Employee ownership trusts: a potential solution for family business succession

New Zealand is experiencing a generational shift in business ownership. Family businesses, which form the backbone of our economy, face the challenge of succession as founders retire and younger generations pursue different careers or lack the resources to take over. 

Traditional succession options – family succession, management buyouts, mergers, or outright sales – each have their merits and drawbacks. However, another option pioneered overseas could provide an alternative: employee ownership trusts (EOTs).

The transfer of wealth and business ownership from one generation to the next is fraught with complexity. Family businesses often hold assets that are illiquid, emotionally charged and difficult to value. Succession planning must balance family expectations, business continuity and the need for fair financial outcomes. 

Many New Zealand family businesses face additional hurdles, such as a lack of interested or capable successors, the risk of fragmentation, and the threat of sale to overseas buyers.

What is an employee ownership trust?

An EOT allows a company to be owned collectively by its employees, without requiring each worker to buy shares. Instead, a trust acquires a significant stake – often a majority, or even 100% – on behalf of the workforce. 

The selling shareholders are paid for their shares from the company’s profits, typically over several years to avoid financial strain. Employees do not directly hold shares. Rather, a trustee administers the trust, ensuring professional management and an ethos of employee engagement and profit sharing.

The UK has a century-long history of employee ownership, with the John Lewis Partnership (retail and grocery) as a flagship example. In 2014, the UK government codified the EOT model in tax law, offering capital gains tax relief to sellers and tax-free bonuses to employees. Since then, over 1,800 EOTs have been established, including high-profile businesses such as Aardman Animations, makers of Wallace & Gromit.

Research shows that employee-owned businesses report higher productivity, better staff retention and greater resilience in times of crisis. EOTs provide smooth succession for founders and strengthen the domestic business base by reducing the risk of companies being sold abroad.

Why EOTs could make sense for New Zealand

New Zealand’s business landscape shares many similarities with the UK: a high proportion of SMEs, a tradition of family ownership and a history of foreign acquisitions.

EOTs offer several advantages for succession planning. They help ensure business continuity by keeping businesses rooted in New Zealand, preserving jobs, culture and community ties. Founders can secure a fair price for their shares, paid out of future profits, without needing to find a single buyer or burden the business with debt.

Employees gain a real stake in the business’s success, which boosts motivation, retention and productivity. Employee-owned businesses are often more resilient in downturns and help spread prosperity more evenly. EOTs may also avoid the pitfalls of fragmentation and the loss of legacy that can accompany outright sales.

The process typically involves valuation and structuring, where the business is valued and the trust is established to acquire a controlling stake. The trust buys shares from the owners, funded by company profits over time. A trustee board oversees the trust, ensuring professional management and employee engagement. Employees benefit from profit-sharing bonuses, aligning their interests with the business’s success.

EOTs could be particularly relevant to New Zealand’s farming sector, where succession planning faces unique challenges. Farms often have high capital values and are built on land that holds deep family and cultural significance, making ownership transitions emotionally and financially complex. 

Strict regulations on foreign ownership limit the pool of potential buyers, while the relatively low profitability of many farms can make it difficult for the next generation to raise sufficient capital for a traditional buyout. 

An EOT structure can help address these issues by allowing ownership to remain local and collective, easing financial pressure through gradual payments, and preserving the legacy and stewardship of the land for future generations. 

Financial viability is a common concern, but EOTs are structured to avoid overburdening the business. Payments to selling owners are spread over several years. The trust model encourages professional management, with employees having a voice but not direct control over day-to-day decisions. New Zealand would need to consider tax incentives and clear legal structures to encourage EOT adoption, learning from UK reforms.

The role of directors

For directors considering succession options, EOTs offer a way to fulfil fiduciary duties, safeguard the company’s future and reward loyal employees. Directors should engage early in succession planning, considering EOTs alongside traditional options. 

It is important to seek expert advice on structuring, valuation and governance, and to advocate for policy reforms to support employee ownership in New Zealand.

EOTs are a potential solution for family business succession in New Zealand. By keeping businesses locally owned, rewarding founders and empowering employees, EOTs can help ensure the long-term prosperity of our SMEs. 

As New Zealand faces the greatest wealth transfer in history, it is time for policymakers, directors and business owners to consider EOTs as a viable, sustainable and equitable path forward.