Rooted and resilient Social Business Wales - The case for employee ownership in the Welsh private sector
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Social Business Wales /businesswales.gov.wales/socialbusinesswales Rooted and resilient The case for employee ownership in the Welsh private sector June 2017
Wavehill social and economic research ymchwil cymdeithasol ac economaidd Authors Eva Trier, Dr Andrew Engeli, Oliver Allies, Ioan Teifi, Anna Burgess Commissioned and published by Social Business Wales and Welsh Government Social Business Wales is funded by the European Regional Development Fund and Welsh Government. It is delivered by the Wales Co-operative Centre and is part of the Business Wales service. Wales Co-operative Centre Y Borth 13 Beddau Way Caerphilly CF83 2AX 0300 111 5050 info@wales.coop www.wales.coop The Wales Co-operative Development and Training Centre Limited (trading as the Wales Co-operative Centre) is a registered society under the Co-operative and Community Benefit Societies Act 2014, number 24287 R. Rydym yn croesawu gohebiaeth yn Gymraeg a Saesneg. Ni fydd oedi os byddwch yn gohebu â ni yn Gymraeg.
Contents
1.0 Introduction 3
1.1 Background to this study 4
1.2 Focus of this study 5
1.3 Methodology 6
1.4 Introducing the employee ownership model 7
2.0 Policy context 9
2.1 Employee ownership in the context of wider economic policy objectives 9
2.2 The Nuttall Review 12
3.0 The employee ownership opportunity 13
3.1 Benefits of employee ownership 14
3.2 Employee ownership models 17
3.3 Potential returns from employee ownership 20
3.4 Employee ownership as a tax efficient way of transferring ownership 23
4.0 Employee ownership in Wales 25
4.1 The wider business succession landscape in Wales 26
4.2 Case studies of employee owned businesses in Wales 28
5.0 Support for employee ownership 35
5.1 Supporting employee ownership 35
5.2 The picture in Wales 37
6.0 Conclusions and recommendations 39
6.1 Conclusions 39
6.2 Recommendations 40
7.0 Appendix 1 42
Key to abbreviations in this report
2 Rooted and resilient
Above:
Caffi Florence converted to employee ownership in 2014.
1.0 Introduction 3
Section summary
• This research was commissioned jointly by Social Business Wales and Welsh
Government to investigate mounting anecdotal evidence that Welsh SMEs are
facing succession planning issues that could be detrimental to the Welsh
economy as a whole.
• The study undertook market research using primary and secondary
data to examine SMEs’ succession aspirations and knowledge, and
mapped existing support packages.
• A particular focus in the research rested on considering
the potential to promote employee ownership
approaches to the betterment of the Welsh economy.
• Employee ownership models are widely seen
as potentially offering more resilient business
models with potential for sustainable wealth
creation and equitable distribution.
• The sector accounts for around
3% of UK GDP and the number of
employee owned businesses
Employee
grows by 10% year-on-year. owned businesses
grows by
Sector accounts
for around
10%
year-on-year
3%
of UK GDP
4 Rooted and resilient
1.1 Background to this study
This study was jointly commissioned From the perspective of the Welsh
by Social Business Wales and Welsh economy as a whole, the employment
Government. Commissioning the and wealth creation provided by SMEs
research was motivated by the can only be retained and higher rates
realisation that there was mounting of SME growth achieved if succession
anecdotal evidence suggesting planning becomes part of a full
that small and medium sized understanding of the SME business life
enterprises (SMEs) in Wales are cycle.
facing succession planning issues that
could potentially be detrimental to Social Business Wales and Welsh
the Welsh economy as a whole. This Government had identified that there
research will contribute to both Welsh are serious economic and social costs
Government’s and Social Business associated with business succession
Wales’ understanding of the scale of failure which can be avoided by planning
the problem and to designing relevant and implementing a considered
approaches to address it. succession strategy. The Welsh economy
was seen to be especially vulnerable
Business succession occurs in SMEs because:
when owner-managers decide to exit
a company, often because they wish
to retire after building up a business, • It is reliant on micro-businesses
sometimes over many decades. Many of less than 10 employees,
successful businesses fail every year which are often more
because succession is handled badly. dependent on the founder and
Some estimates suggest that a third therefore harder to sell;
of all business closures can be seen as
succession failures. • Rural areas depend more heavily
on the sustainability of key
The owner exiting the business is an employers, who might either
essential part of the business life cycle close or leave the area as a
and should be given timely attention. For result of succession.
many owners, exit is their only realistic
chance to realise their investment in
the business. From the employees’
perspective, timely attention can secure a
business’ strategic position in the market.
Rooted and resilient 5
1.2 Focus of this study
The requirement for the study was A particular focus in the research rested
to undertake market research and on considering the potential to promote
analysis using primary and secondary employee ownership approaches
data to examine the demographic and to the betterment of the Welsh
psychographic profiles of businesses economy. Employee ownership offers
and their owners in Wales, their a succession strategy that is suitable
succession aspirations and levels of for many business owners, however, it
knowledge of the options available. is not widely promoted by professional
business advisers despite tax incentives
Alongside this, the brief included a and a growing body of evidence
requirement to map out the range that demonstrates the success of the
of existing support packages that are approach.
available to support business owners in
their succession planning process and Building on the ‘Defusing the Business
provide recommendations for the most Succession Time-bomb’ publication
appropriate support packages that can released by the Wales Co-operative
be promoted and delivered through the Centre in 2012, this part of the study
wider Business Wales service offer. required an update of the policy, taxation
and legislative environment for employee
ownership to allow the interpretation
and contextualisation of the evidence
gathered within UK and Welsh devolved
economic policy.
6
6 Rooted and resilient
1.3 Methodology
The methodology adopted for this study combined primary and secondary
research approaches as follows:
• A desk review was undertaken considering the policy context for SME
succession planning, identifying existing research and developing a
research framework for the subsequent SME survey and the stakeholder
interviews.
• A survey of SMEs in Wales was undertaken to understand SMEs’
succession planning needs and their experiences with the existing
succession planning support infrastructure.
• Stakeholder interviews were undertaken with a
cross-section of stakeholders providing succession
planning support for SMEs in Wales.
• All research results were triangulated in
order to identify where market failures
existed in relation to succession planning
in Wales generally and the promotion of
employee ownership models in particular.
A series of recommendations was
developed for the most appropriate
support packages that could be promoted
and delivered through the wider Business
Wales service offer.
Rooted and resilient 7
1.4 Introducing the employee ownership model
Employee ownership models have With a range of definitions and corporate
received considerable attention in models often being associated with the
recent years. As a 2012 report from the term, it is important to define what is
Department for Business, Innovation meant by employee ownership for the
and Skills (BIS) puts it, an ‘adverse purposes of this report.
economic environment is prompting a
reappraisal of alternative ownership Employee ownership means a significant
models to the dominant public and and meaningful stake in a business for all
private shareholder models - one that is its employees. If this is achieved then a
not only resilient in times of adversity company has employee ownership: it has
but also promotes sustainable wealth employee owners. What is ‘meaningful’
creation and equitable distribution.’ ¹ goes beyond financial participation.
The employees’ stake must underpin
organisational structures that promote
employee engagement in the company.
In this way employee ownership can be
seen as a business model in its own right.
According to the Employee Ownership
Association (EOA), employee ownership
can take one of three forms:
• Direct employee ownership – using one or more tax advantaged share
plans, employees become registered individual shareholders of a majority
of the shares in their company;
• Indirect employee ownership – shares are held collectively on
behalf of employees, normally through a trust;
• Combined direct and indirect ownership – a
combination of individual and collective share
ownership³.
¹ Lampel J., Bhalla A. & Jha P. (2012) The Employee Ownership
Advantage: Benefits and Consequences, Department for
Business, Innovation & Skills
² Nuttall G. (2012), Sharing Success, The Nuttall Review of
Employee Ownership
³ http://employeeownership.co.uk/what-is-employee-ownership/
accessed 01 June 20178 Rooted and resilient
John Lewis is often highlighted as an Policy developments following the 2012
example of the success this model can Nuttall Review reflected this strategic
engender. This success has spurred concern with strengthening the uptake of
heightened research and policy interest employee ownership. Crucially, a number
and has led to a very live agenda around of new tax reliefs were introduced in
promoting, encouraging and supporting the UK Finance Bill 2014, preparing the
the development of more employee ground for greater uptake of employee
owned businesses. ownership by UK companies, not least as
a succession option.
A 2013 EOA report4 showed that, at the
time, the sector accounted for 3% of GDP With these developments in mind, it is
and the number of companies converting important to specifically consider the
to employee ownership was growing role of employee ownership models
10% year-on-year. Making the business in the context of this review of SME
case for more organisations to opt for succession planning in Wales. Identifying
employee ownership, the report called opportunities to enhance succession
for a three-fold increase5 in employee planning support for SMEs in that respect
owned firms in the UK by 2020. However, may be an important building block in
the EOA urged that without incentivised enhancing succession planning in Wales.
support for entrepreneurs and their
employees to pursue co-ownership, few
would be willing to take the financial risk 4 Employee Ownership Association (2013), Employee Ownership
Impact Report
of drastically changing their company 5 In terms of the value of employee-owned firms to UK gross
structures and practices. domestic product (GDP)
Left:
Eurosource Ltd moved towards employee
ownership in 2015.2.0 Policy context 9
Section summary
• Company ownership and corporate governance are closely intertwined
with economic policy objectives and are prominent in the public debate
throughout the UK.
• A commitment to inclusive growth is at the heart of Welsh
Government’s Programme for Government. The Wellbeing of
Future Generations Act provides the higher-level framework and
backdrop for a potential role of employee ownership in
delivering on policy objectives.
• Drawing on evidence on the potential benefits from
employee ownership, the 2012/13 Nuttall Review
investigated how Government could support
employee ownership. It resulted in the introduction
of tax exemptions for employee ownership trusts in
the UK Finance Act 2014.
2.1 Employee ownership in the context of wider economic policy
objectives
Company ownership and corporate of this core theme in economic policy
governance are closely intertwined objectives.
with economic policy objectives. Key
amongst those objectives in Wales, the A commitment to inclusive growth is
UK and the wider developed world are at the heart of Welsh Government’s
productivity and economic growth on Programme for Government, Taking
the one hand, and wider sustainability Wales Forward. The document sets
considerations from social justice and out how more and better jobs will be
equitable outcomes, to environmental delivered through a stronger, fairer
protections on the other. A commitment economy, improvements and reform of
to ‘inclusive growth’ from high level public services, and building a united,
international policy directions as, for connected and sustainable Wales7.
instance, encapsulated in the World
Economic Forum’s work on Inclusive
6 Samans R., Blanke J., Corrigan G. & Drzeniek M. (2015), The
Inclusive Growth and Development Report 2015, World
Growth and Development6, as well as Economic Forum Insight Report
Welsh Government policy, is indicative 7 Welsh Government (2016) Taking Wales Forward 2016-202110 Rooted and resilient
In this context, corporate governance As in other parts of the UK, employee
is frequently identified as a key lever in ownership has received considerable
strengthening business performance. attention in this context. As part of a
At the UK level, a November 2016 UK wider drive to consider the role of co-
Government Green Paper8 outlines operatives in the economy of Wales, the
thinking around strengthening of Wales Co-operative Centre published a
governance arrangements. This includes report on employee ownership in 2012.
increasing the level of staff and customer The report explored ‘how employee
influence at Board level while also ownership options can contribute to long
encouraging businesses to consider term, sustainable succession planning
their social impact and social value - in with measurable benefits to both business
essence having a ‘social mission’ built into owners and employees.’ 10 It referred
their vision, mission and values. This focus to the Welsh Government’s Economic
on changing business cultures clearly Renewal Plan’s recognition of the fact
resonates with economic stakeholders that the Welsh economy was failing to
more widely as evidenced, for instance, keep up with the rest of the UK in terms
in the Vibrant Economy initiative that is of employment and productivity, and the
being spearheaded by Grant Thornton, a distinct economic challenge from being
leading UK professional services firm. comparatively less urbanised than most
European nations These factors were
Corporate governance is also prominent identified as heightening the urgency of
in the policy debate in Wales. A 2015 addressing business succession, which
report commissioned by the Federation can be especially damaging and liable to
of Small Businesses9 highlights a potential fail in regions where economic activity is
Welsh Government role in encouraging already weaker.
‘responsible business by promoting
continuity of ownership for SMEs’ and The Wellbeing of Future Generations Act
‘raising the social ask’ of business more provides the higher-level framework and
widely. Focusing more specifically on the backdrop for a potential role of employee
role of co-operatives and mutuals, the ownership in delivering on policy
Co-operative and Mutuals Commission objectives. Creating a legal requirement
Report documented the contribution to for all public sector organisations to
the economy by such businesses and commit to seven well-being goals (the
made a series of recommendations to What) and five principles, or ways of
further strengthen their role. Indeed, working (the How), the Act embeds
the 2016 Programme for Government long-term sustainability at the heart of
includes a specific commitment to provide policy development and implementation
tailored support for co-operatives and in Wales. The goals and principles are
mutuals. This commitment is reflected in designed to act as a driver for change.
the launch of the Social Business Wales
project, backed by £11m in European
Union and Welsh Government funding.Rooted and resilient 11
The seven well-being goals are very By focusing on the long term, prioritising
much seen as an integrated whole (rather prevention, involving people and
than a hierarchy of objectives) that apply delivering an integrated and collaborative
across different organisations and areas approach, there are expectations for the
of activity throughout the economic, Well-being of Future Generations Act to
social, cultural and environmental sphere: make a tangible difference for people
throughout Wales.
ro u s Wales
e unities
A prosp A Wales of cohesive co
mm
A resilient Wales
A healthier Wale A globally respo
s nsible Wales
A Wales
u a l Wales of vibra
nt cu
e q
A more Welsh L lture and thriv
anguag ing
e
8 Department for Business, Energy & Industrial Strategy (2016),
Corporate Governance Reform Green Paper
9 Brill L, Cowie L, Folkman P, Froud J, Johal S, Leaver A,
Moran M & Williams K (2015), What Wales Could Be,
CRESC Report for FSB Wales Above:
10 Gateway Dental Practice converted to
Wales Co-operative Centre (2012), Employee Ownership:
Defusing the business succession time-bomb in Wales employee ownership in 2016.12 Rooted and resilient
2.2 The Nuttall Review
Framed in this policy environment The Nuttall Review covered the full range
of growing interest in ownership of employee ownership arrangements,
structures and corporate governance, albeit with a particular focus on creating
the UK Government appointed Graeme companies that are either employee
Nuttall as its independent adviser on owned or co-owned (all employees own
employee ownership in February 201211. more than 25% of the company's shares),
It was part of the Government’s drive either through an employee benefit trust
to introduce the concept of employee (EBT) or direct share ownership.
ownership into the mainstream British
economy. Drawing on evidence Employee trusts have been around for a
suggesting that employee ownership number of years and have been used by
models can make a real difference to employers for a number of purposes to
staff engagement, in turn generating benefit their employees (e.g. employee
innovation, increasing productivity, benefit trusts). UK tax legislation has
lowering absenteeism, better always given such employee trusts
industrial relations and improved tax advantages. Legislation in 2014
business performance, the aim was however, introduced an incentive for
to investigate how Government could “indirect” employee ownership of
support employee ownership. companies through new qualifying trusts
– employee ownership trusts (EOTs).
The idea of employee ownership is not The Nuttall Review ultimately resulted in
new – John Lewis, the household name the introduction of tax exemptions for
of employee ownership, introduced the employee ownership trusts in the UK
first form of profit sharing in 1929, and Finance Act 2014.
the business became wholly employee
owned in 1950. However, the Nuttall
Review was a response to the realisation
that a number of practical, legal and
financial hurdles might have stood in
the way of it becoming mainstream12.
Nuttall, a partner at law firm Field Fisher
Waterhouse with extensive experience in
this field, was given a remit to work with 11
See http://webarchive.nationalarchives.gov.
uk/20121126084905/http:/news.bis.gov.uk/content/Detail.
Government to identify the barriers to aspx?ReleaseID=423207&NewsAreaID=2
employee ownership and help find the 12 See https://content.next.westlaw.com/9-518-2533?
solutions to knock them down. transitionType=Default&contextData=(sc.Default)&__
lrTS=20170508063457732&firstPage=true&bhcp=13.0 The employee ownership opportunity 13
Section summary
• There is an increasing body of evidence suggesting that employee owned
businesses out-perform firms with more restricted ownership structures.
Between 2014 and 2016 the UK Top 50 employee owned businesses’
combined sales figures had increased by 10.2%, to £22.6bn. In comparison,
UK GDP as a whole had increased by 7.7% over the same period.
• The sector outperforms businesses with other ownership structures in
terms of labour productivity, financial returns and business resilience and
makes a considerable contribution to economic growth.
• SME succession planning creates an opportunity to support businesses in
achieving these benefits by empowering staff to secure high performance,
but employee ownership can also be part of a longer-term business
strategy.
• The term employee ownership refers to businesses with significant or total
employee ownership, either through direct employee share holdings or
shares held in trust on behalf of and for the benefit of employees, or a
mixture of both.
• Tax reliefs are available for sales of businesses to employee ownership
trusts, not just for gifts of businesses to an EOT, but for sales of businesses
to EOTs at full value, and a range of finance options can help structure the
transfer of ownership.
• In a succession scenario, the transfer of ownership to employees will often
involve owners sharing part of the ownership as a stage in the process of
withdrawing from ownership. There is limited evidence of ‘rescue
conversions’, ownership conversions involving firms in economic distress.
• Employee ownership has an important contribution to make towards
strengthening SMEs in Wales and should therefore be explicitly considered
in a discussion of SME succession planning in particular.
• There is an opportunity to embed employee ownership in longer term SME
development trajectories as well as positioning it as a response to acute
succession issues. There is an opportunity for employee ownership to make
a real contribution to the sustainability and longevity of resilient, locally
embedded businesses.14 Rooted and resilient
3.1 Benefits of employee ownership
A Scottish paper on employee Employee owned businesses out-perform
ownership suggests that ‘one of the businesses with other ownership
main reasons for [a] growing policy structures on other measures too. A
interest in employee owned business review of a number of UK and US-
stems from the increasing body of based studies suggests a consistent
evidence suggesting that employee positive relationship between employee
owned businesses out-perform firms ownership and labour productivity, with
with more restricted ownership employee ownership being linked to a
structures, especially in the UK and US’. 4-5% uplift in terms of productivity on
the basis of more than 70 (mainly US)
To begin with, evidence presented in the studies.15
2016 EOA Annual Review13 highlights the
sector’s contribution to economic growth. Across a number of countries within a
Between 2014 and 2016 the UK Top 50 range of different sectors, employee
employee owned businesses’ combined owned businesses also provide higher
sales figures had increased by 10.2%, to financial returns.16 This trend is also
£22.6bn. In comparison, UK GDP as a reflected in the UK EO Top 50 figures17,
whole had increased by 7.7% over the which suggest that those top 50
same period. Similarly, the EO top 50 companies that figures were available for
had seen a 15% growth in the workforce, in 2015 and 2016 had seen an increase in
taking it to a total of 175,000 over those operating profits of 10.9% year-on-year.
three years, compared to 5.8% growth
in the UK economy as a whole. There is From a strategic perspective, employee
also evidence14 to suggest that employee ownership models play a role in
owned businesses create jobs faster than strengthening business resilience,
their non-employee owned counterparts which is an important part in sustaining
and particularly so in times of economic employment and long-term growth.
downturn.
13 Employee Ownership Association (2016), Annual Review
2016
14 Lampel J., Bhalla A. & Jha P. (2012) The Employee Ownership
Advantage: Benefits and Consequences, Department for
Business, Innovation & Skills
15 Brown R. et al. (2014) The performance of employee-owned
businesses in Scotland: some preliminary empirical evidence
16 ibid
17 http://employeeownership.co.uk/wp-content/uploads/Top-
50-Social-Panels.pdf
18 Lampel J., Bhalla A. & Jha P. (2012) The Employee Ownership
Advantage: Benefits and Consequences, Department for
Business, Innovation & SkillsRooted and resilient 15
Findings from the 2012 BIS report18 highlight that:
• Employee owned businesses have a long-term payback horizon and put
greater emphasis on forward growth planning;
• Employee owned businesses invest more in human capital than their
non-employee owned peers;
• Employee owned businesses show greater preference for internal growth
over external growth - this is particularly true for manufacturing and
processing firms;
• Employee commitment supports the strategic imperatives of employee
owned businesses according to which sector they operate in.
In the context of SME succession The evidence suggests that employee
planning, as a stage in the life cycle of ownership improves employees’
SMEs that creates opportunities for the commitment, positively shapes their
introduction of new ideas, it is worthwhile thinking about ethical decisions and
to reflect on how businesses can achieve influences management action for the
these benefits. better. To quote Graeme Nuttall, the
evidence confirms that ‘how a business is
The evidence19 suggests that the owned and governed impacts positively on
profitability of employee owned the ethics of those who work in it, and this
businesses is linked to greater autonomy has real commercial significance.’ 21
for employees in decision-making.
Employee owned businesses that adapt The research Graeme Nuttall commented
their organisational structure and on considered the question of how far
empower their front-end employees are the ownership of a firm shapes its culture.
more likely to sustain their performance The research into ethics in employee
as their size increases. owned companies across a range of
sectors formed part of the MoralDNA
Considering the mechanisms for series that uses a tried and tested
employee owned businesses to secure tool to assess businesses’ ethics and
high performance, research has been management culture on the basis of a
undertaken to consider differences in comparison with a control cross-sector
company culture. Employee ownership sample.
is often associated with high levels of
19
motivation and engagement, and with Lampel J., Bhalla A. & Jha P. (2012) The Employee Ownership
Advantage: Benefits and Consequences, Department for
impressive company longevity.20 Business, Innovation & Skills.
20 Steare R. et al. (2015), THE MORALDNA OF EMPLOYEE-
OWNED COMPANIES. Ownership, ethics and performance.
21 Steare R. et al. (2015), THE MORALDNA OF EMPLOYEE-
OWNED COMPANIES. Ownership, ethics and performance.16 Rooted and resilient
The research concluded that:
• The culture, values and ethics of employee owned companies are
significantly stronger than those with other forms of ownership.
• When employees own their organisations, the culture is
more human, less fearful and less bureaucratic.
• The structure is much flatter and more
collegiate in employee owned companies.
Everyone has a stake in the company and
therefore it is in everyone’s benefit to care
and treat colleagues on every level with
respect.
• Democratic, visionary,
coaching and affiliative
leadership styles are the
norm in employee owned
businesses.
Taken together, this suggests that
employee ownership has an important
contribution to make towards
strengthening SMEs in Wales and should
therefore be explicitly considered in a
discussion of SME succession planning in
particular.
Experience from the US suggests that
employee ownership can be part of
the long-term strategy of successful
businesses22. Beyond improving support
for specific succession situations, there is
therefore also an opportunity to embed
employee ownership in longer term
SME development trajectories as well 22 Rosen C. & Quarrey M. (1987) How Well Is Employee
as positioning it as a response to acute Ownership Working? Available at
https://hbr.org/1987/09/how-well-is-employee-ownership-
succession issues. workingRooted and resilient 17
3.2 Employee ownership models
The term employee ownership refers The EOA distinguishes between three
to businesses with significant or main models of employee ownership as
total employee ownership. This can follows:
be either through direct employee
share holdings or shares held in trust
on behalf of and for the benefit of • Direct employee ownership: Using
employees. one or more tax advantaged and
other share plans, employees become
There are many different models of individual owners of major shares in
employee ownership and no set rule as their company.
to what percentage of the business has
to be owned by employees. Membership • Indirect employee ownership:
of the Employee Ownership Association Shares are held collectively on
(EOA), for instance, is based on having behalf of employees, normally through
adopted or be working towards an employee benefit trust (EBT) or an
significant or total employee ownership employee ownership trust (EOT).
and workforces being actively engaged
in the management and development • Combined direct and indirect
of their businesses23. However, to benefit ownership: A combination of
from Capital Gains Tax relief provision individual and collective share
provided for within the UK Finance Act ownership.
2014, an employee ownership trust has to
evidence that it owns a majority stake of
the business by owning more than 51% of
the shares. Employee ownership as such is not new,
but the specific form it takes is strongly
influenced by the fiscal and regulatory
environment. A MHA MacIntyre Hudson
fact sheet on employee ownership trusts,
for instance, points out that the UK tax
legislation has always given employee
trusts tax advantages where they are
genuinely implemented to benefit a
company’s wider employee base and
have indeed been used by employers for
23 Employee Ownership Association (2016), Employee
a number of purposes to benefit their
Ownership Impact Report employees.18 Rooted and resilient
Rooted and resilient 19
Initially viewed with scepticism and as being too altruistic, the fact sheet points out
that the tax reliefs were available not just for gifts of businesses to an EOT, but for sales
of businesses to EOTs at full value. So not only does an EOT allow a business owner
to pass on their business to their employees as a legacy of future employment, it also
potentially allows the business owner to sell their business to a newly set-up EOT for full
value completely free of Capital Gains Tax (CGT) and Inheritance Tax (IHT).24
A Social Business Wales guide on tax considerations in an employee buy-out25 also
highlights the range of finance options available to structure the transfer of ownership
to such an EOT while taking advantage of the tax exemptions as follows:
• The trustee of the EOT can borrow money from a bank to finance the
purchase of the shares;
• The company can borrow the money and lend it to the EOT;
• The company can borrow the money and
contribute this to the EOT;
• The seller can sell their
shares to the EOT on a
deferred payment basis
with the sale proceeds due in
instalments.
24 MHA MacIntyre Hudson (2015) Focus on Employee
Ownership Trusts – A new route for selling your business Left:
25 Social Business Wales (2015), Tax considerations in an Gateway Dental Practice converted to employee ownership
employee buy-out in 2016.20 Rooted and resilient
3.3 Potential returns from employee ownership
A paper by the White Rose Employee So far, employee owned businesses
Ownership Centre charts recent remain a relatively small and little
developments around employee understood component of the business
ownership. ‘Although some firms have population within the UK economy.
been employee owned for many years, According to the Employee Ownership
employee ownership started to become Association, in 2012, there were only
more prevalent from the mid-1980s. A around 150 companies27 with a significant
wave of conversions took place in the employee ownership28 within the UK while
late 1980s and early 1990s […]. After the White Rose Employee Ownership
a lull in the late 1990s, conversions Centre paper estimates suggest that the
to employee ownership picked-up in number of firms with significant employee
the 2000s, with the pace escalating ownership in Britain might be nearer 250-
from around 2010. Following recent 300. However, these businesses appear to
policy initiatives, there is currently exist in all parts of the economy.’ 29
considerable interest in employee
ownership within the business
community.’26
The authors trace the increasing
popularity back to the development
of a new model by a small number
of professional services providers in
the 1980s, in response to a degree
of disillusionment with the type of
conventional workers’ co-operatives of
the 1970s. New models of employee
ownership were seen to provide the
advantage that they could be combined
26 Pendleton A. and Robinson A. (2015), EMPLOYEE
OWNERSHIP IN BRITAIN TODAY, Interim findings from the
with conventional forms of company 2014-15, Employee Ownership Survey
management. 27 See Brown R. et al. (2014) The performance of employee-
owned businesses in Scotland: some preliminary empirical
evidence
28 Commonly defined as 25% or more, see for instance Briône
P., & Nicholson C. (2012), Employee ownership: unlocking
growth in the UK economy
29 See Brown R. et al. (2014) The performance of employee-
owned businesses in Scotland: some preliminary empirical
evidence
30See http://employeeownership.co.uk/what-is-
employee-%20%20ownership/
31 Pendleton A. and Robinson A. (2015), EMPLOYEE
OWNERSHIP IN BRITAIN TODAY, Interim findings from the
2014-15, Employee Ownership SurveyRooted and resilient 21
The Employee Ownership Association
identifies a number of scenarios in which
employee ownership typically happens as
follows30:
• Business succession or ownership succession – private owners, such as an
entrepreneur or family business, decide to sell to their workforce. This is the
most typical route into employee ownership;
• Growth and expansion - partners, owners, or managers might
decide to broaden ownership to cover most or all employees,
reflecting the need to attract, retain and motivate talented
people;
• Start-ups – as in the case of John Lewis, Arup Group
or Scott Bader, the founder of a business opts for
employee ownership at the outset of the business or
later.
• Insolvency or closure threat – employee
buy–outs can prove an effective route to
recovery for businesses that might
otherwise fail;
• Public service spin-outs –
sometimes called mutuals,
these newly created
businesses, including social
enterprises and community Using a similar classification of different
interest companies delivering scenarios in which employee ownership
public services, may choose might come about (business succession,
an employee led or owned privatisation, sharing ownership, and
solution as part of their start-ups), the White Rose Employee
structure. Ownership Centre paper presents early
stage findings of a major survey of
employee ownership in Britain. According
to this, 31% of the businesses in the
sample were transferred into employee
ownership in the context of business
succession31.22 Rooted and resilient
Considering these figures alongside in the White Rose paper survey results is
the MHA fact sheet’s conclusion that particularly prevalent in ‘human-capital-
‘the CGT benefits for the seller plus the rich’, knowledge-based companies
IHT exemption mean that EOTs must where a group of owner-managers use
be considered by anyone planning on employee ownership to extend ownership
selling their business‘ 32 , would suggest to a wider group of employees. Owner-
that succession planning stands out as managers typically continue to work in
a particular opportunity to promote the firm though the conversion may form
employee ownership and thereby part of a longer-term succession plan.
contribute to resilient, locally embedded
businesses. The start-up scenario for employee
ownership is a more recent phenomenon
In a succession scenario, the transfer of and relates predominantly to small
ownership to employees will often involve firms in the service sector. In view of
owners sharing part of the ownership suggestions that succession planning
as a stage in the process of withdrawing should ideally be part and parcel of
from ownership. Employee ownership business planning from the word go, this
is a way of protecting the company and may well turn out to provide a template
the interests of the company’s workforce for businesses to more widely consider
as the owner exits. The White Rose this model.
paper identifies a steady expansion of
these cases in recent years: whereas
they accounted for 16 per cent of the
population of employee owned firms in
the late 1990s they are now nearly one-
third of the sample.’ 33
Interestingly, the survey found few cases
of what might be described as ‘rescue
conversions’, ownership conversions
involving firms in economic distress.
The fact that it is difficult to raise finance
combined with employees themselves 32 MHA MacIntyre Hudson (2015) Focus on Employee
Ownership Trusts – A new route for selling your business
being reluctant to risk losing any 33 Pendleton A. and Robinson A. (2015), EMPLOYEE
redundancy payments acts as a corrective OWNERSHIP IN BRITAIN TODAY, Interim findings from the
preventing employees taking on a 2014-15, Employee Ownership Survey
34
liability. See http://taxdeductionsblog.fieldfisher.com/2014/new-cgt-
and-income-tax-exemptions-for-employee-ownership-
trusts
Two of the other three scenarios 35 See http://taxdeductionsblog.fieldfisher.com/2014/
employee-ownership-trusts-explanation-of-changes-
identified also have relevance to the following-consultation
business succession discussion, however. 36 The behaviour requirement looks at the actions of the
What is classified as ‘sharing of ownership’ trustees to see if they would meet the intentions of the EOT
legislation over a specified period of time.Rooted and resilient 23
3.4 Employee ownership as a tax efficient way of transferring
ownership
The UK Finance Act 2014 introduced two tax reliefs or exemptions to encourage,
promote and support indirect employee ownership which took effect in the 2014-
15 tax year. The key exemptions were34:
• An exemption from Capital Gains Tax on gains on certain
disposals of shares in a trading company (or in a holding
company of a trading group) that provide an employee-
ownership trust (“EOT”) (as defined) with a controlling interest
(51%) in that company (the “CGT exemption”); and
• An exemption from income tax of £3,600 per employee
per tax year for certain bonus payments made to employees
of qualifying employee owned companies (the “income tax
exemption”).
Both these exemptions were seen as helping to finance employee ownership. Graeme
Nuttall pointed out at the time that the CGT exemption in particular would raise
awareness of employee buy-outs as a succession solution. As a result of the income tax
exemption, companies 100% owned by an EOT did not now need to establish a share
incentive plan. The latter would have meant that companies would have been forced
to use shares to make income tax free awards to staff. Instead they could now pay
income tax free bonuses to staff without detracting from their 100% indirect employee
ownership structure.
Importantly, the new legislation also created the flexibility35 to enable the recognition of
certain employee ownership trusts (EOTs) as long as they met the so called ‘behaviour
requirement’ 36. On the basis of this provision, companies whose trusts have genuinely
been operating for the benefit of all of their employees and which already held a
significant shareholding on 10 December 2013, will be deemed to meet the all-employee
benefit requirement, and may be treated as an employee ownership trust.
The legislation also creates the necessary flexibility in the treatment of different shares to
accommodate hybrid models of direct and indirect ownership. Shares that are intended
for direct share ownership plans can be managed alongside shares intended to remain
in the trust as long as more than 50% of the shares remain in the trust.24 Rooted and resilient
4.0 Employee ownership in Wales 25
Section summary
• Three quarters of SME owners who responded to the survey that formed
part of this study, had not planned for the full transfer of ownership/closure
of the business at all. Family ownership is a prevalent ownership structure in
this cohort of SMEs.
• Many SME owners have a limited understanding of the detailed tax,
legal and due diligence implications of selling their business and have
unrealistic expectations regarding the price of their business.
• SME owners tend to have very limited awareness of different
succession options. Many assume that selling the business to an
external buyer is the only option. And yet, it is hard to find
interested buyers for SMEs below a £5million turnover.
• Support from mainstream professional advisors may not be
appropriate or affordable for smaller SMEs and there is scope
to strengthen advisors’ knowledge of the detailed financial
implications of and the specific opportunities related to an
employee buy-out.
• Broadening the awareness and understanding of the
opportunities associated with employee ownership in the
context of a business succession scenario therefore offers
a way for many more SME owners to realise the value of
their business in a way that creates benefits for themselves,
for their employees and for the local economy.
• Three Welsh employee ownership case studies make
it amply clear that the sector and nature of the
business does not have to be a limiting factor for
employee ownership. They also provide a longer-term
perspective of employee ownership, because each
represents a different stage in the employee
ownership journey.
Left:
Primepac Solutions Ltd converted to employee ownership in 2005.26 Rooted and resilient
4.1 The wider business succession landscape in Wales
Some estimates suggest that a third Referring to existing evidence and their
of all business closures can be seen as own experience, stakeholders agreed
succession failures. The survey research that most SMEs didn’t do anything
that formed part of this study and about succession, did it too late or only
focused on businesses of between superficially, effectively ignoring or merely
5 and 50 employees suggests that reacting to events during this important
three quarters of SME owners who part of the SME life cycle. Many SME
responded to the survey had not owners are also reluctant to openly
planned for the full transfer of discuss the matter, because they fear
ownership or closure of the business that this will create uncertainty for their
at all. Family ownership is a prevalent business, internally with employees and
ownership structure in this cohort of externally with customers and suppliers.
SMEs.
Feedback from stakeholders in the
professional services and business
advice community in Wales indicates
that many SME owners have a limited
understanding of the detailed tax,
legal and due diligence implications
of selling their business. Interviewees
also highlighted that many SME owners
have unrealistic expectations regarding
the price of their business, particularly
in terms of a potential strategic
premium through a trade sale. As one
interviewee commented, ‘vendors believe
that purchasers will pay a premium
for the strategic advantage, but these
expectations often get stripped away in
the due diligence process’.Rooted and resilient 27
SME owners tend to have very limited Support is available from professional
awareness of different succession options. service providers, but may not be
Many assume that selling the business appropriate or affordable for smaller
to an external buyer is the only option. SMEs. The research also suggests that
And yet, the experts interviewed for this there is scope to strengthen advisors’
study widely agreed that ‘for anything knowledge of the detailed financial
below a £5million turnover, it’s hard to implications of and the specific
find interested buyers, even for successful opportunities related to an employee
profitable businesses’. To put this into buy-out.
the context of business size in terms
of employment, the average turnover Broadening the awareness and
(revenue) per employee in the Welsh understanding of the opportunities
economy is £104,00037 so a turnover of associated with employee ownership
this scale typically equates to medium in the context of a business succession
sized enterprises and above (>50 scenario therefore offers a way for
employees). many more SME owners to realise the
value of their business in a way that
creates benefits for themselves, for their
employees and for the local economy.
Below:
Owner employees from Arup celebrate Employee Ownership 37 Analysis of Size Analysis of Welsh Businesses,
Day 2016. 2016, Statistics for Wales..28 Rooted and resilient
4.2 Case studies of employee owned businesses in Wales
As we have seen, the employee The three case studies also provide a
ownership model is applicable across longer-term perspective of employee
a wide range of sectors and scenarios. ownership, because each represents
As Graeme Nuttall puts it, ‘Employee a different stage in the employee
ownership works in all sectors and ownership journey. ETL Solutions is by
sizes of business, and throughout the now a well-established employee owned
business life-cycle.’ 38 This is usefully business that has successfully adapted to
illustrated through three Welsh changing circumstances and refreshed its
employee ownership case studies business model.
developed for this study. Covering
an SME in the food and drink sector, Gateway OHS represents an example of a
a dental practice and a software recent transfer into employee ownership,
company, makes it amply clear that the in this case with the specific aim of
sector and nature of the business does enabling the business to take advantage
not have to be a limiting factor for of new opportunities.
employee ownership.
Tregroes Waffles, finally, offers an example
38 Steare R. et al. (2015), THE MORALDNA OF EMPLOYEE-
of a business that has recently embarked
OWNED COMPANIES. Ownership, ethics and performance. on the journey of transferring ownership,
adopting a more staged approach
Below:
through a commitment of transferring
ETL Solutions converted to employee ownership in 2016. 10% of shares into an EOT year-on-year.
landscape in Wales n this context,
corporate governance is frequently
identified as a key lever in strengthening
business performance. At the UK level,
a November 2016 UK Government
Green Paper outlines thinking
around strengthening of governance
arrangements. This includes increasing
the level of staff and customer influence
at Board level while also encouraging
businesses to consider their social
impact and social value - in essence
having a ‘social mission’ built into their
vision, mission and values. This focus
on changing business cultures clearly
resonates with economic stakeholdersRooted and resilient 29
4.2.1 ETL Solutions
Serving some of the world’s leading as part of the share sale agreement.
companies, Gwynedd-based ETL Many caveats were included to ensure
Solutions started life in 2002 as a they would be protected.
management buy-out of PrismTech’s
Transformation Manager technology, a Staff were reasonably prepared for the
data migration software. transition as the company made sure
they had a plan for day one. A Board
When the founding director who had meeting was arranged for the first day
led the management buy-out was where the original directors took the
approaching retirement, a number of exit lead. Four employees from different parts
options were considered. It became clear of the business were nominated by the
that venture capitalists’ interest was in original directors to join the Board. They
owning the software only, not in retaining have responsibility for running different
employees. This ran counter to the areas of governance while a monthly
founding director’s intentions. Employee employee forum affords all employees
ownership was therefore considered as a the opportunity to engage with the Board
way of ensuring continuity while offering on the direction of the business and put
a tax efficient exit route. forward their ideas. It has taken time for
the new directors to find their feet, offer
Fully converting ETL into an employee a constructive challenge to the original
owned company was a two-year process directors and implement their ideas. The
and wasn’t accomplished until 2016. A company is still working towards ensuring
separate company, Menai Trustee Limited that employees’ input is meaningful and
was set up to hold all the shares on valued. Some employees don’t have as
behalf of the employees. The company’s much input as they would like.
cash surplus was used to purchase most
of the shares with the remaining shares Social Business Wales supported ETL
paid through a deferred payment plan to throughout the employee ownership
be paid in instalments over three years, transition process. It worked with both
which avoided having to take out a loan. the pre-existing management and the
All employees are treated equally and employee team to explore the different
none own any shares directly. employee ownership models and their
implications and then helped them
Both sides, directors and employees, design the preferred approach to the
found the negotiation process transition to employee ownership. Social
challenging and there was much debate Business Wales was instrumental in
before an agreement was reached. The brokering and supporting the eventual
main challenge was agreeing terms and deal structure and provided support
conditions with the two existing directors in management approaches, setting30 Rooted and resilient
up an employee forum approach, employees are able to contribute through
employee training in governance and the employee forum. Being able to
the role of a Board and sharing of share responsibilities and garner more
responsibilities. Under the Social Business diverse inputs has, for example, led
Wales operation, it was also possible to the development of a more robust
to arrange further specialist help from HR function, forecasting process, and
external consultants on areas such as HR a strategy with short and long-term
processes. objectives.
Since the original management buy- ETL can now make better use of the
out, the company has undergone people and skills it has at its disposal. The
significant change. The core business company has experienced a change in
offer has changed from a product culture towards more forward planning
solution, a standalone software that and proactive actions, as opposed
businesses could purchase, into more to the more reactive approach of the
of a service solution. Under this model, past. Recent sales performance cannot
ETL consultants manage clients’ data be directly attributed to the transfer
through the company’s DataHub of ownership, but it is early days still
service. ETL will, for instance, manage and the hope is that profitability and
dealership data on behalf of automotive growth will increase going forward, for
giants such as Honda and Jaguar Land instance through a marketing approach
Rover, consolidating data from diverse of proactively engaging with potential
dealership management systems for the clients.
clients.
ETL’s clients are almost entirely national
Historical sales remain in ETL’s previous and international organisations and, as
main target market of oil and gas. a data management company, it does
However, following the drop in oil prices not have a significant supply chain.
in recent years, ETL have successfully Consequently, the company’s relationship
shifted their focus to other sectors, with its local community is limited.
primarily automotive, building out from The company is based in Gwynedd
Honda as an existing client. Despite these primarily for historical reasons as this
changes, the business has remained is where the original developers were
relatively consistent year-on-year in terms based. Employee ownership has secured
of turnover and number of staff with 16 continuity for the employees and the
employees at present. business. Their main asset, the people
who work for them, have remained with
Transferring to an employee ownership the company and maintained seamless
model has allowed the company to relationships with clients.
develop more robust processes. Directors
now have specified responsibilities for
different areas of the business whileRooted and resilient 31
4.2.2 Gateway OHS
Gateway OHS Limited was established dental company. Rewarding the staff
in 2007 as a brand-new NHS dental who had built the practice over the years
practice in Abergavenny. Set up by wasn’t feasible either through the former,
the principal dentist, the business because it wouldn’t have been feasible
was originally established as a three- for a young practitioner to purchase
surgery practice, but expanded into a a four-surgery practice, or the latter,
four-surgery practice soon afterwards. because when operating in a profit-driven
Gateway now provides NHS dental care environment, corporate dental companies
to over 10,000 residents in the region. have a poor record of looking after staff
and providing an innovative service.
Since it was established, there has always
been a strong culture of innovation within With support from Social Business Wales,
the organisation and a desire to explore and on the basis of considering different
new initiatives. In 2012, the company options, an employee owned model was
participated in a pilot project looking at decided as the optimal route forward,
different ways of delivering NHS dental because it enabled the principal dentist
care with more emphasis on prevention. to leave the business in the hands of
This was a recognition that dental care people who had been entrusted with the
practitioners, through the Units of Dental business over the years and who were
Activity (UDA) system, are historically passionate about seeing it prosper.
rewarded for the volume of treatments
provided without much emphasis on This is the first dental practice to
preventing poor dental health. As a result transition to employee ownership in
of this project, the company brought in Wales. Consequently, Social Business
staff with a new skills mix including an Wales was involved in every step
oral health educator. The project came of the process from visioning and
to an end and the business subsequently strategic planning to developing and
returned to the UDA system. However, implementing the deal structure utilised
staff now wish to re-explore opportunities in the eventual business transfer. Social
in the area of prevention. Business Wales staff were able to provide
a delivery approach similar to that offered
Coinciding with the principal dentist within the private sector, but to a business
exploring succession options in 2016, that may not be able to lever the funding
the employee owned business model to pay for the fees associated with
seemed to be the perfect fit to pursue such a transition process under normal
such opportunities. Dental practices are circumstances. Social Business Wales was
typically sold in one of two ways - either able to support the transition team with
to a young practitioner who wants to specialist advice on legal and HR issues as
build their own practice, or to a corporate part of this service.You can also read
