Employee ownership is not a new concept – John Lewis has been a notable flag bearer for the sector for over 100 years. But government tax incentives introduced in 2014 provided a significant boost. It is now becoming an increasingly popular ownership model.
The EOT model is now being adopted across a wide range and diversity of industry sectors; the pharmacy sector is playing its part in that growth. The Green Light Group (director Sanjay Ganvir is a strong advocate), UK Meds, Discount Drug Mart and Proact Pharmacy Services have all recently embraced the EOT model.
There are lots of reasons why an owner-managed pharmacy businesses might favour an employee ownership model, but the following characteristics and themes tend to be common to most.
A better succession
Employee ownership can be the right succession solution where an owner is looking to retire but an exit via a trade sale or management buy-out / buy-in is not desirable or is unachievable.
This may be because the concept of being acquired by a competitor or market consolidator is unappealing, the management team does not have the appetite or financial means to structure a buy-out, as a family-owned business, there may not be a next generation willing to take over the running of the business, or an owner may struggle to secure a fair price for the business from a third party.
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Strong management, though, remains important. A leadership succession plan is needed for an owner-manager who is currently integral to the day-to-day operations of the business but who is looking to step back. Unlike a trade sale where change is far more rapid, under an EOT structure a founder can structure and manage the handover of responsibilities, typically over a number of years, to allow for a smooth and gradual succession.
Legacy and culture
Probably the over-riding reason owners look to transition their business to employee ownership is because it helps preserve the integrity and continuity of a business they’ve helped to establish and prosper over many years. Businesses work hard to create and nurture a distinct culture and independence. Employee ownership can be a way to protect and enhance that culture for the long term.
Tax incentives
There are key tax incentives associated with becoming employee owned. In an uncertain tax climate, it is notable that individual owners selling a majority shareholding to an EOT will have no capital gains tax to pay. Staff of employee-owned businesses also benefit through the ability to receive tax-free bonuses.
The rationale of these tax benefits is often misunderstood. The favourable tax regime reflects government support for employee ownership as it helps promotes stable, profitable and resilient businesses where ordinary workers have a share in their success.
A profitable business
An important factor to consider is how an exit to an EOT is funded. Other than where external debt is used, the purchase price to be paid to the previous owners must be funded out of the after-tax profits of the business. The affordability for the business is therefore an important consideration. Owners of well-run and profitable businesses will see employee ownership as a more achievable and straightforward exit route compared with owners of businesses facing a potentially more uncertain future.
People-focused businesses
Employee ownership ultimately works well for businesses that have their people at the core of their business. Becoming employee-owned can build on an existing employee-focused culture by providing a heightened sense of well-being as well as financial rewards to staff. This, in turn, can help drive business performance.
Employee-owned companies tend to be more innovative because managers go out of their way to consult, share information about the company and give staff responsibility, staff in employee-owned businesses tend to be more entrepreneurial and committed to the company and its success, and because they involve staff and give everyone a stake, employee-owned businesses are often better at recruiting and retaining talented, committed staff.
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As with all decisions as important as the future ownership of your pharmacy, it is important to weigh up all the relevant factors carefully. But there are an increasing number of business owners, including pharmacy owners, who feel employee-ownership is the right route for them.
Stephen Hadlow is a corporate partner and EOT specialist at Brabners LLP, Richard Hough is a partner and head of healthcare at Brabners LLP and a former pharmacist.