Have you ever stopped to think about the ownership structure of your company, and what it means?
For Sandberg, the first part is easy; there are only two shareholders: Jesper Sandberg as founder and chairman, and me as CEO. What that means is a much bigger question. As well as being shareholders, we have been employees in the company and directors on its board. We have worked alongside the staff most of our lives, invested decades of our professional ambition into building the business and been involved in the smallest decisions and the biggest ones. We have given a face to the company and allowed our personal reputations to be intricately linked with the company’s reputation. For us, this has been personal as much as professional.
Over the years, we have wondered what we would do if someone offered to buy our shares. Would we sell to another language service company, for example, or a private equity fund? After all, that seems to be in vogue – M&A interest in our industry remains high. In Nimdzi’s most recent language industry market survey, 42.7% of the respondents stated that they are looking for companies to acquire and 26.0% are looking to sell. In 2022, Nimdzi reported that 30 of the top 100 LSPs in the world were already backed by private equity or venture capital. That’s almost half of all privately owned companies on their ranking list.
These exit options may, however, raise questions in a shareholder’s mind when they think about the future of their company. They may want to protect the legacy they have built and make sure the company can continue to trade with its current culture and values. Happily, a shift in ownership doesn’t always mean that the company can’t continue as an independent business.
What is employee ownership?
The principle of employee ownership is well-established in the UK and means that a significant proportion of ownership in the company is held by or on behalf of most of the employees. Thus, in order to have employee ownership, all employees must have a significant and meaningful stake in the business. This contrasts with executive-only share plans and even all-employee plans which only apply to an insignificant minority percentage of shares.
The employees’ shareholding can be owned directly by the employees, indirectly by a trustee on their behalf, or you can have a hybrid. We at Sandberg have been attracted to indirect employee ownership where all the company’s shares are bought and owned by a trust. This has practical advantages over direct employee ownership; it sidesteps the upfront and ongoing administrative complications around individuals buying and selling shares. The employees can’t buy shares, own shares or sell shares, but whilst they are employed at the company, they enjoy the benefits of indirect ownership. If they leave the company, they leave these benefits behind.
What is an Employee Ownership Trust?
An employee ownership trust (EOT) is a relatively new type of employee benefit trust that was introduced by the UK government in 2014. To become an EOT company, a majority of the shares in the trading company must be owned by the trust on behalf of the current and future employees. The purpose of the trust includes the well-being of the company’s employees and it may have other purposes as well, such as community benefit, or social and environmental goals.
There are benefits in selling to an EOT compared to selling to any other kind of buyer. For the shareholders, it means that they can control the timeframe of their exit from the business and be involved in deciding who succeeds them. In the UK, the government also provides tax benefits when an EOT holds a controlling interest; the sale of the shares to an EOT is free of capital gains tax.
The main benefit for the employees is that they get a financial stake in the business without having to invest at all. Once the previous shareholders have been fully paid for their shares, all employees will collectively receive the full financial benefits that would normally be gained by the shareholders. These are not paid out as dividends but as annual bonuses. In the UK, these employee bonuses are free of income tax up to a point.
This employee-shared capitalism model has been proven to boost employee engagement, leading to improved productivity and increased job creation and retention. The UK government sees it as a counter to short-term capitalism, with the ownership structure and tangible employee benefits resulting in a long-term strategic view that benefits the whole country.
Moving to employee ownership at Sandberg
On 31 May 2023, almost 28 years after Sandberg Translation Partners was founded, we set up an employee ownership trust. The trust now owns 100% of the shares in Sandberg.
Initially, the trust didn’t have any funds, so Sandberg the trading company made a contribution of surplus cash to the trust, which was then used as a partial payment to buy the shares from the shareholders. The rest of the value of the shares was exchanged for a debt which will be paid off in regular instalments over the coming years. The price agreed was based on an independent open market valuation of the company and the sum was approved by the UK tax authorities.
Sandberg the trading company is regulated by its articles of association and controlled by its board of directors. This remains unchanged; the board sets the company’s strategy and oversees the running of the company, and the directors are accountable for their decisions and actions.
The employee ownership trust is also regulated by a set of articles called the deed of trust. It is controlled by a corporate trustee that is controlled by a group of trustee directors. Our trust will initially have four trustee directors; Jesper and I as the seller trustee directors will be working with two employee trustee directors who will serve a two-year term, enabling different staff members to rotate in the role. In due course, we will also appoint an independent trustee director from outside the company, someone experienced in running a company at director level.
EOT exit benefits
Selling a business to an employee ownership trust is a tax-efficient exit strategy that offers significant benefits to the exiting shareholders, the employees, and the business itself. It works well for shareholders looking to exit from a business while safeguarding the company’s legacy and taking care of its employees. It’s also a great option where there is no obvious opportunity for a trade sale or management buy-out. Business owners who are heavily involved in the day-to-day management of the company can gradually transition away, providing an extended period for leadership succession to be implemented.
Between 2014, when the government first started promoting the EOT, and June 2020, the employee ownership sector in the UK grew by over 300%. Well over 90% of that growth came from companies adopting the employee ownership trust model. To me, it seems like a refreshing, controllable alternative to other M&A options, and it has certainly given Sandberg an exciting future to look forward to!