EOTs: the post-COVID succession solution?

Scotland continues to set the pace for transitions to employee ownership, and this impetus shows no sign of slowing down.

What is the reason for this, and why are we forecasting a significant boost to the number of Scottish-based employee-owned businesses post-COVID-19?

The recent report on employee ownership in the UK, published by the White Rose Centre for Employee Ownership based at the University of York, found that the number of employee-owned businesses has increased by 100 in the past year. Scotland was second only to London in the number of employee ownership transitions: quite remarkable when you consider the difference in the London and Scottish economies.

Scotland: fertile soil

If everyone agrees employee ownership is so good for the economy, why is Scotland forging ahead? Scotland is an SME economy and the employee ownership trust (EOT), the most common vehicle used to transition to an employee ownership model, is arguably a good fit for the small business. Of course, the tax incentive may play a part. If a business owner sells a controlling interest in their business to an EOT, that transaction is exempt from capital gains tax.

In my experience, the tax benefits are not a key driver for business owners considering employee ownership. It’s loyalty to the workforce, commitment to maintaining the business in the local area and a reluctance to sever all ties with the business that are more likely to be the prime motivators for a business owner to consider employee ownership as a succession option.

The business owner as seller is able to manage the pace of exit, and the continuity of longstanding relationships for both customers and suppliers can be a convincing consideration.

Another factor in Scotland’s success in growing employee ownership is undoubtedly the enthusiasm among our adviser community. The 2012 Nuttall Review identified a lack of awareness amongst advisers at a UK level as being a key challenge to increasing the number of employee-owned companies. However, Graeme Nuttall himself remarked how encouraged he was to see such high levels of interest in Scotland from lawyers, accountants and bankers in building their knowledge of the model. A number of Scottish firms have built significant expertise in employee ownership trusts within their corporate and commercial teams.

The key factor that differentiates Scotland from the rest of the UK, though, is dedicated support for employee ownership from the Scottish Government. Co-operative Development Scotland (CDS), as the specialist unit working on behalf of Scotland’s three economic development agencies, delivers expert business support across the country. Our experienced team provides free advice and guidance to business owners looking to explore the model, and signposts to experienced advisers to assist the business transfer process.

Surviving the storm

In these uncertain times, employee-owned businesses demonstrate a good track record of resilience during recession. A 2012 study carried out by the Cass Business School at City University London found that employee-owned companies experienced a less negative impact from the 2008 recession than their peers of similar size and sector. The study also found that employee-owned companies were more likely to maintain their employment levels and were thus able to bounce back more quickly. This is supported by a recent survey undertaken with a sample of Scotland’s employee-owned businesses, which found that 76% of respondents believed the company’s employee-owned status was helping them through the COVID-19 crisis. With talk of second waves and the threat of further local lockdowns, as well as a vaccine potentially being years away, the employee ownership model may offer some stability and security that is missing from ownership structures reliant on individuals.

Despite the impact of COVID-19 on the economy, CDS has seen eight transactions this year, and an increasing number of companies have been expressing interest in exploring whether employee ownership might be the right plan for them. The EOT isn’t the best solution for every company, but it should certainly be on the table when succession options are being discussed.

To find out more about the EOT transaction, Co-operative Development Scotland is hosting a series of webinars for professional advisers and business owners exploring the employee ownership trust as a succession solution. Find out more here.

Aspire is a Glasgow based company that provides support to those who need it: homelessness, addiction issues, refugees, care leavers and the elderly and vulnerable. Aspire founder, Peter Millar, was attracted to the employee ownership ethos and looked to employee ownership as a means to exit while maintaining and protecting the company’s strong culture and values. Aspire became employee-owned in June 2019, with Peter retiring as managing director in February 2020, although he has remained as chair of the board of directors and as a trustee.

Campbell Clark and Sarah Winter of Blackadders provided legal advice on the transaction. Sarah Winter said: “Aspire is an excellent company that makes a positive impact on society. The move to employee ownership reinforced the company’s values and gives employees real ownership. Employee ownership allowed Peter to retire knowing his company was in safe hands.”

Mediascape is Scotland’s leading independent audiovisual expert, with customers that range from universities and heritage sites to corporate businesses. The company was founded in 2003 by husband and wife team Angus and Shona Knight. They were planning retirement but were concerned that a sale would result in relocation of the business, with a negative impact on the loyal employee group. They read of a similar business that had adopted the EOT model successfully and invested some time in exploring the option, including meeting with several business owners who had taken the same path. Their EOT transaction completed in January 2018 and the business has since had its best trading year ever.

Bruce Farquhar and Ewan Regan of Anderson Strathern were the legal advisers to Mediascape. Bruce Farquhar is enthusiastic about the EOT as a succession solution. “The EOT can be ideal for the business owner who is looking to realise the value in the business, and ensure the company remains in a stable ownership model. Angus and Shona were not quite ready to retire, and the move to employee ownership enabled them to phase an exit that allowed the development of a competent management team, and the appointment of a new managing director to take over from Angus. These deals are enjoyable to work on: everyone is aligned. You don’t get the same adversity sometimes experienced in trade sales.”

Falkirk-based Palimpsest is the UK’s market leader in the provision of typesetting, digital and pre-press services to the publishing sector, with over 50,000 books produced during its 25 years of operation. The two founders, Craig and Ruth Morrison, had no plans to retire but wanted to lay the ground for an eventual exit. They heard about the employee ownership option after attending an event run by Co-operative Development Scotland, and finalised the move in September 2018. It has worked well for the Palimpsest team, and Craig and Ruth believe that employee ownership was a key factor in helping the company weather the COVID-19 crisis relatively unscathed. Qualified lawyer Ruth says: “We had to immediately change to home working and dynamically update our workflow. The staff coped with this efficiently. The service to customers was seamless.”

Douglas Roberts of Lindsays provided legal advice on the deal. “Employee ownership is a flexible model that can be shaped to fit with the aspirations of the sellers, and meet the current and future requirements of the business”, he says. “It is remarkable how quickly employees embrace the ownership stake and demonstrate enhanced performance soon after completion. We have worked on a number of these transactions with excellent results, and have a healthy pipeline of companies considering employee ownership as the best way forward.”