As growing numbers of architectural firms become Employee Ownership Trusts, Sara Cohen outlines the potential benefits, and practice founders Robin Partington, Linda Morey-Burrows and John Assael reflect on their own experiences
Business owners sharing ownership with employees is not a new idea – tax advantages for employee share plans were first introduced in 1978 and there are now many different forms of direct and indirect employee share ownership. Following the 2012 Nuttall Review of employee share ownership, the government launched the Employee Share Ownership Trust (EOT) which introduced important tax reliefs for both owners who sell to an EOT and their employees. Very broadly, as long as an EOT acquires and keeps a controlling share interest (at least 51 per cent) in a company, owners who sell their shares can do so free of capital gains tax and employees can be paid tax-free bonuses of up to £3,600 a year.
While it was made famous by retail giant John Lewis, there is a common misconception that employee ownership only works for certain businesses. Think again. The EOT model can play a significant role throughout the life of a business and as a mechanism for owners wishing to retire to pass ownership to employees. And shared ownership through an EOT is particularly well suited to architects’ practices. Generally speaking, these are quite different from other types of business: they tend to be more collaborative and run on a non-hierarchical structure and takeovers by other practices are rare. There is not a ready market for shareholder owners wishing to retire, but employees do not generally earn sufficiently high salaries to buy them out.
Following the example of certain ‘trailblazers’, employee ownership is increasingly seen as an attractive solution to these challenges. Back in 2004 Ken Shuttleworth drew inspiration from John Lewis when he established Make, which has since become highly successful and is considered a flagship employee owned company. The impact employee-ownership has been resoundingly positive, with staff anecdotally saying that the structure creates a more collaborative working environment. As a result clients receive a better service, with the whole firm aligned behind shared goals and collective responsibility for success.
Staff say that the structure creates a more collaborative working environment”
Employee ownership can be implemented in different ways by different businesses, but the core benefits of the EOT structure remain the same across all businesses and sectors. At least 51 per cent of the shares are held in a trust for the benefit of the employees and profits can be distributed as a percentage of salary or by reference to seniority. As the employees together have a substantial stake in the business, they are more likely to think like owners and focus on the best interests of the business as a whole. In addition to being an effective succession-planning mechanism, the increased engagement with the business which comes with being under the control of an EOT can be a powerful tool to recruit, retain and incentivise employees.
However, that’s not to say EOTs are a panacea, or the sole answer to succession planning or productivity. There are other ways of sharing ownership with employees of unlisted companies where there is no ready market for the shares. Some owners are looking to sell, and granting options to employees to acquire shares which they can sell on an exit can focus them on achieving a successful sale. Alternatively, some companies which have no active aim of selling establish internal market arrangements where employee shareholders can sell shares they have acquired through option and other share plans. Direct employee share ownership can have its downsides, however – there is the cost for employees of buying shares and the cost and administrative burden for companies of buying them back when employees leave.
However it is structured, employee ownership in one form or another has long been recognised as playing an important role in businesses, and successive governments have introduced tax breaks to encourage employers to share ownership with employees.
While Make was among the first architects’ practices to be employee-owned, others – including Formation and Orms – have not been far behind. As the evidence mounts as to the business benefits, employee ownership through an EOT is increasingly seen as a business model which is here to stay, and the structure of choice for many architects.
Since founding the company in 1994, Russell Pedley and I have watched Assael Architecture grow into a renowned practice, working with many leading developers and investors, and building a diverse team of incredibly talented architects, designers and support staff.
We recognise that every success of Assael has been because of these people, and becoming an Employee Ownership Trust means they’ll be rewarded; they’ll have a greater say in the future direction of the practice and they’ll benefit from its success.
We explored other routes, such as a private equity takeover, a trade sale and a management buy-out, but none offered what we were looking for and failed to align with Assael’s staff-centric work culture.
After much consideration – and an awful lot of consulting – we took the collective decision to turn the practice into an EOT. Most recently, we held a vote to democratically elect two staff members to act as trustees alongside Russell and I, with an independent chairperson set to be appointed at the end of the month to complete the trust. These new trustees are both young architects; one has been here for seven years and has made his way up from student to associate, and the other has been here for just over a year. Together, they will be the voice of the staff.
We wanted to ensure that what we’ve built up over the last 25 years is in the best possible hands to drive it forward”
Succession planning was also a big factor in the decision. We wanted to ensure that what we’ve built up over the last 25 years is in the best possible hands to drive it forward. As part of this, Pete Ladhams has been promoted to managing director, having started at Assael as a student 18 years ago. He will be instrumental in guiding the practice through this exciting new chapter.
In addition to putting staff at the front and centre of Assael’s future, becoming an EOT also provides some financial benefits to the team. For example, staff will benefit from up to £3,600 tax-free bonuses every year. For us, this was just another way in which we could reward staff in the process of changing the ownership structure.
My best advice for practices considering becoming an Employee Ownership Trust is to talk to as many people as possible. We met with other architects who had previously become EOTs, and quizzed them on the process and how it’s changed their practice day-to-day. I would also recommend using the best consultants. Changing ownership structure is a huge decision, but our team of advisors and lawyers gave us the reassurance that we were doing what was best for us and our staff.
We set up Robin Partington & Partners – now Apt – in 2009, amidst the chaos of a global financial crisis which added to the usual anxieties of going it alone, but it has always been a personal aspiration to find ‘another way’ to structure the ownership of the business. I had spent my career in large practices, being an active part of their growth within a traditional hierarchical structure and had seen how this can dampen the spirits of an organisation, and risk losing its talent.
Businesses whose assets are their staff need to focus more than ever before on providing environments that attract and retain them. However, congestion sneaks up on you. With growth comes career structure, promotion, and an almost inexorable drift into a traditional hierarchical pyramid where those who set up and build the company expect it to owe them a living and reap the ‘rewards’ in later years. In today’s talent market, that is the cholesterol that will ultimately kill the business.
Planning for succession is therefore critical from day one, and there are a number of interesting alternatives to consider. To make our model work I needed to take a deep breath and step away from generational values, and the ‘comfort’ of ownership, back into a world where you survive (and thrive) off your wits. A healthy dose of humility and insight can help.
Architecture is never about one person; it’s a team sport. An architect’s role is to guide a process, inspiring a team to realise our dreams. The same drive to create great architecture – the sense of ownership and passion – can be applied to the structure of your business. Get it right and it becomes self-perpetuating.
‘Naked in and naked out’ means that you do not have to buy into the business at a time in your life when you can’t afford to, but equally you cannot expect a pay-out at the end”
Our new Employee Ownership Trust model does this. It owns 100 per cent of the shares – a total commitment, as anything less would be a conventional hierarchical structure in disguise. It is a limited company with the flexibility to adapt to an ever-changing business, legislative and tax environment.
‘Naked in and naked out’ means that you do not have to buy into the business at a time in your life when you can’t afford to, but equally you cannot expect a pay-out at the end. You are rewarded as you go through life, when you need it most rather than when you approach retirement.
The structure of the company encourages the nurturing of individuals, helping them to grow by acquiring skills and expertise. No two career paths will be the same, we are all different, with each going at a pace that suits individual temperament and circumstance. We build our people, promoting individuality within a team spirit. Our employees are beneficiaries of our business; it is personal.
Changing the structure of a business in this way is not for the faint-hearted: you need absolute clarity on your objectives rather than half-measures. Never underestimate those involved within your company, and strive for transparency. Seek the best professional advice, and remember that you can always phone a friend.
2018 was quite a year. We established the EOT, moved to a new studio, and celebrated by going ‘all in’ and rebranding as Apt. I am thrilled to bits with what we have achieved. The process invigorated me and the practice; it is transforming my role and releasing energy and initiative within the studio. The buzz is palpable. Almost a year in, we have delivered our first set of dividends and bonuses and look forward to years of fun to come.
The collective passion for MoreySmith and what we do was strengthened on our 25th anniversary last year as we moved to ownership by an Employee Ownership Trust. This seemed a very natural evolution, making all employees beneficiaries and reinforcing our people-orientated ethos, to give our entire team a collective voice and shaping the business for the future. The change is for the long-term good of the company. As our business is all about people, it was the right cultural fit for us to move to this model and invest in those who are best placed to help us succeed – the team.
I built MoreySmith with passion, creativity and a love of designing for people. For me, the business has never been about personal financial gain. This is entrenched in our very being, and although there will of course be financial rewards, it is more about the fact that the entire team benefits collectively.
Striving to be the best by looking after our clients and consistently delivering amazing projects leads to success for the business and creates a stronger team, with more funds available for investment to grow MoreySmith and to support our graduate scheme.
An advantage for employees is that they are now eligible for tax-free bonuses, among other benefits. Though it’s a little early to assess the total impact of the EOT, we were able to give everyone a bonus within the first three months, of which a significant amount was income tax free.
There was a fair amount of paperwork and contracts outlining the different options we could take, but overall it was straightforward”
The EOT reinforces the importance of future-proofing businesses, which is a commitment we apply to our clients and their psychological, physical and operational needs on a daily basis. Over the next few years, as MoreySmith’s employees are financially rewarded, this sense of ownership and share of profit will grow and grow.
We were advised by Fieldfisher’s employee ownership team and the process was very simple. It took around three to four months in total. Once we received the valuation, Fieldfisher took us through a step-by-step process to achieve the various approvals that were required. There was a fair amount of paperwork and contracts outlining the different options we could take, but overall it was straightforward.
It is very much ‘business as usual’ in terms of the day-to-day running of MoreySmith, with the directors making key decisions within structures that have always been in place, but what is different is that as beneficiaries of the trust, all employees have a vested interest in where the business is heading.
The EOT ensures that we all take part in making sure that MoreySmith continues to thrive, and that the hard work everyone puts in benefits all. Being employee-owned has created a new platform for broader employee engagement, empowering our people to make recommendations to the directors about things that will benefit the business.
The studio has always had a great family spirit, as so many of our team have been here from the beginning. The move to EOT has only strengthened this, and added to the sense of cameraderie. The Employee Forum has been very active and enthusiastic, generating some positive ideas to further benefit the team and business.
I would like to undertake a more formal survey and engagement process with everyone towards the end of the year to hear their thoughts, once we have celebrated our first year as an EOT, but so far the main highlight for me is that I can fully share the rewards with the dedicated and committed team who have stayed with me for so many years – it feels good!
