How Employee Ownership Drives Competitive Advantage

By Kevin Uphill, Avondale Corporate

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Achieving competitive advantage in business is synonymous with outperforming competitors. This advantageous position is founded on four key pillars: efficiency, quality, innovation, and customer responsiveness. By excelling in these areas, a company differentiates its offerings, delivers enhanced value to customers, and potentially operates at a lower cost base, thereby increasing market share and profitability.

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Employee Ownership Trust (EOT) businesses inherently fortify these four pillars of competitive advantage. This stems from their ability to attract superior talent, boost employee retention, reduce training costs, and elevate the overall competence and productivity per employee.

Employee retention and attraction are bolstered by EOT businesses, often resulting in higher pay and tax-free annual bonuses of up to £3,600 per annum, per qualifying employee. As “business owners”, employees are more deeply engaged and take greater ownership of their work as they fully comprehend the impact of performance on bonuses and ancillary benefits, such as healthcare or insurance.

In this way, the framework of the EOT model influences the foundations of competitive advantage. While each element might contribute only marginally, the cumulative effect, much like in sports, can lead to a significant overall advantage.

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What is Employee Ownership?

In 2022, a record-breaking 332 new EOTs emerged, bringing the total number of employee-owned businesses in the United Kingdom to 1,418 (source: Employee Ownership Association). This 37% increase is fuelled by both succession needs and the model’s inherent advantages.

Becoming employee-owned involves selling company shares to a trust, which holds them for the benefit of company employees. The process, which is often vendor-led, includes a commercial valuation of the business with no requirement for third-party involvement. Notably, such sales currently enjoy zero Capital Gains Tax (“CGT”) if over 51% of shares are sold. This streamlined process entails reduced due diligence and a structured deal timeline, ensuring a seamless transition while maximising commercial value and minimising tax liability.

Employee Ownership does not entail complete employee control and it is a misconception that management must pre-approve a sale. The new management team, which will be selected based on expertise, may encompass former shareholders, who become employees, driving future growth and safeguarding the company’s legacy.

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Enhanced Governance and Productivity

Research from the Employee Ownership Association reveals that 71% of EOTs embody a statement of purpose focused on societal and environmental contributions. Furthermore, 96% prioritise workforce well-being, highlighting the increased social responsibility, and thereby enhancing advantage and sustainability. Additionally, over 90% of EOTs involve employees in decisions on working conditions, and 75% share financial information regularly, fostering better team engagement and informed decision-making.

Managing the transition to employee ownership while maintaining senior team motivation can be addressed by offering above-market compensation packages, performance bonuses, and retention schemes. Daily business affairs and decision-making remain the responsibility of the company directors and the Managing Director, with a newly formed management board guiding the company’s trajectory.

The trust board oversees the management board, ensuring adherence to good governance and policies benefiting employees. This elevated governance, facilitated by professional trustees being appointed to the trust board, brings heightened accountability, defined roles, and improved alignment with customer demands, all contributing to a competitive advantage. The shares are typically held in trust for the benefit of the employees and they are only beneficiaries as long as they are employed by the company which deals with constant staff movement, unlike minority shareholder models.

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Embracing Change

Evidence underscores the high motivation of employee-owners and the enhanced staff retention and productivity which results. Amid the uncertainty, employee ownership sales offer vendors a viable exit strategy while bolstering business growth, economic contribution, and employee well-being. Navigating the legal and financial intricacies of implementation is straightforward with appropriate guidance. Whilst technical details matter, a focus on the long-term legacy for employees and customers is of paramount importance and will enhance your business model’s competitive advantage.

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In Summation

Steve Jobs once said, “Let’s go invent tomorrow rather than worrying about what happened yesterday.” This forward-looking mindset aptly fits our evolving world. Amid challenges like Covid-19 and shifting customer perspectives, employee ownership emerges as a resilient model. Often likened to the ‘John Lewis model’, EOTs display enduring competitive advantage. Despite its recent troubles, John Lewis is virtually the sole surviving big retailer underpinning the inherent benefits of the model. In a landscape of marginal gains, the EOT business model can drive growth and productivity. The essence of employee ownership lies not in complex structuring but in its profound “why”, highlighting its utmost importance in achieving long-term prosperity through a competitive edge.

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Contact Avondale Corporate

Avondale welcomes the opportunity to discuss your exit options with you and help you plan for your future. Please call them at +44 (0)1737 240888, or email av@avondale.co.uk to speak to one of their EOT specialists. You can also visit their website at www.avondale.co.uk to learn more about their services.

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