Guide

Employee ownership

When you retire or exit your business, you may consider selling it to your employees.

In this section

  1. 1. What is employee ownership?
  2. 2. Benefits of employee ownership
  3. 3. Forms of employee ownership
  4. 4. Planning a transition to employee ownership
  5. 5. Financing employee ownership
  6. 6. Managing employee engagement and ownership
  7. 7. Find support

Guide 7 min read

1. What is employee ownership?

Employee ownership is where employees have a stake in the business and can contribute to decisions.

For many owners, safeguarding the future of their business and its employees is an important objective when exiting the business. Selling to employees can avoid:

In a management buyout, an owner will sell only to the senior management team or key employees. This type of deal can be quicker to complete.

Employee ownership differs from a management buyout as it involves selling to employees across the business. If certain criteria are met, it can be more tax efficient in the longer term.

The Nuttall Review - an independent UK Government review into employee ownership in 2012 - defined employee ownership as providing “a significant and meaningful stake in a business for all its employees”, and that the “employees’ stake must underpin organisational structures that ensure employee engagement.”

This means employees must have both:

  • a financial stake in the business, such as owning shares

  • a say in how it is run, known as ‘employee engagement’.

Some research indicates that when implemented in suitable businesses, the combination of shared ownership and employee participation may lead to superior performance.

The 2024 Employee Ownership Census and Survey commissioned by Scottish Enterprise, indicated that there were 202 Scottish registered employee-owned businesses or co-operatives. The Scottish Government’s target is for 500 businesses to have adopted this model by 2030.

2. Benefits of employee ownership

Employee ownership can be an effective way to:

  • preserve the business, its culture and legacy in local economies

  • deliver continuity for customers and suppliers

  • ensure that employees retain their jobs, are highly motivated and their contribution is recognised

  • attract and retain talented and committed employees who are interested in participating in decision making, sharing responsibility and success.

The existing management team of the company can remain in place after a sale to employees.

Compared with other types of sale:

  • the terms of the employee buyout are, to a greater extent, within the owners' control

  • owners can more easily plan when and how the employee buyout occurs 

  • it may be a quicker process than a sale to an unrelated third-party purchaser

  • there is no need to share confidential information with potential external buyers.

Employee ownership under an Employee Ownership Trust that is structured to meet certain criteria, is still a tax-efficient way to sell a business for the owner and employees. For example, advantages include some relief on Capital Gains Tax and scope for some tax-free bonuses for employees.

Most founders of a business want to see their business survive and prosper and employee buyouts have a good record of succeeding. The ongoing success of the business is also important if there is any deferred consideration, which is when some of the purchase price is paid at a later date. 

However, any owner should obtain independent, neutral advice to ensure a transition to employee ownership is feasible and in their best interests.

3. Forms of employee ownership

Employee ownership can take various forms and the choice may be determined by the size of the business and the number of employees. You need to decide whether employees will be able to sell their shares - and if so, to whom. There can also be important tax implications and professional advice will be needed. 

  • Indirect employee ownership. Shares are held collectively on behalf of employees, normally through an Employee Ownership Trust (EOT) which can bring tax advantages.

  • Direct employee ownership. Shares are held directly by employees in their own names. This may be done by using tax-effective share schemes.

  • Hybrid model. This is a combination of individual and collective share ownership, for example where some shares are owned directly by individual employees, while an EOT owns and keeps the rest.

Employees may choose to form a co-operative that then acquires the business. 

Scottish Enterprise has more information on ownership structures.

4. Planning a transition to employee ownership

The first steps are to identify suitable advisers and check:

Changing from a business controlled by an owner-manager to one owned by its employees can represent a big shift in culture. To be successful, employees will need to be interested in the approach and prepared to become involved in decision-making.

You will need advice on when and how to introduce the idea and involve employees in the process, including being aware of when consultation is a legal requirement.

If possible, allow time to build the ownership culture and properly explore how the transition can be financed and organised. It can take anything from two to 18 months to negotiate and conclude a deal.

5. Financing employee ownership

Finance can be used to allow the business to be sold for a fair price, even if the employees cannot afford to buy it outright. Options will depend on the financial viability of the business and how the buyout is being structured. 

An Employee Ownership Trust may be able to borrow from a bank, particularly if the business has strong, predictable cashflow and assets. The Trust would then use future profits to repay the loan.

Some specialist lenders finance employee buyouts, such as Co-operative and Community Finance.

Owners can help finance the deal by agreeing to accept payment over time. And some may sell for less than the full market value if they are motivated to secure the future of the business.

Employees can also support by financing the gradual acquisition of shares by taking shares or share options as part of their remuneration, or they can invest their own savings. In the case of business restructuring and rescues, if the business is still potentially viable, employees taking on ownership to avoid closure may accept changes to their terms and conditions or take lower salaries.

Financing structures can have tax consequences, so specialist advice will be needed.

6. Managing employee engagement and ownership

Once the transition to employee ownership is complete, in many cases the business will continue to operate as a profit-making enterprise, with the same managers and employees, but both need to understand their new roles as owners. They may need training if they will be responsible for electing directors to the board, or taking on new responsibilities for setting up frameworks for employee participation, as employees must have a say in how the business is run. 

It may be worth becoming a member of an organisation like the eoa to draw on the experiences of a range of employee owned businesses.

If an EOT is in place then the Trust must have trustees, some of whom are likely to be employees. All trustees will need access to specialist advice, especially around managing shares and distributing dividends.

Whatever the ownership structure, key principles for successful implementation across all employees will apply. Employee share ownership plans must be:

  • simple – properly thought out and easy for everyone to understand

  • transparent – with all performance indicators able to be measured objectively, and progress communicated clearly and regularly

  • consistent – although you can choose to offer greater reward to specific levels or individual staff or for relevant outcomes for which employees have control

  • reliable – once communicated, systems and processes should not change frequently

  • supported – the system must be supported by all company owners, board, and management.

7. Find support

Co-operative Development Scotland (CDS) is part of Scottish Enterprise and offers up to three days of hands-on advice and support to help owners decide if employee ownership is the best exit strategy. If so, they can undertake a feasibility study covering potential ownership structures, governance, management, funding and transition.

The eoa is a membership association offering insights, networking, and learning and development for businesses on the employee ownership journey from exploring the options, transitioning, then growing and developing.

When negotiating a deal, the business owner, employees and any trustees may have different interests, so will need their own professional advisers, such as lawyers and accountants. Ideally advisers will have relevant experience.

Business Gateway can also provide advice and put you in touch with local support services.