Employee ownership offers a combination of potential tax reliefs, and its flexibility means that it can suit a wide range of circumstances and personal preferences.
It provides a framework resulting in reduced disruption, greater confidentiality, and opportunities for the existing employees to become owners of the business, strengthening the bond they have with the organisation.
What is an employee-owned business?
An employee-owned business is where employees have a significant and meaningful stake in a business. This means they will have shares and a say in how the business is run. There are generally three models available:
- Indirect employee ownership: where shares are held collectively in an employee ownership trust (EOT) or employee benefit trust (EBT)
- Direct employee ownership: where employees become individual shareholders (potentially facilitated by an EBT or EOT)
- Hybrid model: a combination of the above
What are the benefits?
Passing the business to employees can often result in a smoother and faster transaction for all parties involved as those within and outside of the business already know the new owner. It can also provide a sense of reward and loyalty to those taking on a share in the business, as they help build the company, which can result in improved culture, business continuity and growth. Employees having a share in the profits can also mean a more engaged and higher-performing workforce, whilst increasing employee retention and aiding recruitment.
Although there are a number of conditions to satisfy (primarily these are assurances that the business is properly held for the benefit of employees), employee ownerships have attracted attention because shares can be sold to an EOT free of Capital Gains Tax.
What’s next?
For many owners, employee ownership has been a way of phasing employees into future generations of business owners whilst being able to realise some or all of the value of their business now.
It’s important to gain a solid understanding of each business model option and the potential risks while also working out how much each model option could generate in terms of capital and income over time for the owner(s). You will also need to be aware of any tax and legal implications and address these in the early stages.
How Mazars can support you if you are looking to transition your business to employees
The Mazars deal advisory, tax and financial planning advisors can support you through all stages of transferring your business to employees. The Mazars team will work with you to:
- Help you understand what your business is worth, to ensure the business is transferred at a fair value
- Understand your key objectives and timing so that the Mazars team can help advise on the right transaction structure
- Understand the capital/financing requirements to deliver on objectives and help you identify the right source of capital to meet those objectives, whether that be through cash on the balance sheet, external debt, or new equity from an investor
- Work with you to understand the potential future value of the business, using our financial modelling experts, to help communicate the opportunity for employees
- Advise you of your potential tax exposure for any relevant transactions, both for you personally, the relevant employees and the business to ensure you have clarity over any potential tax exposure
- Advise you on alternative deal structures to ensure tax efficiency, where appropriate
- Manage and obtain relevant clearances from HMRC on your behalf, where appropriate
- Advise you of your reporting requirements to HMRC in order to minimise the burden and give you peace of mind
- Calculate the level of capital required from the transition to meet your objectives and provide security, using sophisticated cash flow forecasting tools. This helps you understand what is needed and what is aspirational
- Work with you in advance of the transition to agree a personal financial plan, so plans can be implemented efficiently once proceeds are received
Get in touch
If you’d like to know more about employee ownership trusts and how the Mazars deal advisory, tax and financial planning advisors can assist, please email Chris Ridley on chris.ridley@mazars.co.uk.