Incentivising employee ownership

In an Autumn Statement that focused on measures of austerity, there was surprising generosity in the form of tax measures aimed at incentivising employee ownership (see panel below). A surge in interest is expected, and Co-operative Development Scotland (CDS) has put together a programme of “Expert Briefings” to help ensure lawyers are up to speed with the model. I sought the views of CDS and the professional advisers who are supporting the programme.

Sarah Deas

Sarah Deas is chief executive of CDS, and as a member of the BIS working group, advised the Government on the new measures. She believes employee ownership is a structure that is increasingly attracting attention:

“The number of employee-owned firms headquartered in Scotland has doubled in the past four years, and these new tax reliefs should mean this growth continues.

“From an economic development perspective, employee-owned businesses are important to Scotland. These firms are more likely to remain in their local area, sustaining and creating new jobs.

“Research has demonstrated that employee-owned businesses tend to be more profitable and productive than conventionally structured businesses. Indeed, research released at the beginning of this year by Cass Business School at City University London shows that employee-owned firms outperformed similar companies during the recession, achieving higher sales turnover and maintaining higher employee numbers.”

On the “Expert Briefings” programme she added:

“At CDS, we anticipated the rise in interest and last year focused our activities on raising awareness of the model. We initiated a number of activities designed to support legal and other professionals on building their knowledge, providing resources for internal learning and for client information. Response was encouraging and we found a real appetite amongst advisers to find out more.

“This year, we are seeking to build on this interest and develop that learning. The previous sessions could only give a broad overview. We felt there was a need for more technical information to better equip those advising businesses on the finer details of employee ownership transactions. With input from several helpful individuals within the legal, accountancy and banking sectors we have put together a programme of seminars, each led by a recognised specialist. These briefings explore different aspects of an employee buyout from a specialist perspective.

“The first session took place in Edinburgh in early February, and approximately 30 advisers attended from a cross section of law firms, accountancy practices and banks. Interest for future sessions has been such that we have had to identify larger venues. CDS aspires to grow employee ownership tenfold in 10 years, and the legal sector is critical in achieving this. The support demonstrated by the law firms we have engaged with to date suggests that this is an achievable ambition.”

Ewan Hall

Ewan Hall delivered the first session in February. Formerly a partner with Wright, Johnston & Mackenzie, he is now legal director with Baxendale Ownership, a consultancy which works exclusively on advising organisations looking to pursue employee ownership. He emphasises the merits of involving the employees from the outset:

“There are basic principles and stages of an employee ownership transaction, but every deal is different. One of the attractions for a business owner choosing employee ownership is that the business transfer process can be structured and paced in a way that is going to suit them. The deal can be completed without involving the employees, but the most successful transactions by far are where employees are involved from early on and have some say in the shape of the new business. These companies are likely to see the uplift in productivity and engagement much more quickly. And of course, the process doesn't stop when the deal is signed. Employee ownership is a way of working as much as it is business structure.”

John Alexander

John Alexander is a chartered accountant who has been advising and structuring employee buyouts for many years. He delivers the session on funding on 9 April in Glasgow. Are employees expected to put up their own money?

“If the business is an attractive proposition with a good outlook then a buyout should be possible. Traditional lenders may fund part of the deal, and vendor financing is often a feature of employee buyouts. Employees can contribute an element of the cash required, but I would counsel against employees stretching their finances to fund a buyout.

“Increasingly, we have to be more creative with how we structure finance packages. I don't see any reason why we can't look at patient venture capital or crowdfunding. What is important is that we don't compromise the employee ownership stake by having external investors influence the business, resulting in a disproportionate emphasis on financial returns at the expense of long term success.”

Ann Somerville and Andrew Ford

Tax specialists Ann Somerville and Andrew Ford of French Duncan CA will give an insight into maximising the tax effectiveness of the employee ownership transaction, in Glasgow on 7 May. Will the business owner achieve proper value for the business, and what impact will the new tax proposals make?

“An owner selling to employees should expect to achieve a competitive price for their business. There may be occasions when a trade buyer might pay a premium for assets or market share and the tax reduction will not compensate for that. However, for an increasing number of entrepreneurs, value often means more than just the cash, ranging from wanting control over their own future role in the business to protecting jobs for the employees. In suitable commercial scenarios, employee ownership may offer a credible alternative to traditional exit routes.

“Advisers may not previously have brought the employee buyout route to the table. The new legislation on capital gains tax relief will encourage advisers to put the option forward for consideration as they explore appropriate commercial succession routes to suit their clients' stated objectives.”

Rodger Cairns

A partner with Shepherd & Wedderburn, Rodger Cairns is a specialist in employee benefits and incentives. He will lead on Share Ownership for Employee Owned Businesses on 10 September in Edinburgh. He advises on helping employees appreciate what share ownership involves:

"A company is missing a trick if they implement a share plan but don't take the opportunity to educate staff on the commercial reality of what makes the business profitable. It is widely acknowledged that, when employees make the link between contribution and financial reward, business performance improves. Employee ownership takes this a stage further. When employees have real influence in a business, and share in the rewards they help create, then it makes sense that engagement and performance levels will be higher.

"Choose the most appropriate plan or plans for your company and invest a bit of time in explanation and education. Share ownership is more than 'just another perk'; it can help align employees with company strategy, and reinforce productive working practices."

Chris Kerr

Chris Kerr, partner with Harper Macleod, advises several employee-owned businesses. Chris will deliver the final session on 5 November, covering Governance in Employee-Owned Firms. This, he advises, involves a culture shift:

“The benefits of widespread employee ownership have been proven. The new tax reliefs are a step in the right direction and I believe we will see an increase in interest in the model. However, we always have to bear in mind what the objectives are. Simply implementing a new ownership structure and treating the employee buyout as a legal transaction will not deliver the benefits in itself. Companies have to work on winning the hearts and minds of employees. The governance structure is critical in this. Companies who get the culture right are the ones which enjoy the benefits.”

Proposed measures for 2014

• CGT relief for vendors who sell to an employee ownership trust

• Exemption from income tax on cash bonuses up to £3,600 per annum paid to employees of qualifying employee-owned companies

• Amendments to ensure IHT exemption on transfer of shares and other assets into a trust

• Amendments to ensure employers can claim deductions on corporation tax for relevant bonus payments

• Thresholds increased on HMRC approved share incentive plans