Employee ownership means all employees have a significant and meaningful stake in the business.
If a controlling stake of your business is held by, or on behalf of, all employees (the employee owners), this is called an employee owned business.
Employee ownership models
Some employee owned businesses are conventionally structured, with the employees owning shares directly through straight purchase, a tax approved share incentive or share purchase options plan.
An employee owned business can be classified as a worker co-operative if there is some form of representative or democratic voice for employees, in line with international co-operative principles.
Worker co-operatives operate with a commitment to principles, such as allowing all eligible employees to become members of the co-operative. Co-operatives members take part in its governance on a one member one vote basis.
Other employee owned businesses are held by an employee share Trust, which owns shares and acts in the interests of the employees as a whole.
Reasons for employee ownership
You would consider the employee ownership of a business if the owner is looking to retire and wishes to sell the business to the employees. It could also be used as a method of increasing employee engagement and commitment. This can help support an investment programme and secure external investors through an improved ownership structure.
Employee ownership may also be the result of divestment, where a business wishes to sell off a subsidiary, or a realisation of investment by business owner or one of the business partners. Alternatively, it could be a rescue strategy for a business that is performing poorly and possibly facing bankruptcy or liquidation.
Public service mutuals, where public sector employees are bidding to take over the services they provide (often called public service spin-outs), may also be a reason for employee buyout.
For more information, see the Mutuals Information Service on the GOV.UK website.
Employee ownership - sources of funding
Employee ownership businesses have various sources of funding available to them. If there is enough current and predicted disposable cash within the company to finance all or part of the purchase price, either in one lump sum or over a period of years, you may consider funding from the company.
Alternatively, the employees can raise funds from their personal resources, or receive shares from the owners as gifts. Loan finance is also a viable option, as is funding from a finance house, which will take greater risk than conventional loan finance and expects a higher return. The latter is referred to as mezzanine finance.
If an entrepreneur, management team or a family are selling a business, they may be prepared to take their cash over time. This is also known as vendor finance.
Learn more about the different aspects of employee owned companies:
We offer a wealth of information, advice and guidance for social business owners. Below, we’ve listed some more useful resources on employee ownership:
- Wales Co-operative Centre's report on employee ownership in Wales
- Social Business Wales - Business planning
- The voice of employee owned businesses in the UK, Employee Ownership Association (EOA)
The Department of Business, Energy & Industrial Strategy (BEIS)’s guide on employee ownership
- Employee ownership guidance and model documentation toolkit
- The Employee Share Ownership Centre (ESOP Centre) informs, lobbies and researches in the interest of developing all forms of broad-based employee share ownership plans (that is, in which all employees in a company are able and incentivised to acquire shares in the company for which they work) in the UK and Europe.
- Engage for Success provide information and case studies about the effect of increasing employee participation.