In the last year, 27% more UK businesses have switched to employee ownership trusts.
According to a report from the accountancy firm Lubbock Fine, by the end of 2023 542 businesses would have transferred ownership via employee stock options (EOTs), up from the 428 that had been done the year before.
In the last five years, EOTs, which allow business owners to transfer their company to employees via a trust, have seen a rapid growth. In 2018, 19 businesses were using EOTs. By 2023, this number will have increased by 2,750%.
This model was created by the Conservative Government in 2014 in order to encourage employee ownership. High-profile companies such as Richer Sounds, whose owner Julian Richer , transferred ownership of his company to its employees in 2019, have adopted this structure.
This structure is especially appealing to business owners, who wish to reward loyal employees and preserve their company’s culture.
Many entrepreneurs believe that by transferring ownership to their staff, they protect the values and ethos the company rather than taking a risk with external buyers. Employees can also reap financial benefits, as they gain a stake and share in the profits of their business.
The appeal of this model lies in its tax benefits for the owners. Mark Turner, Lubbock Fine’s partner, said that the model was ideal for owners who wanted to leave the business while still ensuring it remained in trustworthy hands.
He said that EOTs allow owners to sell shares at full market value – often financed by future profits – without having to pay income tax, capital gains (CGT) or inheritance tax. This can be an important advantage when compared with private equity deals.
If the Budget this month introduces higher CGT, EOTs will become even more attractive to entrepreneurs. Turner stated: “Any increase to CGT will likely accelerate the use EOTs as they are a tax-efficient option for traditional buyouts.”
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He said: “Entrepreneurs who are concerned that selling their company to private equity will lead to a too drastic change in the business may find EOT agreements more suitable. It allows founders to leave while rewarding employees who built their company.
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