Burgoyne Pallet Track embraces employee ownership as drivers reap tax-free bonuses

Drivers of Burgoyne Pallet Track may celebrate with a nice piece of Wensleydale if they pick up their first Employee Ownership Trust (EOT) tax-free bonus this year.

The Herefordshire-based group introduced the EOT on 1 January 2023 after being partly inspired by successful examples in other industries such as Aardman Animations – whose creations include the cheese-loving Wallace & Gromit.

“Our owner Burgoynes (Lyonshall) was looking to divest the transport arm,” explains finance director Deborah Spencer. “Rather than selling to a third party, the company was anxious to maintain business continuity by retaining the existing employees and culture. I suggested that an EOT could be a viable option compared with selling to a business that we didn’t know.”

An EOT is a trust that buys a controlling interest in a company – usually as part of an owner’s exit strategy – and then holds those shares for the long-term benefit of the employees.

Deciding to sell to a trust can be beneficial for the owner as the proceeds are free from Capital Gains Tax. Employees can benefit from having more of a direct say in the new structure and the chance to be paid tax-free bonuses of up to £3,600 each per year, usually from future company profit or cashflow.

There are currently almost 1,500 UK employee-owned businesses. These are mainly established firms with indirect employee ownership models, where shares are held through an employee trust; direct employee ownership, where employees become registered individual shareholders; or a combination of both.

Perhaps the most famous example is retailer John Lewis and the famous bonuses it pays out to staff, or partners as they are known, every year.

“The idea is to ensure that the company concerned remains independent and operates for the benefit of the employees,” explains Andrew Harrison, partner at EOT specialist Co-ownership Solutions, which advised Burgoynes. “Assuming that the company has profit to distribute, then the employees will expect to get their share. If they come up with ideas on how to improve the business or work more diligently, then it leads to more success and additional profit.”

From the owner’s perspective, Harrison says EOTs have become the third exit option. “A decade ago, 99% of owners would have looked instinctively at a trade sale or a management buyout. Now they don’t have to sell to rivals or a management team without the resources to buy them out,” he states. “With an EOT they can get paid, keep their name above the door, and retain and reward their loyal staff.”

Harrison says solicitors draft all the legal documents and accountants determine the market value of the shares. The market value must be handled independently. An affordability exercise may also be necessary to ensure that the market value and the payments can be funded out of future profits and cash reserves.

“We project-manage these schemes and ensure that the owner and the management team go in with their eyes wide open,” Harrison says. “With a trade sale, the people on the other side are trying to chip away at the price and ensure it is a win for them. Here we are trying to get a win-win for all.”

The average payback period to the seller from the EOT is around seven years, although it can be paid in one instalment. Around half of EOT structures have agreements that no bonuses will be paid to employees until the whole amount of money due to the seller has been paid.

However, Harrison says that most of the deals he advises on find a balance so that owner and employees receive payments quickly.

“Owners should think about paying a bonus within the first year of the EOT,” Harrison urges. “If an employee is told to wait seven years to get their promised income tax-free bonus, then it may be underwhelming.”

Other important factors to consider in an EOT structure include appointing trust board directors to oversee management and ensure the trust benefits employees; and creating an employee council so that staff views can be aired to management.

“You want the employee to think and feel like an owner,” Harrison says. “Perhaps share information such as accounts and KPIs regarding turnover or overheads. Allow the employees to raise questions and challenge management. Some companies allow employees to vote on strategic decisions – but that is the minority.”

Indeed, one employee-owned company director tells CM it is important to remember that the management of the trading company still makes the ultimate business decisions. “Managers still manage, drivers still drive,” the director says.

Burgoynes, which has 24 employees, had the initial idea in spring 2022. The trust was up and running on New Year’s Day 2023.

“The owners were behind the process, so it wasn’t confrontational,” Spencer says. “Determining the valuations would have been more complicated if they were selling to a third party.”

Spencer and operations director Jonty Howard now form the leadership team and are also trustees. “We want to expand the trust to get more employees involved,” explains Spencer. “We haven’t done a distribution yet as we haven’t produced a full set of annual figures since the change. We will be looking at the bonus based on the 2023 performance.”

But she believes the EOT has already boosted company performance. “There is better productivity and a greater sense of belonging and engagement,” she says.

There is no set formula for an EOT. Dunstable haulier Axle Haulage set one up in 2021, but previous majority stakeholder Barry Jordan remains as MD.

“I set up the business in 1988 and started this process back in 2020,” says Jordan. “I was looking at succession, but I wanted to remain active and leave a legacy. I’ve seen many takeovers go wrong which could have risked that.

“It is a real model for people power,” he says. “Like John Lewis, our staff are partners. We have a five-person employee council that discusses management issues such as health and safety, training, driver discipline and future investment. Although actual responsibility for procurement and purchasing remains with management, it leads to a degree of governance.”

He says the firm’s turnover since the EOT has “gone up massively” with better productivity, lower absenteeism and greater employee engagement. Its employee numbers have also grown from 28 to 36. “You are no longer employees working for a wage. You are the beneficiaries of a successful company,” he says. “That is something which I don’t think is yet fully understood by many employees in trusts. We are trying to push that message and it should help us recruit.”

Communication and interaction with employees can be a difficult obligation in a tightly run haulage business, Jordan adds, but that is the only downside. “It’s still early days,” he tells us. “But it has been fantastic so far.”

George McLaughlan, founder of Perth-based George McLaughlan Transport, offers a longer-term perspective. Following advice from his accountant, he has had an EOT in place since 2003 for what are now 50 employees. “The company is 12% owned by the trust and we have four employees who are directors,” he explains. The employees enjoy a bonus on a pro-rata basis depending on experience. “That is when the company is fortunate to declare a bonus, which in haulage may not always be that often,” McLaughlan says.

So why do so few haulage firms have EOTs in place?

According to the Employee Ownership Association, the top-two employee-owned sectors are professional services and manufacturing.

Spencer searched for relevant haulage examples when considering an EOT, but failed to come up with many names. Indeed, apart from the three companies interviewed, CM’s research found only a sprinkling of others such as Unipart and the Cardinal Partnership.

"Transport companies are often owned by the person or family who started the business,” Spencer says. “So it is well suited if they want to develop an exit strategy. They have a management team in place, office staff, warehouse and drivers.

It is a self-contained unit. An owner can ensure that the emotional investment they have put into the company for years carries on.”

Harrison says that there are “no reasons” why EOTs can’t apply to haulage, although the sector does have its peculiarities. “Because the payback for the shares acquired from an outgoing owner are normally funded from the company’s future profit, then there could be a constraint with capitalintensive logistics firms that plough profit back into the business,” he says. “Maybe you need to use that profit to service the debt you got when you invested in new trailers. There might be some arguments over where the money should go.”

However, Jordan says Axle has had no such issues, spending over £1.5m in the last year on equipment. “Our repayment term is over five years, but because of our strong balance sheet, that has been reduced to four. Rather than waiting for that time to elapse, we have already made out EOT bonus payments,” he says.

Another possible wrinkle for haulage firms could be the solitary nature of the driving role. “A lot of EOT companies have employees who work cheek by jowl every day, sharing views,” Harrison adds. “They have direct interaction with their managers. In logistics you get some of that in the office and the warehouse, but if you drive you are away from the depot and might not see much difference.”

To counter that, haulage EOTs should ensure that when drivers do come into the yard, there is engagement with management.

“It may not be suitable for every owner,” Harrison says. “Some may not want to give control to staff and others might want to see the value of their shares paid up-front in one lump sum from a trade sale. But there will undoubtedly be more in logistics. Once one or two firms do this, then it could snowball.”

- This article was first published in the 22 February issue of Commercial Motor.