The sale of a successful company can be a life-changing event for the owner. After all those years of hard work, it’s an opportunity to bank the gains and embark on a new phase of your career. As such, the completion of a deal is a hugely exciting prospect.
But that’s not necessarily how your employees will see it. The years preceding a company sale are often characterised by a drive for higher revenues and profits, as the owners strive to maximise the value of the venture ahead of putting it on the market. For those who see the light of a lucrative exit at the end of the tunnel, there’s a clear incentive to put in the extra work, but motivating the wider workforce can be a real challenge. After all, if employees are unaware of any plan to sell the company, they’re unlikely to share the owner’s enthusiastic push for growth.
What’s more, when employees are told that the business is to be sold, the first reaction is likely to be concern about jobs and career prospects. The result could be a dip in morale and an exodus of key staff. That could be bad news for the vendor, particularly if the sale is linked to performance targets.
Common goals
So, as you plan for the future, it makes sense to align your interests with those of your employees. “Ideally, your staff should be thinking in the same way as you,” says Martin Benson, Head of Baker Tilly’s London Employment Consulting Group. “You can achieve this by allowing them to share in some of the reward that you’ll be receiving on exit. The best way to do this is to give them some of the equity.”
This is where employee share incentive schemes come into play. By granting share options, companies offer employees a means to partake in the gains as the company grows. And when the business is sold, the option holders cash in.
If your company has gross assets of less than £30 million, the Enterprise Management Incentive (EMI) scheme offers a tax-efficient way to award share options. Under EMI, shares worth up to £120,000 per employee at the date of grant can be put under option. Furthermore, no income tax or national insurance (NI) will be payable, either on grant or on exercise (provided the exercise price is equal to the value of the shares at grant).
Any gain made on selling the shares is liable only to capital gains tax (CGT).
Not all businesses qualify for EMI, but other arrangements can provide valuable low-taxed incentives. If a company is worth £5 million, and an employee is given shares representing 1% of the total, you may expect income tax to be due on £50,000. However, a small shareholding normally attracts a substantial minority discount, which could be up to 85%. So, those shares may have a value for tax purposes of only£7,500. An employee might pay that amount to subscribe for new shares, or may get a taxed bonus to cover at least part of that cost. If the company is then sold for, say, £20 million, the employee would get their full pro rata value of £200,000, without any minority discount, and all within the CGT regime.
Salary sacrifice
When it comes to motivating staff, there are alternatives to share option schemes. As Lesley Fidler, a Tax Director at Baker Tilly, points out, businesses can build loyalty by showing a commitment to ongoing professional staff development. “If your people can see you’re helping them to advance their careers, they are more likely to stay with you and work hard,” she says.
Training can be delivered tax-efficiently via salary sacrifice, where employees give up a proportion of their wages in return for training. Both parties pay less tax and NI as a result. To qualify for salary sacrifice, training must be provided by employers. “But that doesn’t mean the selection of courses has to be top down,” says Fidler. “Employers can make it clear to staff that they are open to training requests.”
Keeping staff on board once a sale has been announced can be a difficult task. “Often the best thing you can do is communicate clearly to allay fears,” says Fidler.
However, the new owner can offer to put some of the gains made by employees into a new share options scheme, giving key people an incentive to stay. “This can be attractive, as there will usually be no income tax or CGT on the exchange of the options,” says Benson. “The employee may also be liable only to CGT on selling the shares received on exercise of the replacement option.”