EO is growing – but what do the figures mean?
‘Oh, wow, that figure is a lot!’ It’s not often a business report sparks a response like this from our MD Jeremy, but the EOA’s 2023 update on the EO sector did just that.
Or rather, part of it did – the news that 90 per cent of today’s 1,400-plus EO companies have become employee-owned since the Finance Act of 2014.
This legislation introduced a tax incentive for founder/owners to choose EO when succession planning. It’s the focus of an HMRC consultation on EOTs and EBTs which is now open for responses until 25 September 2023.
No surprise then that Jeremy was struck by that 90% figure when it was released on EO Day 2023. And we’re sure he wasn’t alone...
Encouraging the growth of EO
‘That’s a lot of new EO businesses in the last nine years,’ he points out, ‘but we haven’t reached a tipping point yet. We’re certainly seeing today’s growth in company transitions reflected in the increasing number of enquiries we’re getting about the support JGA can provide.
‘The government’s policy has succeeded in encouraging EO’s growth, but there are potential risks which is why we welcome the HMRC review.
‘It shows the government is prepared to invest time and energy to get the legislation right and secure EO’s long-term success.’
Yet Jeremy is in no doubt that, although the 2014 Finance Act has facilitated the sector’s growth, the increase in the number of EO companies is being driven by more than the tax incentive of selling to an EOT.
Supporting significant change
‘It may sound counter-intuitive, but I often remind our clients that EO is simply another form of ownership – it’s what you do with it that enables you to achieve more. Transitioning to EO won’t guarantee your business’s future, but it does allow you to continue to be successful by engaging with those who made it the success it is’
Jeremy Gadd, JGA’s founder and MD
‘EO’s undoubtedly meeting a broader need,’ he explains. ‘A significant percentage of the founder/owners we support are concerned about their legacy, their team’s long-term employment and their ability to recruit in a market where EO is a driver for those who assume it’s a better way to work.
‘It may sound counter-intuitive, but I often remind our clients that EO is simply another form of ownership – it’s what you do with it that enables you to achieve more.
‘Transitioning to EO won’t guarantee your business’s future, but it does allow you to continue to be successful by engaging with those who made it the success it is. It can also encourage genuine social mobility.’
The first step is to ensure your company is ‘in the right place’ with a solid business foundation before choosing EO as a succession plan.
‘Becoming EO involves significant organisational change and much of our work involves supporting this delicate part of the transition,’ Jeremy reveals. ‘Once your EO is embedded, you can accelerate the benefits of being employee-owned.’
Unlocking the potential of your people
So what else in the EOA’s 2023 report caught Jeremy’s eye? The fact that the top five sectors for EO remain unchanged, he says.
So why are more businesses in Professional Services, Manufacturing, Construction, Wholesale and Retail Trade plus Information and Communication employee-owned than other industries across the UK?
‘I expect this is nuanced, but what do these sectors have in common? There’s a significant element of ‘people relationships’ here,’ Jeremy suggests. ‘Done well, EO encourages greater engagement. To achieve that you need greater education, so people become more educated and empowered too.
‘For Professional Services, I’d look at EO’s appeal as a succession model,’ he adds. ‘Many are LLPs and for LLPs succession is a challenge, because who can afford to buy into the practice? It’s an important and live conversation right now.’
Clarifying your story and beliefs
The Guardian breaks Riverford’s latest news in May
So, when it comes to sectors, are Riverford Organic Farmers and Go Ape the exception rather than the rule? Both have become EO since 2018, with Riverford’s founder Guy Singh Watson selling his remaining shares to the EOT this summer to make his farm 100 per cent employee-owned.
Jeremy worked with Guy during the early stages of his EO journey and has followed Riverford’s story with interest ever since.
‘With Riverford and Go Ape, both have a strong belief in their businesses and are very values-led. Historically, if you look at the John Lewis Partnership or Scott Bader, their founders Spedan Lewis and Ernest Bader also had a clear narrative about what employee ownership could mean.
‘If we want to broaden EO’s appeal, we need to identify the organisations who are genuinely values-led but have yet to engage with this model. EO might be growing but we haven’t hit a tipping point yet.’
Promoting sound EO governance
And what about governance? Large-scale failures of this in non-EO organisations have been headline news in recent years, spotlighting the impact on people and reputation when leadership accountability isn’t strong.
The good news is that the EOA’s 2023 report confirms that 97 per cent of EO businesses have at least one form of employee governance, while 74 per cent have at least two.
JGA has a proven record of enabling EO businesses to establish sound governance, whether that’s by building Trust Board effectiveness or ensuring employee representation is strong.
The size of the challenge
Jeremy and JGA Associate Pip Meaden have both enjoyed getting out to support EO clients this summer
And, finally, size – the UK’s 50 largest EO companies now employ more than 180,000 (combined) employees between them. But there are 1,400-plus EO businesses in total, so what about them?
At JGA, we work with clients whose teams range from five to several hundred employees. ‘It’s important to recognise that different organisations are grappling with different challenges,’ Jeremy says. ‘What does it mean to you to be EO? That might be an easier concept to navigate with a smaller team. The space in which a business operates will influence the discussion too.’
Either way, Jeremy is excited by EO’s opportunities at a time when interest in a more sustainable way of doing business is building: ‘We’re certainly in for an interesting 10 years.’
Want to know how our transition, people and governance services can support your EO business? Get in touch here.