Six reasons why agencies should consider becoming employee-owned

In the past five years, a growing number of agencies and professional firms have become employee-owned.

Employee-owned firms are more resilient and they preserve an agency's independence, argues Nigel Mason
Employee-owned firms are more resilient and they preserve an agency's independence, argues Nigel Mason

Twenty of the top 100 architects’ firms are employee-owned, and now the trend is accelerating in the world of PR and marketing agencies. Why is this happening?

1. Employee ownership secures a firm’s independence

PR agencies invest a lot in developing their own brands as well as those of their clients. History is littered with stories of brand destruction following trade sales and botched mergers. Selling to an employee trust secures the culture and creates a legacy.

2. Selling to an employee trust is tax-free

Founders who sell a controlling interest to an Employee Ownership Trust pay no capital gains tax. This is not a scam; it’s a statutory relief introduced in the 2014 Finance Act to encourage more employee ownership. Provided the sellers are willing to be paid out over several years, there is no reason why they can’t get fair value without any of the stress and uncertainty of a trade sale.

3. Employee owners are engaged and committed

One of the main roles of leaders is to secure the commitment of their employees. Creating a sense of ownership is the Holy Grail, so why not create actual owners rather than phantom owners?

It’s the ultimate statement of a company’s purpose: “We exist to serve our clients so that they and our employee owners prosper.” When car rental company Avis was employee-owned, its advertising showed pictures of employees with the strapline: “They act as if they own the place.” This is exactly the goal; providing an incentive to succeed.

4. Bonuses in employee-owned firms are tax-free

A company that has become majority owned by an Employee Ownership Trust can pay income-tax-free bonuses up to £3,600 per employee per annum; the only tax break of its kind. It’s recognising that bonuses are like a dividend to the employee owners.

5. Founders decide the pace and the terms of their exit

Withdrawing from a business that you’ve founded is like surfacing from a deep sea dive. You’ve been used to prolonged pressure, so you need to come up slowly, otherwise you’ll get the bends. With employee ownership, founders can stay involved for a period as they hand over the reins and mentor a successor team. Continuity reduces risk.

6. Employee-owned firms are resilient

These are tough times for many businesses. The survivors will share the pain and the ultimate rewards. Numerous studies have shown that employee-owned firms weather economic cycles better than most. So, during these tough economic times, perhaps this could be the pathway for your business.

Nigel Mason is managing director of RM2 Corporate Finance

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