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An alternative exit strategy: Employee ownership

Most business owners would like to sell their company one day, but the fact is that every year only a tiny percentage of businesses are actually sold.

There are lots of reasons for this, but the main one is that no one wants to buy it! The reason for that is usually that there is too much dependence on the business owner. To replace her/his input would require a salary that would eat up most of the profits, leaving no return on investment for the buyer.

Michael Gerber in his famous book The E-Myth – Why Most Small Businesses Don’t Work and What To Do About It sets out clearly how to tackle this over-owner-dependency problem. The main solution is to develop systems and empower the team to operate them. This can be impossible to do because it involves changing habits and engrained practices.

What is missing in these situations is the motivation for the employees to make changes, i.e. the WIIFM question (What’s in it for me?).

I believe that empowerment of the team by sharing ownership of the business with them is the best solution to this problem. As part of the process, it may also be possible to provide an exit route for the current owners.

At my accountancy firm, Kirkpatrick & Hopes (K&H), more than one-third of the shares are owned by the rest of the team, and everyone has at least one share. For the last couple of years we have been members of the Employee Ownership Association (EOA), whose flagship member is John Lewis. K&H has rather flatteringly been called ‘the John Lewis of Accountants’!

Here is a summary of some of the main benefits to the business owner of employee ownership (EO):

1. It can provide an alternative exit route for the present owners, e.g. with employees buying in with cash or sacrificing future income to buy out the shares.

2. The business should be more profitable with more motivated employees. EO companies make more money, according to all the research.

3. The combination of more profits and more empowered employees means that the company should be easier to sell.

4. In EO companies, it is also common to share information about the business: profits, sales, new business won etc. This alone can be hugely motivating to the team and help marginalise and get rid of uncommitted employees, making it a much better place to work.

5. There can be significant tax benefits, e.g. using share schemes to award tax-free shares and paying employee/shareholders in dividends that are free of National Insurance.

6. The EOA website has more proof of the benefits of EO.

Of course, as an exit strategy, nothing beats getting a big fat cheque and retiring to the beach (even if you get bored after a few days!), but as a plan B or as a stepping stone to a sale, EO is well worth exploring.

If you’d like to know more about how we have made employee ownership work at Kirkpatrick & Hopes or our Build to Sell planning process, please call me on 07977 074492 or email andrewg@kandh.co.uk.

One Response to “An alternative exit strategy: Employee ownership”

  1. Andrew Gray says:

    Here’s a great video setting out how employee ownership can work, and the tax benefits: http://www.postlethwaiteco.com/resources/intro-share-schemes

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