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Why employee ownership may be an option for your franchise

Written by Gary Davie on Tuesday, 25 September 2018. Posted in Legal

Employee ownership isn’t just a succession option but an extremely useful tool to improve your staff retention and boost morale

Why employee ownership may be an option for your franchise

It’s a common misconception employee ownership can only be used to form part of a succession plan. Whilst that’s true in many cases, franchises shouldn’t shy away from this innovative business model but instead carefully consider the benefits it could bring.

Employee ownership has become the fastest growing business model in the UK. As well as many other benefits, the structure, commonly known as the John Lewis model, can help engage and retain employees by offering a meaningful stake and voice in the business.

Franchise businesses rely on loyal, hardworking employees to ensure the operation runs smoothly. This is especially true of franchisees who own multiple locations and cannot be everywhere at once. Yet finding and retaining employees can be fraught with expense and frustration. It’s important to remember that the way employees are treated will mirror the way they treat customers.

Employee ownership may well provide a solution for franchisees wishing to improve their culture or performance. The structure inspires a cohesive approach while improving customer service levels which encourages long-term employee commitment and productivity, with the added bonus of setting the business apart from the crowd. At a point where levels of trust in businesses are an all-time low, research conducted by YouGov and commissioned by the Employee Ownership Association, found employee-owned businesses are perceived as more trustworthy than businesses not owned by their staff members.

Furthermore, employee ownership is proving to directly support the government’s priorities around its industrial strategy, with the business-led The Ownership Effect Inquiry suggesting the model is increasingly recognised as a key contributor to regional economies.

With new franchisees coming on board all the time, it may be possible for franchisors who believe employee ownership to be beneficial to the business to persuade them to adopt the model from the outset. However, given brand consistency is of upmost importance to franchisors, it may prove difficult to roll out the scheme across the board. For instance, franchisees may be reluctant to give up ownership stakes or not wish to enter the scheme to the same extent or on the same terms. Therefore, making the model mandatory is unlikely, instead it may be better to take a flexible approach, offering franchisees the choice based on each individual scenario.

Whilst employee ownership normally involves having a significant stake in the business, this can take a variety of forms, judged on a case-by-case basis. It may be decided direct ownership is best suited to the business and employees will own shares in the company, on the other hand indirect ownership may be more suitable, with shares owned by a trust set up and run for employees’ benefit. Alternatively a combination of both may be most suitable.

Whilst direct ownership may seem daunting for a franchisee, it’s possible to adopt a hybrid model on a smaller scale. For instance through the creation of a trust which can own a meaningful stake, whilst the owner maintains operational control.

Yet it must be noted the model is not purely about ownership and financial returns but also about behaviours, being open with communications and involving employees in the business process. Whilst the same tax breaks that come with other types of employee ownership would not be available in a hybrid approach if the owners do not relinquish control, both the owner and the employees can still benefit from many rewards.

When considering employee ownership there are a few essential factors franchises should address firstly. In order to decide whether the opportunities outweigh the sacrifice of losing an equity stake in the business it’s necessary to consider two key factors, even just from a purely financial standpoint. Firstly, how much of the business growth is dependent on the workforce and, secondly, whether the value of the expected productivity gains outweigh the loss of equity.

These are not easy issues to address and no calculation will determine the correct answer but the economic benefits which can flow from this model should not be underestimated. Imagine, for example, the customer goodwill that could be generated across a wide franchise operation with the right marketing of this message, especially in the current climate of distrust within the large corporate establishment.

For franchises wishing to pursue employee engagement, it’s necessary to check the terms of the franchise agreement and confirm whether consent is required before arranging a discussion with the franchisor. Additionally, it’s wise for owners to get advice early on, not only from experts but also from other businesses who have adopted the model in the same sector.

Employee ownership can be a powerful move. With proper planning to manage both customer and employee expectations, the model can be an attractive option for franchise owners who  wish to provide business continuity with the added benefit of engaging the workforce.

About the Author

Gary Davie

Gary Davie

Gary Davie is a partner and head of employee ownership at Shakesspeare Martineau, the law firm.

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