Next month, hundreds of representatives of employee-owned businesses from around the U.K. will gather in the Midlands town of Telford for the Employee Ownership Association’s annual conference. Employee-owned businesses have existed in the U.K. for decades, with one of the oldest being the retailer the John Lewis Partnership, so often held up by politicians as a model for how businesses should be run. Although recent years have shown that John Lewis is not necessarily more immune to the challenges of the economic environment than other companies, the concept of employee ownership has gained in popularity to the extent that the EOA claims there are currently around 2,250 of them.
Employee ownership of a company can take various forms, from having direct ownership to the increasingly popular mechanism of them owning the business via a trust. This approach was created in the 2014 Finance Act because then deputy prime minister Nick Clegg had a pet project of creating a “John Lewis economy.” And the concept has certainly proved popular. There were just 11 successful applications in 2016-17 tax year and only 20 in the year 2018-19. But, following a 10-fold rise to 225 in the 12 months to the end of June 2021, the scheme has expanded to the point where, according to the law firm Osborne Clarke, there were 560 transitions in 2024 alone.
In a recent article on its website, it points to the reasons why the structure has proven popular with a wide range of businesses, even with changes in last year’s Budget designed to ensure it was genuinely encouraging employee ownership and reducing opportunities for abuse. The benefits can be grouped into tax advantages — shareholders pay no capital gains tax on the sale of shares, bonuses of up to £3,600 per employee are exempt from income tax and there is no inheritance tax liability for selling shareholders; improved employee engagement through a boost to staff incentives and the retention of company culture, while the effective co-ownership of the company by employees encourages increased investment in its success; and preservation of company values through the founders retaining a minority interest and directorships and less chance of disruption to operations through the arrival of an outside buyer.
The idea that EOTs encourage employee engagement and build on already established positive company cultures and values was identified in an evaluation of the concept published by HMRC in May of this year. The report said that “transitioning to an EOT model was reported to have a positive impact on employee engagement.” It added: “In particular, it was felt to provide a tangible and more official way for employees to influence the company they work for. It was also felt to indicate a commitment to instilling an employee-centric culture.” The HMRC report concluded that both sellers and employees had generally regarded the transition positively.
This seems to have been the experience of Simon Woodcock and his colleagues at LAVA, a London-based boutique mergers and acquisitions advisory firm that has just marked a year since going through the process. Simon Woodcock, who founded the business focused on smaller mid-market companies with Hamish Martin, said the original plan when they started the business in 2020 was to build it up and then sell. “What I learned was that it gets complicated,” he said in an interview with me. “The people we brought in grew up with us. They invested four years of their careers with us.”
Having taken the risk to leave an established firm, Woodcock was seeking a reward for that via an exit. At the same time, though, he realised that he and his colleagues had created “something great” with a “fantastic” culture and that “the firm deserved to remain independent for the foreseeable future.”
The attraction of the EOT was that it enabled that to happen while he and his colleague crystalized some of their gain. But in the months since the transaction, he has seen other benefits. Recognising that the firm was ultimately a people business, he saw that it was not appropriate for a single individual to own most of the firm. “If I didn’t address the equity holding then I suspect we would have ended up finding it difficult to attract the people that we want.” In fact, in recent months, the two founders have been joined by a new partner, Paul Joyce, and the headcount is expected to rise to the mid-20s next year.
Woodcock has also felt the some of the strain of running a business has been taken away. “I feel the burden is shared,” he said. “A decision to invest becomes very corporate and a board decision rather than solely a decision by myself.”