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Employee Ownership: A Better Structure for Doing Business

By Jacqui Mitchell - Posted on 23 April 2013

Employee Ownership: A Better Structure for Doing Business

Management consultant and Strathclyde MBA alumnus, Jacqui Mitchell looks at the benefits of employee ownership…..

While the idea of a “John Lewis” economy has set tongues wagging in the halls of Westminster, the enthusiasm for employee ownership has yet to capture the collective imagination, with just 2% of GDP currently attributed to employee-owned companies.

Despite this, switched-on SME owners looking for effective exit strategies are increasingly likely to  consider employee ownership as an alternative to traditional succession – an option with many benefits compared to others such as trade sales.

Employee ownership allows the values of a business to be maintained, while enabling it to continue to operate from its current location. Exiting owners also favour this option as a means to reward loyal employees. Not only does transferring ownership in this way increase sustainability, but it can also be a fantastic catalyst for future growth.

With staff each having a personal stake in their businesses, employee ownership can also have a marked impact on productivity, staff turnover and absenteeism, as employees have a greater incentive to perform.

Financial participation alone is not enough to ensure the full benefits of employee ownership are enjoyed. To guarantee employees genuinely think, feel and act like owners, they must also be consulted and given more information on all major decisions affecting the company. Employees must also fully understand the rights and responsibilities of ownership and the required culture change doesn’t happen overnight.

Employee ownership can also have societal benefits by maintaining jobs in local communities and improving income equality. Studies have also shown employee owned companies create jobs at a faster rate than other businesses and are more resilient during a recession.

Moving a company into employee ownership doesn’t necessarily require existing staff to have the funds available to purchase shares. Although they may well choose to invest some of their own money in the business, buyouts tend to be structured through a mixture of vendor finance – whereby the current owner lends the required finance to the employees buying the company – and external borrowing.

There are also various choices around how to structure ownership. Some people will favour the John Lewis’ model, with all shares held in a trust on behalf of the employees, while some business owners will wish to either give staff shares directly or use tax-efficient share schemes to make employee purchase more viable. Others may even decide to go for a mixed model which may be viewed as the best of both worlds combining individual share ownership with the stability of having a majority of the shares held in trust.

While it may not be suitable for all businesses, employee ownership can offer a range of benefits through increased motivation and productivity. For businesses either considering succession or looking for alternative sources of finance, it should be a key consideration.

Are you a business owner who’s transferred ownership to staff? Do you work for an employee-owned company? Please let us know in the comments below.

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