On Employee Ownership (EO) Day, we take a look at the increasing popularity of Employee Ownership Trusts (EOTs), which have been experiencing steady growth in recent years. What motivates businesses to choose employee ownership, and how has the landscape changed in the last year? This blog will address these inquiries and provide the latest EOT statistics.
What is an Employee Ownership Trust (EOT)?
Before exploring the details, what exactly is “employee ownership”? We are referring to businesses that are predominantly owned by their employees, often through the utilisation of an Employee Ownership Trust (EOT). An EOT is a special type of trust to which the majority ownership of a business can be sold. The assets, such as trading company shares, are held for the benefit of both current and future employees. However, you can find a more detailed explanation within our downloadable EOT guide.
The Latest Employee Ownership Statistics To commemorate EO Day
The Employee Ownership Association (EOA), in collaboration with the White Rose Centre for Employee Ownership (WREOC), has released the annual employee ownership statistics for 2022.
The findings include:
- Between 2020 and 2022, the employee-owned sector more than doubled in size, surpassing 1,000 employee-owned businesses.
- In 2022 alone, there were 332 new employee-owned businesses, setting another record for annual growth. By comparison, 285 businesses transitioned to employee ownership in 2021, which was a record at the time.
- As of June 2023, the total number of employee-owned businesses reached 1,418, representing a remarkable 37% growth within the past 12 months.
- The top 5 sectors for employee ownership as of June 2023 were:
- Professional Services: 39.1% (including recruitment!)
- Manufacturing: 15.1%
- Construction: 13.6%
- Wholesale & Retail Trade: 11.4%
- Information & Communication: 8.1%
This growing trend coincides with a government consultation on EOTs, “to ensure that the reliefs are closely targeted at incentivising EOTs as an employee ownership business model whilst preventing the reliefs from being used for unintended tax planning”.
Reasons for the Popularity of EOTs
The rising popularity of EOTs can be attributed to various factors, as elaborated in our EOT guide. However, some of the key benefits for both sellers and employees in these transactions are outlined below:
- Availability of Willing Buyers at Fair Prices: There is no need to seek external buyers or consider selling to competitors. An EOT provides a simpler route to achieve a fair price for the sale.
- Preservation of Culture, Values & Legacy: Many owners wish to retain the culture, values, and legacy they helped build, which can be at risk in third-party sales but can be preserved through an EOT.
- Possible Tax Relief on Sale: Unlike alternative sale routes such as traditional third-party sales or management buyouts (MBOs), selling to an EOT does not attract capital gains providing certain conditions are met (more details can be found in our EOT guide).
- Retention of Key Staff: EOTs provide a mechanism to retain and incentivise key employees. By offering an ownership stake in the business, recruitment agencies can motivate and reward their top performers, which can contribute to higher employee retention rates. It can also be combined with an EMI scheme, another popular mechanism to help retain key staff.
- Financial Reward for Employees: EOTs enable employees to benefit financially from the agency’s success through a share in the profits. This comes without a financial commitment from staff and without the need for an exit for staff to realise this reward. With an EOT, staff can receive up to £3,600 as an annual bonus income tax-free. This can serve as a powerful recruitment and retention tool, attracting top talent to the agency.
- Competitive Advantage: Being an employee-owned recruitment agency can differentiate the business in the market. It demonstrates a commitment to employee well-being, shared prosperity, and a long-term focus. This unique ownership structure can be appealing to clients, candidates, and stakeholders who value businesses that prioritise employee empowerment and engagement.
How can Recruitment Accountants help?
There are many benefits to transitioning to EOTs, however it may not be the right option for all businesses, whether it is the right exit option for your Recruitment Business depends on your business’s individual circumstances and goals, various factors will need to be considered. To discuss if this could be an option for your Recruitment business, please reach out to one of our EOT experts Alison Price at firstname.lastname@example.org or 01462 687333.