For many SME founders, succession planning is a pressing challenge. Whether retirement is on the horizon or you’re simply looking for a way to secure the long-term future of your business, employee ownership (EO) is an increasingly popular option. But is it right for you?
At its best, EO can drive engagement, secure company culture, and ensure continuity. At its worst, it can lead to operational headaches and unmet expectations. Before you take the plunge, let’s explore the key motivations, financial and structural considerations, and the risks founders often overlook.
Why do founders choose employee ownership?
Most founders who transition to EO have a clear vision: they want their business to thrive beyond their personal involvement. The most common motivations include:
- Succession planning: Ensuring the business continues successfully without needing to sell to an external buyer.
- Preserving the culture: Keeping the company ethos intact rather than risking dilution under new, possibly corporate, ownership.
- Long-term sustainability: EO models often focus on resilience rather than short-term profits.
- Rewarding employees: Many founders feel their teams deserve a stake in the business they’ve helped to build.
The motivations are compelling, but EO is not a one-size-fits-all solution.
The financial and structural implications
Employee ownership usually takes one of two forms: a direct share ownership model (where employees individually hold shares) or an employee ownership trust (EOT), where a trust holds shares on behalf of employees.
Structuring an EOT means selling at least 51% of the business to the trust, which then pays the founder over time, often using company profits. The immediate benefits include a tax-free sale and continued business stability. However, this also means:
- The founder is not receiving a lump sum payout (unlike selling to a trade buyer or private equity).
- The company must consistently generate enough profit to fund the buyout.
- Employees may not fully understand what ‘ownership’ entails, leading to potential disengagement.
If EO is to succeed, it requires careful financial planning together with education of the future co-owners.
Common challenges and risks
Many founders underestimate the complexities of shifting to EO. The most common pitfalls include:
- Lack of employee buy-in: If employees don’t feel like real owners, they may not act like them, causing the company potentially to fail.
- Decision-making bottlenecks: Some EO models slow down decision-making, especially if governance isn’t well-structured.
- Leadership gaps: Founders often assume leadership will naturally emerge, but it may not. Without investment in leadership development, the business may struggle.
- Financial strain: If the business isn’t consistently profitable, funding the transition may be challenging.
Lessons from success and failure
There are plenty of inspiring EO success stories—John Lewis, Riverford Organic Farmers, and Richer Sounds are well-known examples. These businesses have seen increased employee engagement, long-term stability, and strong financial performance.
On the other hand, businesses that fail to plan their transition properly can struggle. Some find themselves weighed down by decision paralysis, while others see employee morale drop due to unclear expectations. The difference usually comes down to how well the transition is planned and communicated.
Is employee ownership right for your business?
EO works best when it aligns with your goals, values, and financial realities. If you’re considering it, ask yourself:
- Do I want to prioritise long-term sustainability over an immediate payout?
- Is my team engaged and ready to take on ownership responsibilities?
- Can the business support an EOT financially?
- Am I willing to stay involved for a period to ensure a smooth transition?
EO isn’t just about handing over shares, it’s about embedding an ownership mindset. If that excites you, it might be the perfect next step for your business.