When people talk about Employee Ownership Trusts (EOTs), the focus is often on the benefits for employees, but employee ownership cannot expand unless business owners are willing to sell to their employees.
One of the key purposes of the EOT structure is to encourage vendors to consider employee ownership alongside more traditional third-party sale options. While there are many reasons why employee ownership can benefit employees, providing a meaningful incentive for owners to pursue that route is critical.
An EOT is not the right solution for every business. However, it represents an attractive alternative that can deliver benefits for the vendor as well as employees and customers.
Why incentives matter
If employee ownership is to grow, business owners must be willing to choose it. That is why the tax advantages available through the EOT structure have been so important. They help level the playing field when compared with a sale to a third party and create a compelling reason for owners to consider Employee Ownership Trusts as part of their succession planning.
However, the tax advantages should never be the only reason for pursuing an EOT. Successful transitions are driven by more than financial considerations alone. Owners often care deeply about the future of their businesses, the people who helped build them and the values that shaped their success. The EOT structure provides a mechanism through which ownership can pass to employees while also rewarding the vendor for choosing that route.
Looking beyond the tax benefits
While tax incentives are important, the case for employee ownership goes much further. One of the most well-known examples in the UK is John Lewis.
After taking control of the business from his family, John Spedan Lewis established a structure through which ownership was held on behalf of employees. He believed employees were entitled to share in the profits of the business, leading to the creation of the annual partnership dividend that still forms part of the organisation’s identity today.
The John Lewis story highlights one of the most frequently cited benefits of employee ownership. When employees have a direct stake in the success of a business, they often become more invested in serving customers and clients. For many consumers, John Lewis has long been associated with high levels of customer service and the company is often referenced as an example of how employee ownership can contribute to a stronger customer experience.
What the evidence says
Research in both the UK and the United States has examined the impact of employee ownership over many years. In the United States, the National Center for Employee Ownership (NCEO) has conducted and compiled extensive research into employee ownership. The findings cover a range of employee and business outcomes and have helped establish a substantial body of evidence supporting employee ownership models.
The issue has also been examined in detail in the UK. The Employee Ownership Effect: A Review of the Evidence was produced by Matrix Evidence in conjunction with organisations including John Lewis, the Employee Ownership Association and Circle Health. It found that there are benefits where employee ownership is delivered effectively.
Ownership alone is not enough
The Employee Ownership Effect found that the greatest benefits were achieved when employee ownership was combined with high levels of employee engagement and involvement. Simply selling a company to employees without actively encouraging engagement produced limited benefits. Equally, encouraging high levels of engagement without employee ownership also produced limited results. The strongest outcomes occurred when both elements were present together. Employee ownership works best when employees are not only beneficiaries of the structure but are also genuinely engaged in the success of the organisation.
Is an EOT the right option for your business?
An EOT should not be viewed as the right solution for every business, nor should it be viewed solely through the lens of tax relief. EOTs can provide significant benefits for vendors, employees and businesses alike. They can create a credible alternative to a third-party sale, help employees share in the success of the organisation and support a culture where people have a genuine stake in the outcome of the business. However, the greatest benefits arise when employee ownership supported by meaningful employee engagement.
For some businesses, an EOT will be an excellent fit. For others, a different succession route may be more appropriate. If you’re exploring your succession options and want to understand whether employee ownership could be right for your business, download your free guide which takes you through the opportunities, challenges and practical considerations involved.
Download Employee Ownership Trusts: A Practical Guide
This article is based on Chapter One of Employee Ownership Trusts: A Practical Guide, a clear, practical guide to Employee Ownership Trusts, written by specialists, explaining benefits, risks and process, helping you assess suitability and implement EOTs confidently, compliantly and commercially within your organisation today.