Employee buyouts

This section helps you to understand:

  • What an employee buyout is, and the advantages of employee ownership
  • When to involve employees
  • The different types of ownership structure
  • Co-operative Employee Ownership
  • Critical success factors
  • The first 10 questions you need to consider
  • Getting the right support

What is an Employee Buyout?

An employee buy-out is the process by which ownership of a business is transferred to its employees. This can take many forms, from wholly employee-owned co-operative businesses like Suma Wholefoods through to Gripple (see related links) which operates employee share schemes where employees own a minority stake in the business.

Employee Buyout – a solution to the ‘succession problem’

  • In 2015, there were 5.4 million businesses in the UK, 99% of which were defined as SMEs (fewer than 250 employees, and 5.1 million (95%) businesses were micro-businesses – employing 0-9 people.
  • Recent NEF research suggests that there are around 120,000 family-run small and medium enterprises in the UK expected to undergo a transfer of ownership in the next three years. Read the report.
  • Microbusinesses accounted for 33% of employment and 18% of turnover (reference: Parliamentary briefing)
  • Work undertaken by the Federation of Small Businesses (FSB) found that 3% of small businesses in the UK (over 160,000) have succession as their main priority for the following year. (reference: FSB member survey 2013-14)

Business succession is an issue for the UK economy. Lost businesses are often going concerns with established products, markets and customers and so have a higher probability of survival than new firms. Transfer failure sees viable businesses closing each year, resulting in the loss of jobs, businesses and skills in our local communities.

Employee ownership is a viable succession option for business owners. Business owners can get a fair price for the business and who better to pass your business onto, than the people who know it best, the employees.

The benefits of Employee Buyouts

Passing ownership of the business into employee hands can:

  • Protect loyal staff from redundancy, and stop businesses from having to close.
  • Keep businesses in the local community, preventing unemployment and empty premises.
  • Create more engaged, fulfilled workers.
  • Improve productivity and innovation, and reduce absenteeism as commitment to the business increases.
  • Help spread wealth by maintaining wage levels and introducing share ownership.
  • Save the existing owner from negotiating with new or potentially adversarial buyers.
  • Allow the business to take long-term decisions about its future rather than focus solely on succession.

Tax incentives

In addition the Government has provided tax incentives to encourage the growth of employee ownership through two tax reliefs;

  1. A relief on Capital Gains Tax for owners when they sell a controlling shareholding in their Company to an employee ownership trust;
  2. An 'income tax exempt' bonus for employees of up to £3600 annually where an employee ownership trust owns a controlling stake (50% plus one share) in the employer Company.

When to involve employees

Watch our short video on when to involve employees, and employee decision making:

Updated: 29/03/2019