How Do You Know When The Right Time Is To Move To Employee Ownership?

It is common for a business to reach a stage of its evolution where changing structure feels like the right thing to do. There can be many reasons for this, and not all of them may be positive, but changing to an employee ownership model is one of these options, and is usually done because it feels right for the business. In other words, it is viewed as a positive step for the business.

The founder or owner of a business is usually the person who makes the decision to change to an employee ownership model, and so they have to assess whether it is the right time to do so. After all, this will be the legacy of everything they have built up over the years, so they won’t want it to fail. Transitioning to employee ownership will also bring a lot of change, and it can be a challenge to manage this. In an ideal world you want this change to be natural, smooth and organic, rather than instilling fear and apprehension in people.

Working out the right time to move to employee ownership

Knowing when the right time is to move to employee ownership has to involve what suits the founder, as well as what suits the business, so let’s look at this in more detail:

• Qualifying criteria

First and foremost, does the business meet the qualifying criteria? You need to be trading and profitable, but also the sellers, or parties associated with the sellers such as children, do not account for more than 40% of the total number of employees in the Company. If you don’t meet this then you won’t qualify to become employee owned in the first place.

• Founder looking for an exit strategy

The founder has to want to sell the business for this to work, they can’t be forced into it. So as the founder, are you looking to move on and are you emotionally ready to let go of the business? The company will no longer be yours after this transition, and even if you retain a position within the structure you won’t have the same level of control. Are you ready for this?

• A strong culture

A key benefit of forming an employee owned business is the sense of collaboration and the shared goals it develops. But you can only achieve this with a strong and healthy culture. If there is a good sense of loyalty and motivation within the workforce, the transition can work. But if you have a toxic culture with internal politics, division and a high staff turnover, that isn’t a good place for a community structure to thrive.

• Stable and profitable

Essentially, do the numbers stack up? Part of the process of becoming employee owned is getting an independent valuation of the business. But you need to have a good idea of this anyway, and an indication that the finances add up and that undertaking this transition makes financial sense for all parties.

• Structure is ready

There can be a leadership void created by moving to an employee owned structure, and if the business is too dependent on your expertise or leadership, as the founder/owner, then this could cause problems. Often, when a good leader leaves, other people leave too. Ask yourself, is there a succession plan within the existing structure? Are there people who are able and willing to step into new roles with new responsibilities?

• When do you need the money?

It is likely that the founder/owner will be paid their money over multiple years, rather than as a lump sum. Is this a problem? It is often the case that moving to employee ownership is the founder’s plan for retirement, and the business is their pension. Do you have sufficient funds to live the life you want to live in retirement? And if you are selling the business for another reason, do you need the money now? If that is the case, it could be a problem and employee ownership may not be the right exit strategy at this time.

At the Employee Ownership Advisor we have lived experience of going through the process of transitioning to an employee owned business. Our expert team can advise and support you through this process and help you make the transition smoothly and successfully, and first of all, that means advising whether employee ownership is the right move for your business now. Contact our team at the Employee Ownership Advisor today.