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For Richer for poorer

Julian Richer, the founder and owner of the eponymous Richer Sounds, the audio equipment company, has just sold a 60% stake in the business to his employees via a trust.  Mr Richer has a history of incentivising his employees, believing that happy, engaged staff are pivotal to the long-term success of any business – and he’s not alone.

Research by the Employee Ownership Association demonstrates employee owned businesses (EOBs) have higher levels of productivity and efficiency than non-EOBs, better workforce retention and recruitment, and a strong record of encouraging employees to drive innovation.   As a result, employee ownership can offer great solutions for business owners looking to improve performance or plan for the future.   It can also be an excellent strategy for succession planning or exiting a business.

There are also tax benefits for both owner and the employees.  Owners who sell more than 50% of a company to employees receive capital gains tax relief (as long as certain conditions are met) so they pay no tax on the sale.   Owners can retain a minority stake and therefore still benefit from future profits and any subsequent sale to a third party.  Staff in an EOB are eligible for (although not guaranteed) a tax-free annual bonus of up to £3,600.

Prior to Richer Sounds, the most famous example of an EOB in the UK is probably the John Lewis Partnership, but the benefits can be reaped across businesses of all sizes.  How does employee ownership work?  There are three main models,  each with its own pros and cons:

Direct employee ownership – where employees become individual shareholders. Benefits include employees feeling directly engaged in the future of the company.   However, each time an employee moves on the shares need to be transferred to someone else, with paperwork to be completed and stamp duty potentially payable.

Indirect employee ownership – where shares are held collectively on behalf of employees, usually via an employee ownership trust, offering simpler ongoing administration and quicker decision-making than direct employee ownership.

Hybrid ownership – this combines the first two with some shares being held by a trust and other shares by individual owners (including sometimes the departing owners) – as adopted by Richer Sounds.  The flexibility of hybrid ownership allows for the current owner(s) to scale down their interests over time and make a phased exit from the business and/or for shares or share options to be held by a new management team by way of incentivisation.

There can be various misconceptions around employment ownership, for example, that it may result in current owners losing out on a better sale price in the open market or that finance can be difficult to raise.  However, the success of numerous EOBs in Scotland suggests these fears are either unfounded or capable of being managed.

Clearly, decisions about moving to employee ownership need to made in the wider context of the current tax regime, the overall financial climate and the landscape for raising finance.  If the business is family-owned there may also well be relationship and succession issues to factor in.  It is therefore vital that consideration of any move towards employee ownership should be taken with the benefit of legal and financial advice.

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