Research reveals businesses and employees missing out on benefits of employee ownership due to lack of awareness among business owners
EOA Guest Blog – ThinCats
Two recent pieces of research have revealed that there are genuine economic, social and environmental benefits to be gained from businesses adopting an employee-owned structure, however, there is a real lack of knowledge about why and how to do it.
As a long-term funding partner to many mid-sized SMEs, ThinCats provides specialist debt solutions for businesses that need external funding to facilitate the transition to E0 status, typically via an Employee Ownership Trust (EOT).
The benefits of an employee owned structure
Research carried out by independent think tank Ownership at Work (OAW) in October 2023 compared employee-owned businesses (EOBs) and non-EOBs to assess their impact on individuals, businesses, communities, and the wider economy.
In terms of economic performance and contribution, EOBs performed better than non-EOBs. EOBS were 8-12% more productive than EOBs and although representing only 0.1% of businesses in the UK, employed 0.7% of total employees and contributed 0.8% of national output. An explanation for EOBs’ superior productivity is provided by their higher levels of investment in R&D compared to non-EOBs. EOBs also scored higher than non-EOBs in terms of profit growth and employment growth.
Looking at non-financial metrics, EOBs showed other benefits of the EO Model including: better information sharing; higher dividends and bonus payments; enhanced health & wellbeing support; greater investment in skills; higher employee engagement & job satisfaction; greater support for the local community; higher sustainability accreditation.
PANEL : Read the full EO Knowledge Programme report, October 2023 here
The challenges to making the EO transition
Given the wide-ranging benefits of the EO model described above, why aren’t more business owners transferring ownership of their businesses to their employees when implementing their succession plans?
To answer this question, OAW commissioned a separate piece of research (co-sponsored by ThinCats) in November 2023 to ask business owners about their succession plans and their understanding of EOTs as a vehicle to facilitate an EO model. Link to “Generation E0: The Great Succession Opportunity” here.
A key finding was that around 60,000 business owners are likely to sell their financial stakes within the next 5 years, rising to 94,000 within the next 10 years. The most common reason for selling mentioned by 69% of respondents is due to their age or wanting to retire.
When owners were asked their most important considerations for a succession process, the ones most frequently cited were: retaining the existing workforce; business continuity, avoiding closure, price maximisation, retaining a local workforce, protecting the company values/culture; retaining the company name, speed of the transaction.
However, when asked about their level of knowledge around succession options such as family succession; trade sale; management buy-out; majority sale to private equity; winding down the business via liquidation; sale to employees via an employee buy-out or EOT; owners were much less knowledgeable about the benefits of, and process for, transitioning to an EO model.
Given how well the EO model compares to other options in terms of business owners’ desires to protect employees and maintain a local presence, the research showed that there is a clear gap in business owners’ knowledge of how selling their business to an EOT could be a better solution to achieving their succession goals.
Read the full report Generation E0: The Great Succession Opportunity here.
From ThinCats’ experience of funding numerous EOT transactions we come across many examples where business owners would like to go down the EO route, but are not aware that external funding is available to facilitate the transition.
For more details on how ThinCats can help business owners and advisers with funding to support businesses considering transitioning to an EO model click here.