Employee-owned business: Is the John Lewis model a viable option for family succession?

John Lewis has been in the headlines recently amid reports that it is considering diluting its partnership structure. This is in order to raise up to £2 billion in new investment.

As the UK’s largest employee-owned business, the John Lewis Partnership has an 80,000-strong workforce and total sales of over £12.3 billion. It’s a widely respected business and employee ownership is a model that has served John Lewis well over the years, even though partners went without their annual bonus this year after only the second ever full-year loss in its history.

Founder John Spedan Lewis set up the business over 100 years ago. He created a governance system that allowed it to stay ahead in a competitive industry, giving every employee a voice in the business they co-own. But is this a model that can work for family businesses?

The evidence suggests it can, as the employee-owned business sector has more than doubled in size in the past three years. According to the Employee Ownership Association, by December 2022 there were 1,300 employee-owned businesses in the UK.

This growth comes after new tax rules regarding employee ownership came into force in the 2014 Finance Bill. These rules now mean that families can sell their businesses to an employee ownership trust (EOT) without having to pay capital gains tax. It also allows bonus payments to staff of EOT owned businesses to be exempt from income tax up to a cap of £3,600 per employee per annum (representing a maximum £1,620 income tax saving for additional rate tax payers). The trend towards using this alternative business structure has gathered pace in recent years and looks set to continue with the incentives on offer and as businesses become more attuned to the impact an engaged workforce can have on profitability.

For many family businesses succession is a major issue that they fail to face up to. This is often because the next generation of family members are either not natural heirs to the throne, or they are not interested in running the family firm. Family business owners often see no way of realising the true value of their business whilst safeguarding jobs and creating conditions for future growth. The option to sell to the employees is a way to preserve what is unique and special about the business, and to ensure that the company can be run by people who share the values and vision of the outgoing owner. It may well make the painful decision of leaving a business that they have dedicated their lives to easier to face.

The Government wants employee ownership to enter ‘the bloodstream of the British economy’. The measures introduced nearly 10 years ago now provide incentives for growth of the employee ownership sector by promoting awareness of the sector and increasing the attractiveness of indirect employee ownership structures for business.

With research pointing to employee ownership increasing workers’ wellbeing and productivity, and the benefits of the tax incentives on offer, we expect to see many more companies looking to this alternative business structure to solve their family succession dilemma.