Why small business owners are cashing out and employees buying in

Political backing

A big push is occurring in Britain towards increased employee share ownership, one that may be followed in Australia.

Britain is embarking on a program to reform its economy with one of the central pillars increasing employee ownership, as recommended by the recent Nuttall Review.

Graeme Nuttall, author of the Nuttall Review, told attendees at the recent Employee Ownership Association annual conference in Australia that businesses which have majority employee ownership perform better than all-share businesses.

In Australia, the coalition is supportive of higher levels of employee ownership.

“For the enterprise it unlocks the human capital of employees, which can drive improvements and greater success,” Tony Smith, shadow parliamentary secretary for tax reform, said recently.

“Employees who have shares are more likely to be in tune and part of a company’s mission and success because they have a stake in the outcome.”

Pitfalls of employee ownership schemes

An employee ownership scheme won’t suit every business.

Grlyak says an ESOP suited C-Mac because of the position the business was in.

“The company has to be not too profitable but profitable, otherwise major companies would come in and buy it,” he says.

“The company has to be in a certain financial situation; we make a profit and get a share out of the product into the business.

Grlyak also says the owners of the business have to be prepared to pass their skills and knowledge on to the employees in order for it to work.

While employee ownership schemes can be great motivators if the business is doing well, they don’t work as well in a downturn, according to Nally.

“Say you have a huge focus on employee ownership, and the company isn’t doing well. If your shares are under water, well, that has a very negative effect,” he says.

“Worthless equity isn’t much of a reward.”

Do your research

If you are thinking of implementing an employee share ownership, the advice from the experts is to do your research to ensure it’s the right option for your business.

CPA Australia recommends business owners considering disposing of their business through this approach should seek professional tax advice, not only for themselves but also their employees that may buy the business.

“This is because the tax rules in this area can be complex and if not done the right way, can lead to themselves and/or the purchaser paying more tax than what they should,” Ord says.

“This can lead to unnecessary animosity between the former owner and the new owners.”

At C-Mac, the employees are optimistic about the future.

“We haven’t made a profit yet, but we are still open and we still have our jobs,” Grlyak says.

“We are all thinking differently and we are innovating.”