Five Questions to Ask Before Stepping Into Employee Ownership

By Chris Theobald, Director of Transaction Services, Affinia

Broadly employee ownership can take two forms: direct ownership, whether the employee owns shares in the company outright, or hold options to buy shares (e.g. Enterprise Management Incentive (EMI) share options) or indirect ownership via an Employee Ownership Trust (EOT). There is some complexity in weighing up how this can be achieved: current owners need to agree to a sale or to a diluted shareholding. This needs to be beneficial compared to the alternatives. It is helpful to have a checklist of practical issues to consider.

What are shareholders’ objectives?

Business owners may be considering a future sale and want to ensure they retain good staff as part of that journey. An EMI scheme, being a tax efficient HMRC approved option scheme, can be set up to reward growth, which can be structured in flexible ways to achieve objectives. The extension of the EMI rules in the Autumn Statement now enables larger businesses to use these schemes.

Business owners considering exiting can sell to senior staff (Management Buy-Out) or sell to an EOT which benefits all staff, alongside sale to a trade buyer or an investor (e.g. Private Equity). The changes to the Capital Gains Tax (CGT) relief on a sale to an EOT have eroded the benefits, but it remains a viable and tax-efficient option, all other things being equal (which they may not be). It is important to evaluate carefully and realistically the expected sale proceeds after tax from a range of options before starting a process.

What are the employees’ objectives?

For staff, there are three questions to consider: what is the incentive worth? When will they see the benefit? Is that meaningful? A senior manager in a company owned via an EOT may not feel as incentivised if the opportunity for direct ownership has been taken away, but other members of staff may see the benefits. An EMI scheme could sit alongside an EOT to achieve these benefits for management.

Is the scheme affordable?

There is an inevitable delay before staff see the benefits of an EOT. The owner selling to an EOT fixes a value now for the business, taking some of that upon completion, with the rest typically paid over several years. HMRC guidance indicates EOT arrangements may be scrutinised where repayment terms are excessive (see GOV.UK), and it is essential to ensure the business can afford the loan payments before seeking approval. Scenario modelling and structuring advice is needed to get this right and avoid exposing the seller to risk.

EMI options have relatively lower costs to the company, but can staff afford the exercise price? If not, the option may not be meaningful, or the business needs to consider paying a bonus to enable exercise (with significant income tax costs), or structuring the EMI option scheme in a way that does not create a cashflow issue for staff. EMI options dilute the equity of a shareholder: they can ‘afford’ this if future growth means their shares are more valuable after accounting for dilution.

What happens for leavers?

EMI option holders will normally lose their options if they leave the company before they are exercised, but EMI option agreements can be tailored to have some discretion. After they are exercised, shares cannot be taken away, but there can be requirements to sell them at a market value upon departure. Leavers from an EOT cease to be beneficiaries of the trust and so lose rights to future benefits.

How will employees be able to sell their shares?

If shareholders are to offer staff an opportunity to own shares, there needs to be some thought as to how and when staff can sell those shares. For the EOT, this could involve a sale of the shares with the proceeds distributed to staff. For EMI shares, this may come from a planned business sale, IPO or creation of an internal market to allow ‘windows’ for sale. The new PISCES market (launched in June 2025) creates potential to sell minority stakes to market investors without the complexity and cost of an IPO. PISCES is an FCA framework, and participation is subject to platform rules/eligibility.

Conclusion

Employee ownership schemes remain attractive and can bring value to shareholders as well as staff, as part of a remuneration strategy. Businesses considering these options need practical, commercial and financial advice, as well as tax advice, to reach a sound conclusion. They should also consider what employeeswant before investing resources into offering employee ownership. This checklist isn’t exhaustive, but it offers a series of points to consider as well as thinking about CGT reliefs: there has always been more to this than just picking the maximum tax relief.

This article is for general information only and does not constitute legal, tax, investment or financial advice. Readers should obtain professional advice specific to their circumstances.