Why is Scotland leading the way in employee ownership?

– by Carole Leslie

A study released in June 2020 by the White Rose Centre for Employee Ownership, a collaboration between the Universities of Leeds and New South Wales, found that Scotland was second only to London in the growth of employee ownership.  When you consider the disparity in economies this is quite remarkable. According to UK Government statistics, London is home to 1.1m businesses whereas there are only 334k in Scotland. What is Scotland doing that seems to be working?

It’s worth giving some background.  Employee ownership was on a relatively slow burn in the UK until the Coalition Government of 2010-2016.  The Government made a commitment to promoting more employee ownership in the economy, initiating the Nuttall Review of 2012.  Tax Lawyer, Graeme Nuttall OBE (for US readers – OBE is an honorific title an Officer in the chivalric order called The Most Excellent Order of the British Empire) is a life-long advocate of employee ownership.  The Nuttall Review identified a number of barriers to employee ownership including poor awareness of the model, lack of knowledge of advisers, and perception that the model and transition to employee ownership was too complex.

As a result, a new vehicle was created to encourage more business owners to consider employee ownership as a succession option.  The Employee Ownership Trust (EOT) brought three key benefits:

• A sale to an EOT would be exempt from Corporation Tax
• A company where the EOT held the controlling interest could pay cash bonuses to employees which would be free of income tax up to an annual limit of £3,600 per annum
• The EOT provide a clear and straightforward means to convert to employee ownership

This was a game changer for employee ownership in the UK, resulting in a 71% increase in the number of employee owned firms between 2014 and 2019. More than 20% of the UK’s employee-owned firms are Scottish.

So why the prevalence in Scotland? Scotland is very much an SME economy (for US readers SME is small to medium enterprise, typically businesses with less than 250 employees). 99.3% of businesses owned in Scotland are SMEs.  Employee ownership is an SME model. There is something very attractive about employee ownership that excites the SME business owner; there is continuity for the staff and the customers, the business remains local, the owner can control not only their own exit but the shape of the company in future. As a transaction, it’s something they can “make happen”; they don’t need to find a buyer, it’s cheaper and easier than a trade sale.  It’s also viewed as a positive thing to do and sellers to EOTs are often viewed as local heroes.  I believe we have fertile ground.

SMEs are vulnerable to larger “predators” and recognising the need to retain as many locally owned employers in Scotland, all parties in the Scottish Parliament have been supportive of employee ownership as a means to achieve this.   There is a specific team within the economic development agency to promote and support the growth of employee ownership in Scotland.

This team offers the following :

• Direct support to business owners considering their succession options. This take two forms:

• • 100% funding of feasibility reports into whether employee ownership would fit.
  • Grant funding of up to 30% towards the cost of advice for the transaction.

• An education programme with advisers.This funds CPD sessions for advisers (lawyers, accountants and bankers) with the aim they would suggest employee ownership models to their clients. This has led to the Scottish adviser community being much more aware of employee ownership than is found in the rest of the UK.
• Publicity around transitions.The team deploys significant public relations activity around any successful transitions, and this proves an effective means to generate more interest.

That is only part of the story.

I believe there are a few vocal “champions” who push the message continuously. Some of these are advisers like me, some are business owners and some are companies who have been through the process.  We have some amazing success stories in Scotland who highlight the benefits of employee ownership for the business, the employees and the economy. Perhaps a benefit of being a small country is that a few voices can make a lot of noise!

But it’s not enough. We should be doing much better than we are. With the size of the budget and the amount of resource allocated I would be looking for more than 15 transactions in a year if I was sitting in the Scottish Government.

I do see a significant opportunity ahead.  The Covid 19 crisis will likely result in a stagnant M&A market and buyers will be looking for bargains rather than paying top dollar for companies to add to a portfolio.  Business owners will still be getting older and planning to retire. They can “make” employee ownership happen; no expensive marketing process or business brokers required.  The deal can be shaped to future earnings whereas the current crisis will have depressed profitability and lowered potential business sales prices. Employee ownership might be the answer to a lot of the current problems.

Signs are good. I have completed 6 employee ownership transitions this year and have three live projects underway. The number of genuinely feasible leads is increasing weekly. Advisers are speaking proactively to clients about the benefits of the EOT. Despite the economic gloom, lenders are still funding employee ownership transactions

There can be no doubt that the next few years are going to be tough for many businesses. Employee ownership champions have a role to play in promoting and facilitating an ownership structure that will enable companies to “build back better” and deliver a new and fairer way to do business.

About the Author – Carole Leslie is an Employee Ownership Specialist based in Scotland. http://www.ownershipassociates.co.uk/