Finance for employee share ownership

Getting employees as owners or co-owners of businesses can mean some important advantages for all concerned. Staff are more motivated and have a commitment to the company. This can translate to greater profitability, reduced costs with less time lost, and reduced staff turnover.

This means that workers stand to benefit from the success and growth of their company. If the company succeeds and the value of the shares increases, the workers enjoy the results from their own hard work.

There are two main routes for Employee Ownership:

• Direct Employee Ownership – under an Employee Share Ownership Plan, employees hold shares or are given the option to buy shares in their company at discounted and tax-efficient rates.
• Indirect Employee Ownership – a company is owned either in full or in part by a trust set up on behalf of its employees.

Employee Share Ownership Plans, or ESOPs, are the most common form of employee ownership in the UK. There are now over two million employees in the UK who hold shares or options through a share scheme and many FTSE 100 companies have ESOPS in place.

How an ESOP works

ESOPs are trusts that acquire the company’s stock for the benefit of employees. Typically, the company borrows money from lenders or investors and then loans the ESOP trust funds for the purpose of acquiring shares. As the ESOP loan is paid down, shares are allocated to employee accounts in proportion to the employee’s annual compensation.

Employees can receive cash in exchange for their shares upon retirement, termination, disability or death.

Many private business owners a now starting to use ESOPs as an exit strategy. ESOPs are an excellent tool for succession, as government support means that they will provide various tax benefits, and allow business owners to reward their employees and managers by giving them a stake in the business.

ESOP transactions can also allow owners to withdraw slowly over time or all at once, and sell from all their stock, or merely a percentage to the newly created ESOP. This makes it possible for an owner to remain active in their business even after selling all or most of the company.

Employee ownership does not mean employees become involved in day-to-day operations, governance, or strategic direction. Members of management can retain their positions, allowing for a smooth transition when forming an ESOP. A smooth transition is one in that long-term supplier, distributor and customer relationships remain uninterrupted.

The funding required

The cost of setting up an ESOP will, of course, depend on the value of the company, and a sum equivalent to the value of the company may be required.

Each situation is different, and setting up funding for the ESOP trust can be achieved in several ways. Many lenders will be happy to lend, but the large sums involved many make it necessary to proceed carefully to avoid excessive costs. At Rangewell, we know the market and the lenders who can offer the most competitive rates and a can work with you to understand your needs and develop the most appropriate funding package for them.

 Call us now to get our experts working to the solution you need for your Employee Share Ownership Plan.