A growing band of companies are giving power to the people by transferring ownership of the business to their management and staff. They may be fending off hostile takeovers, or resolving financial difficulties. Some businesses are even founded on the basis of employee ownership. But the main motive in most cases is business succession—when the founder of a company decides to sell the business to its employees.

Employee ownership of companies is not exactly new in the UK. But it appears to be gaining in popularity, with high-profile, staff-owned businesses such as the John Lewis Partnership, the UK's largest employee-owned company, providing a blueprint that many are keen to emulate.

The John Lewis business model reflects current management thinking on employee engagement and is in many ways more suited to the modern-day workplace culture of stakeholders than the more traditionally structured business. But where employee ownership is really striking a chord is in creating successful and profitable businesses.

According to Patrick Burns, executive director of the Employee Ownership Association (EOA), given the chance, many more business owners looking to sell their companies would prefer their employees to succeed them. "An increasing proportion of [company] owners see it as an opportunity to retain the culture and ethos of the business that they founded, repay a debt of gratitude to the people who helped you build up the business and get a fair price," he says.

What prevents more company owners from taking this course of action is lack of funding. Few businesses have the available funds and few business owners want to see their employees borrow excessively to buy into the business. Traditional sources of finance, such as venture capitalists, who generally want to see a return on their investment within three years, are ruled out of what is essentially a long-term project.

Nevertheless, a number of companies have overcome the financial barriers and, under the ownership of their employees, continue to thrive.
Loch Fyne Oysters, famous for its fresh and smoked seafood, shellfish, meat and game, and its sister company, the Loch Fyne Restaurants group, was founded in 1977 by two oyster enthusiasts, Andrew Lane and John Noble. Started on a shoestring, the business based in Cairndow in Argyll, Scotland, enjoyed quick success. Then, in 2002 following the death of Noble, Loch Fyne Oysters faced an uncertain future. Andrew Lane, then the managing director, says: "We needed to sell John's shares and had to put the company up for sale. But the prospect of selling to outsiders raised concerns, not least, that of job security for the 100 or so employees—the prospective buyers we were showing round were clearly set on moving production elsewhere—and the values and traditions of the business, which would inevitably disappear."

The idea of employee ownership had previously been discussed, but dismissed as unworkable because of the lack of finance. In 2002, it was raised again, when, by chance, Lane heard about the Baxi Partnership, a trust-owned investment company that had facilitated a number of employee buy-outs.

Using its loan of £2m, plus additional finance from the bank, Loch Fyne Oysters completed its employee succession in 2003. Following the buy-out, half the shares were held permanently in a trust for employees, with the rest available for purchase and distribution among individual employees.

The board was restructured to include two directors elected by the workforce. For Lane, it was a satisfying conclusion. He says: "You might ask, 'could I have had a better return on my investment by selling to someone else?' I would say, 'how much money do you need?' We got a good price and the guilt that I would have felt had there been any other outcome would far outweigh any financial gain."

Lane continued as managing director until last year, when he became a non-executive director, working on the ethical and sustainability side of the business. Later this year, he plans to retire altogether, knowing that he leaves his business legacy secure in the hands of Loch Fyne Oysters' 125-strong workforce.

"Employee ownership is not a magic solution," says Lane. "It has been a challenge, for me and for the staff, in adapting to the changes. But the more I learn about employee ownership, the more I enthuse about it. This is the 21st century, where the general populous is far less inclined to work its nuts off to make someone else rich. In our employee-owned business, everyone is working for each other."

Funding from Baxi Partnership was also instrumental in the successful employee buy-out of Highland Home Carers, an Inverness-based provider of domiciliary home care services.

The move was prompted by the need for a succession solution that would allow the business to continue as a small independent care provider in a growing sector that was heavily regulated and dominated by much larger businesses.

Founder and managing director Nick Boyle's biggest fear was that the company he had started in 1994 would be swallowed up by one of his larger national rivals. In 2004, with Baxi Partnership's financial intervention, ownership of Highland Home Carers was transferred to its 107 employees. "This business model particularly suits this sector. With a sense of ownership, the staff are more motivated, more engaged, and therefore more committed to providing better standards of care," says Boyle.

Sickness absence and staff turnover rates have also fallen since the 2003 employee buy-out. This, adds Boyle, has led to a greater continuity and consistency of care for clients, and a better product than that of some of its competitors.

Today, Highland Home Carers employs 120 staff and turns over around £2m a year. There are three employee directors and one non-executive director on the board. Boyle has vacated the managing director's seat to become chairman, a move he admits provoked mixed feelings.

"In a way, it was a relief," he says. "I was never really comfortable with the business being centred on one person. On the other hand, there were decision-making issues that I may not have agreed with at the time, but eventually have had to admit are working." Away from the front line, Boyle is now able to concentrate on new projects, including a joint venture with a house-construction company to build a sheltered housing complex. This is the kind of project, he says, that he never had the time to do as managing director.

"Getting the right value for the company is important," says Boyle. "But not as much as knowing that the business will continue in the same vein and with the same values on which it was built. And it is very satisfying to know that you have given something back to the people who helped you."

For some companies, the decision to become employee-owned reflects the culture and values of the sector in which they operate. That was the case for Eaga, a provider of residential energy efficiency solutions aimed at eradicating fuel poverty in vulnerable households. The company works on behalf of central government, local authorities and utilities. Established in 1990 as the not-for-profit organisation Energy Action Grants Agency, towards the end of the decade the company found its status increasingly out of kilter with growing competition in the energy efficiency industry as well as the government's decision to put contracts out to tender.

John Clough, its chief executive, says: "We considered various options, including a management buy-out, but felt that was not appropriate for the environment that we were operating in, which was the public sector. On balance, what mattered were the values. We decided that the solution had to be based on sharing ownership and profits, and felt that employee-owned status would achieve that."

After an independently-valued arms-length sale and purchase of the company in 1999, ownership of Eaga was transferred to the staff, creating the Eaga Partnership, which is 100 per cent owned by an Employee Benefit Trust and modelled on the John Lewis Partnership. Thanks to its low or no working capital requirements during the first few years of trading and operating in the public sector, the company had become profitable very quickly, enabling it to provide the funding for the employee buy-out.
Eaga has three governing bodies: the board; the employee benefit trust; and a staff council. But Clough is quick to dismiss any ideas that employee ownership makes difficult business decisions any easier.

"Three or four years ago, we needed to implement a voluntary redundancy programme to reduce some of our costs and prepare for a period of growth," he says. "That was a very difficult thing to do. But we did it as decently as we could, redeploying skills elsewhere in the company where possible. But we still lost more than 100 people."

Today, Eaga employs 3,300 people. In June, its workforce experienced another major transition in the form of the company's flotation on the London Stock Exchange. However, Clough insists that Eaga will maintain its commitment to employee engagement as a plc, by ensuring that Eaga Partnership Trust remains the largest single shareholder.

"Investor response to our employee-owned status has been very positive," he says. "For Eaga, one of the key benefits of being an employee-owned company has been the creation of a highly motivated workforce with a strong sense of commitment and a passion for customer service. And we intend to see that continue."

Clearly, employee ownership has brought success to many companies. It has helped to reduce sickness absence and staff turnover, has increased productivity and ensured long term sustainability.

But with organisations such as the Baxi Partnership, whose limited funds allow it to help only a few of the hundred or so companies that contact it every year, a rarity, it remains beyond the reach of many businesses.
Patrick Burns of the Employee Ownership Association says:

"The fact that so many business owners and directors are considering employee succession is encouraging, as is the fact that the government has acknowledged the potential of the model for greater business and economic prosperity. The pressure is now on organisations such as ours to show that the lack of finance is a barrier and to demonstrate how the various bodies stand to gain, for example, by making loans available to this sector."

The evidence that employee ownership is financially viable is there to see in the companies that have made the transition. And Burns insists that the City financial institutions are clever enough to spot a winner.

"One of the biggest issues for business right now is employee engagement," he says. "It is the key to staff retention, motivation and productivity. When your employees are co-owners of the business, how much more engaged can they be?"

Company structure models

There are three basic models of employee ownership:

1. All the shares are held permanently by the trustees of an employee benefit trust, as in the case of the John Lewis Partnership.

2. All the shares are owned by the employees individually.

3. A combination of the two.

"The 100 per cent EBT shareholding is a popular option," says Graeme Nuttall, head of equity incentives at Field Fisher Waterhouse. "The structure is easier to administer and there is no need to keep buying and selling shares as and when staff join or leave the company."

The status of employee-owned companies can vary, as can the structure of their boards. Nuttall adds: "All the current members of the Employee Ownership Association have been established as share capital companies-and it is a model that has stood the test of time. In terms of the board, you don't have to have employee representation. However, a number of companies do and it can help to ensure that staff views are heard and that information is communicated throughout the organisation."