For employees of owner managed businesses, succession planning is often a rather delicate subject. You want the boss to know you’d like to be one of the owners one day, but it’s not exactly an easy topic to bring up.
Maybe some vague promises were made at the interview. Perhaps hints have been dropped. Possibly the owner doesn’t actually have a clear plan (actually, experience suggests that’s more likely to be a ‘probably’).
One expectation by employees is that the owner is going to give them some shares in the business one day. Maybe this was stated, maybe implied, perhaps assumed.
There are, unfortunately, a number of reasons why this is incredibly unlikely to actually happen.
Giving It Away
The first is the simple fact that owner(s) don’t tend to give things away.
I have had many a meeting owners looking to sell their business. They pronounce how much they think their business is worth, but then stress that the most important objective is to look after the clients, many of whom he (it has always been a ‘he’) considers to be friends.
Then we have the discussion about what he thinks the business is worth which is, of course, different to what I want to pay. When I point out that those appearing to offer more money are unlikely to look after the clients as well as we would, they wholly agree.
Then I hear three months later that they sold to the highest bidder.
The Tax Bill
There is, however, a far more prosaic reason why an owner will not gift shares to employees. Any such gift would be deemed by HMRC as being due to the nature of the employment. They would therefore treat the gift of shares as income.
So if, for example, a young adviser (earning, say, £50k) were given 10% of a business worth £1m, HMRC would say this is additional income of £100,000, leading to a tax bill of some £46k.
Giving shares away means giving away little bits of control. It’s one thing letting a few clients go to the younger advisers, or allowing them to bring in new ideas about the advice process; it’s another matter entirely letting them make actual decisions about the business.
I know, I’ve been through the process. There are moments when you tell yourself that your employees aren’t ready, when really (now I look back on it) it is you that is unable to let go. The stakes are high, and letting go is much harder than it looks.
Leaving It Too Late
And then, all of a sudden, nothing happens. It becomes too late. It can take five years to prepare a business to be passed on to the employees. The moment comes that the owner decides the time is right, but by that time they are unable or don’t want to wait five years.
Employee Ownership Trusts
If shares cannot be handed to employees for free, and the employees don’t have the money or security to buy the shares, what other options are there? How can owners get out and employees get in without creating large tax bills or stumping up lots of money?
The Employee Ownership Trust provides the answer.
Chris’s new book on how to transition to employee ownership, The Eternal Business, is available for pre order on Amazon. If you would like to get in touch, be it for more info, details of Chris’s consultancy, or the online course he is developing, visit his web site.