Advisers have been warned against pursuing employee ownership for its tax advantages.
Speaking at the Personal Finance Society's conference today (November 23), former adviser Chris Budd said employee ownership was a good opportunity for advisers looking to exit their business and also something advisers could recommend to their clients, if done for the right reasons.
Earlier this year Mr Budd had sold the majority of his business to an employee ownership trust, which will own any profit his firm makes and will have as its beneficiaries all the employees of the firm he founded, Ovation Finance.
He said selling to an employee ownership trust was an alternative to selling to a consolidator or to the company's existing management team.
But Mr Budd warned against selling a business to an employee ownership trust, or recommending this structure to a client, for the tax benefits.
There are tax advantages to this structure because as long as the trust owns a majority of the business, the payments it receives are free of capital gains tax. Additionally, the employees receive up to £3,600 of their payments free of income tax.
He said: "Don't go out and talk about it as a tax-free scheme. The accountants and solicitors are going out there and selling it on the basis of it being tax-free but the company needs to keep going after you've left in order to pay you out."
Mr Budd said he had encountered a firm which had been told it could transfer into an employee ownership trust model within six week for the tax advantages.
But he said: "It takes two years to get ready, at least. The company won't be there in one year's time [after the transition]. It will fail."
Mr Budd has written a book called The Eternal Business detailing how to transition an advice firm into an employee ownership trust and the interest has prompted him to arrange a programme to help advisers.
The programme costs £300 a month and helps prepare a business for the transition into employee ownership over the course of 18 months or two years.
Of the 280,000-odd businesses in the UK with between 10 and 250 employees, only some 320 are employee-ownership trust businesses.
One of biggest employee-owned companies in the UK is the John Lewis Partnership, which runs Waitrose and John Lewis, whose employees are partners in the business and receive a share of the company's profits as an annual bonus, with all employees receiving the same percentage of their salary.