Employee Ownership Frequently Asked Questions

Our definition of Employee Ownership is where employees have a significant stake in the company they work for. This stake refers both to the ownership, and also to the expectation that employee owned companies develop a culture of partnership.  Employee Owned companies in the UK tend to take one of three types of structure:

• Direct Employee Ownership - employees become registered individuals shareholders of the shares in their company.  The purchase of these shares would ideally be facilitated using one or more tax advantaged share plans.
• Indirect employee ownership - the shares of the company are held collectively on behalf of employees, normally through an employee trust.
• Combined direct and indirect employee ownership - a combination of individual and collective share ownership.

Trusts play two vital roles in making employee ownership possible and stable. They're an efficient vehicle for buying and 'warehousing' the shares being bought out; while shares permanently held in trust can't be bought and sold, hence don't need to be financed again, and so become an extra guarantee that ownership is secure.

In broad terms an Employee Benefits Trust (EBT) is a discretionary trust for the benefit of employees.  EBT's are used in employee owned companies to hold the company's shares on behalf of their employees.  EBT's can buy, hold, and in some instances distribute shares. They are often used in the ownership structure of an Employee Owned company to ensure the future sustainability of the company by holding 51% or more of a company's share capital ensuring that it cannot be sold or subject to hostile activities of a predator company.

Company owners usually consider moving into Employee Ownership in the following scenarios:

• When considering business or ownership succession - company owners can decide to sell their company to the their workforce as an alternative to a trade sale, MBO, or liquidation.  An employee buyout ensures that the people who have helped to build the business can continue to develop the business and share in the future rewards. Employee buyouts also ensure that relationships with customers and suppliers are able to continue, and that jobs stay in the local community.
• If a company faces the threat of closure, subsidiary demerger, or insolvency - employee buyouts can provide an effective route to recovery, and potentially rescue, so long as the business can show that it's financially viable and has a future.  
• Owner vision - As in the case of John Lewis Partnership, Arup Group, Scott Bader, and Sutcliffe Play, the founder of the business had a vision to create an employee owned business either at the outset of the business or later.
• Privatisation - bus services and other privatisations have provided opportunities for employee buyouts.
• Independence - a company's independence could be protected if they are able to demonstrate that employees hold a significant stake in the company.  

Not at all. Most business owners sell at full valuation and have the added bonus of ensuring the future legacy and independence of the company. A small number of owners have however chosen to sell at a discount to reward the loyalty of employees who have helped them build up the business.

There are two basic methods that are often used to arrive at a business valuation.  A business could be valued based on a price earnings ratio, or a value could be arrived at using a net asset value calculation.  Baxendale has extensive experience of working with business owners and helping them arrive at an agreed business value.

Yes it is.  Many company owners want to continue working after the buyout as they will have lots of skills and experience that is invaluable to the business.  The position of the company owner post buyout should be agreed as part of the buyout negotiations so that everyone is clear about the role to be performed and the remuneration package.

It is possible to raise finance to complete a buyout from mainstream and specialist lenders.  Usually a buyout involves an employee trust buying a majority of shares and individual employees buying a minority of shares.  The shares bought by a trust would typically be financed by contributions from the company itself, or a loan that's then paid back by the company.  Baxendale work with a number of specialist lenders who only finance employee buyouts.  However, most lenders would expect to see a level of financial investment from employees and Baxendale has considerable experience in gaining employee commitment to this.

Only if they have bought shares in their company.  If a company with a direct shareholding structure were to face administration or liquidation the employees could lose the value of their shares, but would not be liable for any of the company's debts.  Companies which operate an indirect employee ownership structure (100% EBT) have no employee shareholders and as such no employee's money is at risk.

An Employee Buyout is no more complicated than other types of sale. The arrangement of funding, new ownership structures, communications, due diligence and agreement on Heads of Terms are all part of the process as they would be with any other method of sale.  However, employee buyouts tend to be less antagonistic and quicker to make happen.  Since 2001 Baxendale has co-ordinated the transition of a number of companies into employee ownership and we understand the unique factors involved.  Therefore we can ensure that the process is as efficient and streamlined as possible and significantly reduce the amount of your time that is required.  Baxendale can recommend professional legal and financial advisors who have particular expertise in employee ownership, and help to make tasks for advisors more straightforward and cost effective.

The time to complete an employee buyout depends on the complexity of the deal, but typically a completion is achieved within 6-12 months of starting an employee buyout project.

Exploration – Baxendale can provide an overview of how employee ownership can work, describe some of the successful models in operation, suggest potential structure solutions, identify any pitfalls that might hold up the process, agree a business valuation, and potential methods of finance.  Identifying the needs and aspirations of all relevant stakeholders is critical to designing the appropriate model and process to create a successful employee owned company.

Funding and finance - Companies may not be aware of the sources of finance and different methods for funding an employee buy out.  Baxendale may be able to assist with exploring different options, providing access to specialist lenders, and helping to prepare business plans and forecasts.

Structure - Baxendale work with companies to determine what that optimal employee owned structure will be.  A full assessment will be required of the existing organisational structure and culture, the aspirations of the owner, the strength of the management team, and people practices on site. Once this assessment is complete Baxendale are able to suggest a communication strategy, suitable mechanics for employee representation, reporting and information techniques, succession planning, and address any weaknesses that may be identified.

Preparation -  Experience demonstrates that investing time at this stage of the process ensures that the transition takes place much more smoothly. The company has decided to make the move, major decisions regarding the future have been taken, and the company is heading towards employee buy out. This is a time for unfreezing attitudes and finding effective ways of working to facilitate new working practices in the spirit of true ownership. A comprehensive change programme will be designed in consultation with all of the company. This will involve communication and education and we can guide you through the process to ensure a successful transition.

Completion - As signing day gets ever closer the number of legal documents and questions increases.  Baxendale are on hand to help guide companies through this process and into a new employee owned structure.

Ongoing support - Baxendale continue to support companies after the completion by offering a host of development products and services, such as a full suite of employee ownership courses, measurement of 'ownership', and helping to provide or source trustees and non-executive directors.

In our experience successful Employee Owned companies all have highly professional management structures, and managers with job descriptions and clarity of role and the accompanying responsibility. The only difference is that managers are more accountable to their colleagues – and co-owners – than they would be in a company owned by outside shareholders.  Numerous research has provided evidence that the spread of ownership generates greater employee commitment and productivity.  Most managers who join employee owned companies find it a much more rewarding role than managing in 'standard' organisations.

Many co-owned businesses benefit from having some employee representatives on the Board because they find it's a good way to make sure employee views are heard.  However, there is no rule that companies must have employee representatives on the board.  Employee owned businesses tend to have employee representatives on the trust body that controls some or all of the shares.  What is important is that the organisation finds the best structure for them. Some companies find “Employee Councils” work very well.

Employee owned companies have an excellent record of sustainability – at least partly because their employee co-owners are so committed to making sure the business does well. In particular, employee buy-outs have a much better survival record than management-only buy-outs [MBOs]. A remarkable proportion of MBOs fail, usually under pressure from the venture capital which will have funded the management takeover.

There are very few industry sectors or types of business where an employee buyout is unsuitable.  However, for an employee buyout to be successful the company in question must be financially viable, have a good market position, and the prospects of future growth and development. 

Employee ownership generally produces superior performance and productivity, especially when it's accompanied by real employee involvement and well thought out ways to let employees participate in the business.  As with all business models and ownership structures some employee owned companies are better than others.

For an employee owned company to be successful the company in question must be financially viable, have a good market position, and have the prospects for growth and development.  Our experience, and research studies, has also shown that successful employee owned companies tend to focus on developing a partnership culture by embracing participative management techniques, actively encouraging delegation, sharing relevant business information, and generally promoting a mantra that they want employees to 'think, feel, and act like owners'.

Profit is very important in employee owned businesses.  The big difference from other kinds of ownership structure is that dividends don't go to outside shareholders; dividends go to the employee owners who helped to generate them.  Our experience, and numerous pieces of research, have shown that employees owning a stake in the business results in more productive and profitable businesses.