Employee ownership (EO) or management buy-outs (MBOs) are fast becoming the preferred succession planning route for many forward-thinking business owners. Thanks to the success of John Lewis (which is owned by its employees, known as ‘Partners’), employee ownership is becoming a common theme in business news.
Here I look at some of the advantages of employee ownership, for employees, the company, and the exiting business owner.
Empowering employees through shared ownership
Employees that have a stake in the business are more engaged and more productive. They’re also far more likely to be more innovative, more entrepreneurial and to drive change from within. Employee ownership helps create a culture of collective purpose and, as a result, employees take real pride in their company. Employees who feel like they are an integral part of the business are the best possible ambassadors for a brand or business.
Employee-owned companies consistently perform better
Because they have happier, more engaged employees, employee-owned firms tend to be more productive and have higher staff retention rates. They also tend to make more money and consistently outperform their competitors. The Esop Index, which has been tracking employee-owned companies since 2003, shows that employee-owned companies consistently outperform FTSE All-Share companies; Esop shares have risen faster than the FTSE All-Share Index in eight of the eleven years for which the Esop Index has been calculated.
EO makes sense for the exiting business owner
EO provides a smooth exit route for the business owner. With an outright sale, if certain performance conditions are not met, you may not receive the full value of the business. But, in this method, employees buy into the company with cash or by sacrificing future income to buy out the shares – meaning you’re more likely to receive the full, fair value of the business (albeit over a longer period of time, rather than in a lump sum). Moving to an EO model can take around five years to complete, meaning you get to retain an ongoing interest in the business and help steer its future direction. The gradual passing of ownership gives you more time now for the things you love and a certain peace of mind about the company’s future.
Of course, for a lot of people, nothing beats the idea of getting a big fat cheque and sailing off into the sunset (even if you get bored or seasick after a few days). If that’s your end goal, it’s still worth exploring the idea of employee ownership – if only as a plan B or as a stepping stone to an eventual outright sale. A combination of engaged employees and higher profits resulting from employee ownership means your company is likely to be worth more and be more attractive to potential buyers.
If you’re new to the concept of employee ownership, I realise it may all sound a bit utopian. However, companies like John Lewis show us that EO can work very successfully in real life. My firm, Kirkpatrick & Hopes, is also employee owned so I’m in the best possible position to sing the praises of this method. If it works in my business, it can work just as well for you.
This post is based on an extract of my book Do More of What You Love: The New Approach to Business Succession Planning, out now.