments in instalments and third party financing will be repaid through the contributions from the company.

As an incentive to align interests, the company may issue shares or warrants/options to key managers and employees.

Employees will then be eligible to receive income tax-free bonus payments up to £3,600 per employee per annum.

Overview:

Employee ownership can benefit most businesses, particularly for those looking to retire, attract top talent, give employees a stake, or ensure long-term independence. A feasibility study can determine if it's right for your business.

Benefits:

Guaranteed Sale Price: The price is set at fair market value, providing certainty.

Tax Efficiency: Transferring to an Employee Ownership Trust (EOT) can exempt sellers from Capital Gains Tax.

Smooth Succession: Allows for a gradual, managed process without external parties.

Retaining Expertise: Outgoing owners can retain a stake and a reduced role, aiding stable transition.

Employee Engagement: Co-ownership improves employee engagement, productivity, and loyalty.

Transition Planning:

Full Exit: Owners can place all shares into an EOT.

Partial Involvement: Owners can retain up to 49% of shares and stay involved in a reduced capacity.

Management Rewards: Key employees can receive differential rewards, similar to a management buy-out.

Setting Up an EOT:

Sell 51-100% of shares to the EOT.

EOT pays with third-party financing and vendor loans.

Vendors receive payments in installments; the company repays financing through contributions.

Key managers and employees may receive shares or options.

Employees can receive tax-free bonuses up to £3,600 per year.

Funding Employee Ownership:

EOT borrows from lenders with a company guarantee.

Lenders take a charge on company assets.

Company contributions repay the loan over time.

Tax Relief Conditions:

EOT must have a controlling interest (>50%).

Established for all employees' benefit, excluding significant shareholders.

Treat all employees equitably.

Taxation of Employee-Owned Businesses

Subject to standard taxes with exceptions for CGT exemption on controlling stake transfers and tax-free employee bonuses up to £3,600.

Controlling Stake Requirement:

At least 51% of shares must be in an EOT, allowing sellers to retain a stake if desired.

Transition Timeframe:

Flexible; allows a smooth and gradual transition based on goals and concerns.

Management Structure:

Employee-owned does not mean all employees manage the company.

A management structure and employee input (councils, employee directors, company constitution) are necessary.

How can a business fund employee ownership?

There are various options for funding employee ownership, with the following being the most commonly used approach.

The EOT borrows money from lenders (third-party senior, subordinated and/or vendor), with a company guarantee.

The lender takes a charge on the company’s assets.

The company makes contributions to the EOT to pay interest and fees and to repay the loan (contractual obligation).

The loan to the EOT is repaid over time through contributions made to the trust by the company.

What are the conditions for tax relief on an Employee Ownership Trust?

For an EOT to offer a tax-free exit route to selling shareholders, it must meet the following conditions:

It must have a controlling interest in the company i.e. greater than 50%

It must be established for the benefit of all employees (excluding, broadly, individuals who hold or have previously held 5% of the shares) in the company

It must treat all employees on an equitable basis

How are employee-owned businesses taxed?

Employee-owned businesses are subject to the same taxes as other types of businesses, but with two important exceptions:

Transferring a controlling stake into an Employee Ownership Trust will make the sale exempt from any Capital Gains Tax (CGT) that would otherwise need to be paid.

Each employee can receive an annual bonus payment of up to £3,600 free from income tax.

How much of a controlling stake does there need to be for employee ownership?

At least 51% of the shares in a company must be placed into an Employee Ownership Trust for a business to qualify as employee-owned.

This allows the sellers to retain a stake in the business if they wish, which is a common option for business owners using employee ownership as part of their retirement planning.

How long does it take to transition to employee ownership?

This will depend on the circumstances, but one of the advantages of employee ownership is that it can allow a smooth and gradual transition. For example, the outgoing owners might initially retain shares and stay actively involved in the business, with a plan to sell the remainder of their shares and step back entirely after an agreed transition period.

Exactly how you use employee ownership for transition planning and the time frames involved are something you can define based on your goals and any issues you are concerned about, making the process highly flexible.

How are employee-owned companies managed?

Just because a business is employee-owned, this does not mean that every employee needs to be part of the management team. A management structure will need to be agreed upon as part of the plan to transfer the business into employee ownership.

Employees do need to have a say in how the business is run, however, so this will need to be considered. This might include options such as setting up an employees’ council, having employee directors on the board and having a company constitution to define the business’s values and its relationship with its employees.

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