Why founders have turned to employee ownership during the pandemic
New data points to record growth in the employee ownership model over the past 18 months, but what benefits can founders expect to gain from giving employees a stake in the business?
Interest in employee ownership hit record highs during the pandemic, with 250 new employee-owned businesses established in the past 18 months.
The form of ownership sees employees collectively own the shares of a business, giving staff a greater stake in how the business is run and a portion of its profits. While companies such as The John Lewis Partnership have long flown the flag for this model, recent growth is unprecedented, according to the Employee Ownership Association.
The organisation’s chief executive Deb Oxley says: “We had an influx of businesses making enquiries, as did our professional adviser members. Covid-19 provided a real shake-up for some business owners that suddenly had reason to have a sharper focus on succession plans.”
Founder of Wave Refrigeration James Bailey is one such owner. He made the decision to transfer 85% of the company’s shares into an employee ownership trust in June 2020. After seeing the business grow beyond his expectations, he decided that “the people who helped the company succeed should be rewarded”.
The £1.4m-valued business, which provides refrigeration maintenance and management services for companies including Sainsbury’s and Aldi, is now jointly owned by Bailey and its 17 employees.
He says the transition to employee ownership has been transformative for Wave Refrigeration, helping it to record 22% growth over the past year. “People within the business are more engaged; they’re going beyond their job requirements and seeking opportunities to grow the company,” Bailey adds.
The impact of the pandemic was also a consideration for Bailey, who is not shy about sharing his socialist values. “I like the fact that everything is fair and equal for all. When people join they don’t have to buy the shares and when they leave they will have enjoyed the benefit of being employee owned before passing the baton onto the next person.”
Last year, two of the younger members of staff at Wave Refrigeration were able to buy a house because of the profit they shared through the employee ownership trust. “That gave me a lot more satisfaction than taking out a dividend,” Bailey says.
Pandemic causes employee ownership to take off
Many employee-owned organisations share Bailey’s beliefs, with 70% describing employee ownership as a socially responsible thing to do, according to a survey of 230 businesses by the White Rose Centre for Employee Ownership. Of those, 77% said that making a positive contribution to society and the environment was part of their purpose.
According to Oxley, an “increased awareness, attention to ESG and the pandemic have created a perfect storm for employee ownership to take off”. She adds: “Being employee owned doesn’t automatically make you become more ethical, but it unites people behind a common purpose which makes it easier to drive both performance and other impacts.”
Over the course of the pandemic, the Employee Ownership Association heard from founders who wanted to leave behind a more sustainable business that can continue to contribute to the local economy after they’ve exited. Oxley says: “Founders want to leave a business that contributes to the local economy and keeps the company culture and values alive.”
This was one of the elements of employee ownership that appealed to Bob Grayson, founder of boutique law firm Tapestry. The company completed its transition to 100% employee ownership in the midst of the pandemic.
Explaining the reasoning, legal director Chris Fallon says: “It was a complete no-brainer. The tax savings alone make it worth considering. But it’s also a way of ensuring the unity of the team and the ethos of the company. It has acted like rocket fuel for employee engagement.”
As part of the tax incentives offered to employee-owned organisations, businesses can pay a tax-free bonus of £3,600 to each employee every year – an option which tapestry took in its first year of new ownership. Grayson adds: “The government thinks this is a socially good thing, so it’s been given huge tax breaks which sweeten the deal for everybody involved.”
Although the process of transitioning to employee ownership occupied a lot of his time during the months leading up to the transaction, Grayson adds: “It takes a hell of a lot less effort than selling to a third party, because you’re selling to people you know and who know what they’re buying.”
Will the growth in employee ownership continue?
When assessing whether this trend will continue, CASS Business School professor Ajay Bhalla points to the spike in employee ownership during the financial crisis of 2008. He says: “Employee owned businesses tend to do much better during times of crisis because they’re more flexible, agile and we find their productivity is much higher.”
But, despite the benefits of the employee ownership model, it is not the right fit for every business. One issue comes with scaling up, which can be challenging when multiple employees have a stake in the business. “I hardly ever see employee owned businesses going global,” Bhalla adds. “It can also promote group-think, which can be detrimental to adaptability and agility.”
Secondly, financing can be more challenging for employee owned organisations. The number of options for raising capital are much more limited when the business can’t offer a stake in return for investment. Bhalla says: “The only place you can go to for finance is a bank and the financial terms are not always as good as what’s available to a non-employee owned business.”
Although these factors may limit the ability for employee owned businesses to scale at the same rate as other companies, shifting attitudes towards employment structures may also provide an impetus for change.
“We talk a lot about the future of work, but we don’t talk about the future of ownership,” Bhalla says. “The next generation are not motivated purely by money, they are also looking for an employer to provide a sense of purpose, satisfaction and work-life balance. And that’s where the employee ownership model can come in.”