ABERDEEN IT FIRM MARKS TENTH BIRTHDAY WITH EMPLOYEE OWNERSHIP TRANSITION

North East IT provider ITWORX has announced its transition to employee ownership, with 17 staff given a stake in the business.

Philip Mowatt and Jill Ross

Established in 2010 by Philip Mowatt and Jill Ross, ITWORX provides tailored IT and communications services and solutions to a range of clients. The firm is headquartered in Aberdeen and has recently expanded into Dundee and Angus, however many of its clients have a global footprint. With 50 years of combined experience, a host of prestigious awards, and a customer retention rate of 98%, ITWORX prides itself on providing an exceptional quality of service. Last year, the firm turned over £2.6m.

As ITWORX approached its tenth birthday, founders Philip and Jill wanted to mark this milestone while looking ahead to the firm’s next chapter. An adviser at Business Gateway had previously mentioned employee ownership and its benefits, and they decided to explore the option further.

We spoke to Jill to find out more.

“Ten years into ITWORX’s journey, we were in a great position – financially stable with a solid client base and a skilled and dedicated team. Looking ahead to the next decade, we wanted to use this strong position to reinvent some aspects of the company that would bring about long-term benefits.”

It was with this in mind that Jill and Philip began to seriously consider employee ownership. They were put in touch with Co-operative Development Scotland, and after learning more from an adviser and undergoing a feasibility study, they concluded that employee ownership would bring a number of lasting benefits to ITWORX.

“It can be difficult to stand out in the IT market – the offering is largely the same across the board when it comes to the practical service, therefore with ourselves it’s more about the people and relationships. It’s easy to talk up your company’s values in these areas, but being employee-owned demonstrates that commitment.

“Our staff are key to our success, and some of the senior employees have been with us for a very long time so handing the company over to them shows them they are valued. It also offers peace of mind about the company’s future as there is no risk of the company being absorbed by a competitor further down the line. Our clients know we are here for the long haul with an engaged, incentivised team, and we look forward to continuing those relationships for many years to come.

“We also hope the structure will help attract and retain new talent. Young talent is so important, especially in an ever-evolving industry like IT. There is a wide range of expertise at all ages and levels within the company that we listen to and learn from, and again, by giving the team a say in how the business is run, they know their skills and contributions are appreciated.

“Philip and I have no plans to step back from the business any time soon, and will continue in our roles as usual for the foreseeable future. We envisage new ways of working to take our course slowly and steadily, with increased input from the entire team. We’re very excited about this milestone and what the future holds for ITWORX – hopefully it will continue to thrive for many more decades to come.” 

An Employee Ownership Trust has been formed and holds 100% of the shares on behalf of the employees. The transition to employee ownership was supported by Co-operative Development Scotland (CDS), with the process managed by Co-ownership Solutions LLP and legal services by Lindsays.

If you’d to know more about employee ownership and how it could help your business, please get in touch with us here using the ‘expert support’ option.

RESET AND REBUILD VIDEO

As part of our Reset and Rebuild campaign, we have created a video featuring a wide range of experts on inclusive business models, including Darah Zahran, Sarah Deas, Jaye Martin and Carole Leslie, as well as the businesses themselves such as The Community Carrot, Merlin ERD and the John Lewis Partnership, discussing why they think the models can help rebuild the economy post-Covid-19 and help create a stronger, fairer and more democratic economy.

You can watch the video below.

 

Read more about these inclusive models here and find out about the support available if you’re considering your options: https://bit.ly/3jJVMuf

Can inclusive business models help us achieve a stronger and fairer economy in a post-pandemic world?

11/12/15 - 15112301 - SCOTTISH ENTERPRISE    GLASGOW    Claire Alexander

Head of Co-operative Development Scotland Clare Alexander explores further.

Along with the Scottish Government, we want to help create a more progressive Scottish economy that contributes to increased prosperity and equity, creating better opportunities for everyone and spreading the benefits of economic success more evenly. COVID-19, with its proven ability to target and highlight inequality, has made this a more urgent task.

This is at the heart of Scotland’s Programme for Government, which is responding to the economic, health and social crisis that COVID-19 has brought, and I believe our business community is key to supporting this. The inclusive business models we promote are great examples of plural ownership, one of the five pillars of Community Wealth Building, which is seen to be integral to effect the necessary change for local communities and national wellbeing.

As we enter this period of rebuilding our economy we recognise the importance of supporting this people-centred approach to economic development which redirects wealth back into the local economy and puts control and benefits into the hands of local people. Our commitment is to support any business interested in developing their model to drive both business success and resilience, while ensuring greater equity for our communities and fairer working practices for our workforces.

While discussions on the social aspects of the economy have become more vociferous in recent years, COVID-19 has undoubtedly fuelled its relevance and urgency. The crisis has had a massive impact on the global economy and Scotland, like all countries, has been deeply affected. Many of our norms have been questioned and there is a desire to change the way we do business. Business leaders have prioritised wellbeing, communities have responded by supporting each other through the crisis, and new and innovative ways of being economically viable have come to the fore. There has also been a focus on a collective, rather than an individual, call to action. We’ve been driven not just to respond in the immediate term, but also to make choices about the sort of economy we want to have and to focus our efforts on ‘building back better’.

With thoughts turning to economic recovery, we are highlighting the critical role inclusive business models, such as employee ownership and consortium and community co-operatives, can play in helping to implement and ensure the creation of a fairer and more democratic economic alternative.

These co-operative business models are collaborative vehicles that play an important role in creating globally competitive businesses, industries and infrastructure. They enable employees, businesses and communities to work together to fulfil shared interests. This unlocks creativity and capacity. There is growing evidence that they increase productivity, innovation and growth – whilst achieving wider societal benefits.

An employee-owned business is one in which the employees hold the majority of the shares, either directly or through an employee ownership trust.  Selling to employees allows owners to manage their exit and achieve fair value while safeguarding the long-term future of the company. Employee ownership gives employees a meaningful stake in their organisation together with a genuine say in how it is run.

Evidence shows employee-owned businesses consistently outperform in terms of improved business resilience during times of economic crisis. They tend to be more productive with higher levels of staff engagement and wellbeing, particularly relevant during a time in which people are spending more time working from home.

Research we recently conducted highlighted significant worries from Scots about job security and closures of local amenities such as shops and pubs. Co-operative models can help to address those concerns through their ethos and structure.

Setting up a community co-operative can be an effective way for people to safeguard public services, for instance coming together to take over a local shop or pub and prevent it from closing, something which could be relevant in the current climate. Community businesses can have a significant positive impact on areas whether they provide a local service, deliver economic growth, or contribute towards the health and wellbeing of the local community – often all three. They are important to the economy because they can retain jobs, bring economic opportunity and retain vital services and amenities.

The economic and social potential of community business is significant, and could be more widely adopted in Scotland. Combined with the greater community spirit that has been cultivated during COVID-19, now is an appropriate time to champion community business models and the wider economic, social and environmental benefits they can deliver.

We’re also advising business owners to consider the advantages of formally joining together via the consortium co-operative model. These are established when businesses come together for a shared purpose; to buy or sell in scale, market more effectively, share facilities or jointly bid for contracts.

We know collaboration has been a vital part of the response to the pandemic, so formalising a consortium co-operative could be an effective, low risk way for businesses to improve market presence and achieve new goals whilst retaining their independence.

Whilst these types of inclusive businesses have experienced many of the same challenges around job retention, cash flow and uncertainty as others during the pandemic, they are often more resilient, putting them in a strong position to weather the economic storm.

The economy needs to have the best possible chance of recovery, with businesses that can be resilient, adapt and offer a fairer more inclusive economy.  We know there is a significant role for inclusive business models to play in helping to build back better and would urge any business owners reviewing their options to consider adoption of these models.

Please click here to find out more about these inclusive business models and the support available: https://bit.ly/3jJVMuf

Employee Ownership Explained – Making Employee Ownership Work

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The final webinar in the Employee Ownership Explained series took place on Wednesday 18 November. This month, the focus was on ‘Making Employee Ownership Work’. Having worked in the employee ownership sector for 16 years and supported over 60 companies move into an employee ownership structure, Carole Leslie of Ownership Associates, talked through the process of moving to an employee-owned structure, and how to achieve the best outcome for the sellers, the employees and the business.

The presentation focused on ‘Five Steps to a Successful Employee Ownership Transaction’.

five steps diagram

Step 1: Initial Conversations

It’s worth investing time and effort in exploring the sellers’ aspirations and motivations behind the move to an employee ownership model.   Being clear on the expected outcomes, realistic on valuation, and honest on the company’s prospects will all help achieve the optimum results.

Choosing the right advisory team is key to a smooth and pain free process. A seller is likely to only do this once, so select advisors you trust and feel you can work with. The usual project length is 3-6 months although everyone should be prepared to move deadlines if there is any uncertainty.

Leadership succession planning is critical if a move to an EOT is part of exit planning by business owner. If there is no one to step into the seller’s shoes, then the owner will be constrained from moving on.

The owners’ own financial situation- and that of any family members connected to the business- should be considered. Is everyone making a contribution and if so, does their salary reflect this, bearing in minds dividends won’t be paid if all shares are in the Trust.

Step 2: Valuation

The first potential obstacle is reaching an acceptable valuation.  The feasibility study will report an indicative valuation, and an accountant will confirm or amend this number and provide a repayment schedule. As these deals are largely vendor financed, then the seller must be comfortable with the terms and accept the element of risk to which they are exposed. There will be a number of protections built in to mitigate this risk but the seller must have that confidence that the company will generate sufficient cash to meet the agreed figure.

Step 3: Building the Model

A key question is how many shares will be sold to the Trust? To benefit from the tax incentives, the controlling interest (50%+) must go into the EOT.  If the seller wants to retain a shareholding, they must be realistic about their options to divest in future. A minority shareholding in company controlled by an EOT is unlikely to be an attractive prospect to a buyer, so the obvious buyer would be the EOT once the initial consideration is repaid.

There is usually some reorganisation of the company’s governance structure, with appointing new directors and formalising board procedures.

There should be serious consideration given to the composition of the Trustees. The Trustees are effectively the stewards of the company for the future, carrying many of the same powers as a majority shareholder would in any private business.

If the company has property, there may have to be decisions whether that property remains in the business or whether it is retained by the owner and leased back.

Share schemes are often a feature of employee-owned companies and it’s worth thinking ahead as to whether it is desirable to implement one now, or at any time in the future.

Step 4: Funding

These transactions are largely vendor financed although there is an increasing interest from banks and specialist lenders to support EOT deals. Including external funding can lengthen the process but sometimes this is worth it for reducing risk to seller and formalising loan with company.

 Step 5: Communication

Telling the employees at the right time, in the right way, is critical. It’s usually very unexpected news, and it will be a new idea to most employees. All companies are different and it is worth spending time in using a variety of channels such as all-company meetings, small group meetings, offer of one to one conversations supported by documented explanations to ensure employees see the move to employee ownership as a positive outcome for them.

Consideration must be given to other stakeholders in the company such as customers, suppliers, landlords etc.  No one wants to fall out with their most important customer because they found out about such momentous news in the press!

The presentation was then followed by a panel discussion involving Bill Grossart from Grossart Associates, Innes Chalmers from Scottish Gallery and Sheila and Fraser Dunphy former owners of Finesse Control Systems and an interactive Q&A session, a summary of which is outlined below.

It is worth noting to any clients interested in exploring employee ownership that Scottish Enterprise via Co-operative Development Scotland provides free support including an Ownership Succession Review and an Employee Ownership Feasibility Study. This allows clients to objectively assess whether Employee Ownership is for them and outlines how ownership can be structured, governance and employee engagement within the business and indicates how a deal might be structured including a valuation. To find out more visit: https://www.scottish-enterprise.com/eo

A recording of the webinar can be found here:

A copy of Carole Leslie’s presentation is available here: Making Employee Ownership Work

Panel Discussions:

Bill, you initially chose a different path. Why change direction?
We had received several approaches to buy the business. However, it was a tortuous process with the buyers trying to tie us in, give us targets, and quibble over value. I read an article about the EOT and here we are! It’s been excellent. The team have risen to the challenge and we are having a great year.

Innes, why did the Scottish Gallery opt for employee ownership?
The Scottish Gallery could have been a target for a private buyer. We wanted to protect the Gallery’s legacy as an 170 year old institution.

Sheila and Fraser, why did you choose to sell your shares to an EOT?
It was important to us to keep the business local and protect the ethos of the business.

To all panel, what would you differently if you were to do it again?
Bill Grossart, Grossart Associates: Been pretty seamless. Some obstacles with funding but nothing we couldn’t address.  We found the bank generally supportive.
Innes Chalmers, The Scottish Gallery: We wouldn’t do anything differently.  It took time but we got commitment from the staff and the shareholders and overall we thought the process went very well.
Sheila and Fraser Dunphy, former owners of Finesse Control Systems: We received good advice to point us in the right direction and keep us on track. We haven’t yet come to anything we feel could have been different.

Questions & Answers

What makes the process so expensive?
Most corporate deals do require a lot of expert advice and as the EOT transaction tends to be collaborative, in the context of business sales then it’s probably not as expensive.
Innes: The Gallery didn’t feel the costs were high for the advice received.

If business is regulated by Financial Conduct Authority then can’t move to an EOT without their approval, any advice?
There are a few financial advisory firms going through the process at the moment, and although the FCA approval process adds a complexity, approval will be given if the transaction meets their criteria.

What can advisors be doing more to promote employee ownership?
Employee owned firms have a part to play. Grossart Associates changed our logo and our branding to make sure people knew we were owned by our employees.

Is there a contribution towards fees from Scottish Enterprise?
There is support for a feasibility study for companies looking to explore employee ownership.

What is the advantage of selling to an EOT rather than an established local charity or social enterprise?
There isn’t a definitive answer to this. In some cases a charity or social enterprise is the right solution; it depends on what the desired outcome is.

TANGRAM BECOMES EMPLOYEE-OWNED

Edinburgh-based contemporary furniture and interior design company Tangram Furnishers Limited has announced its transition to employee ownership.

The company, which operates from a showroom and office in Edinburgh city centre, specialises in the premium end of the market and works with clients, designers and architects to specify and supply contemporary furniture, lighting, blinds and rugs.  Its wide variety of projects includes work for both private individuals and commercial sites such as restaurants, offices and museums.

Tangram Furnishers, Jeffrey Street, Edinburgh, 28/10/2020: Founder Julian Darwell-Stone (seated front) with Sarah Ramsay (managing director, seated front) and the team in their Edinburgh Old Town showroom / office. The team are (rear, from left):  Joanne Golden (interior designer), Jenny Milne (interior designer), Tracy Innes (office manager), Melissa Mathieson (interior designer) and Wouter Bossenbroek (correct, (interior designer).

Tangram Furnishers, Jeffrey Street, Edinburgh, 28/10/2020:
Founder Julian Darwell-Stone (seated front) with Sarah Ramsay (managing director, seated front) and the team in their Edinburgh Old Town showroom / office. The team are (rear, from left): Joanne Golden (interior designer), Jenny Milne (interior designer), Tracy Innes (office manager), Melissa Mathieson (interior designer) and Wouter Bossenbroek (correct, (interior designer).

Tangram was founded in the early 1990s.  Julian Darwell-Stone joined the firm in 1998, becoming sole owner and managing director in 2003.  Julian wanted to plan for his eventual exit by considering the succession options in good time, therefore allowing for a smooth transition. He wanted a solution that would ensure the job security of the long-serving team and reward them for their hard work and loyalty.

Whilst other options were considered, employee ownership was suggested by Scottish Enterprise, who put Julian in touch with Co-operative Development Scotland (CDS).  After review it quickly became apparent that employee ownership was the route that ticked all the boxes.

We caught up with Julian to find out more.

When I started to think about the future of the business and my eventual retirement, I knew I didn’t want to simply shut up shop and end something I’ve worked extremely hard to build. I also knew I had a long-serving and incredibly loyal team and I wanted the business to continue in its current form for them.  I didn’t want to sell to a third party and see the business absorbed into another organisation with different values or a strategy that might not match ours.

We have developed a very successful business together and have created a strong team ethic, so it was important to me to give the company, the jobs and the brand the best chance of continued independent existence following my exit. Employee ownership is the perfect fit for us.”

Tangram Furnishers, Jeffrey Street, Edinburgh, 28/10/2020: Founder Julian Darwell-Stone with managing director Sarah Ramsay in their Edinburgh Old Town showroom / office.

Tangram Furnishers, Jeffrey Street, Edinburgh, 28/10/2020:
Founder Julian Darwell-Stone with managing director Sarah Ramsay in their Edinburgh Old Town showroom / office.

An Employee Ownership Trust has been formed and holds 100% of the shares on behalf of the employees.  Julian will remain in the business on a part time basis and Sarah Ramsay will become managing director.

“The staff are very excited about the transition.  It’s been a very positive experience and they’ve been really keen to take the reins with lots of plans for the future. Moving into employee ownership gives the opportunity for continued job security for all staff and enables them to have collective control of their future.

“Although we were initially affected by the COVID-19 pandemic, business has improved significantly since then.  We’ve actually enjoyed a very successful period over the past couple of months, so much so that we’ve recently appointed someone new to the team who confirmed he accepted the role partly due to our impending employee ownership status.  I am confident I am leaving the staff with a good business with further potential for growth.”

The transition to employee ownership was supported by Co-operative Development Scotland (CDS), with the process managed by Co-ownership Solutions LLP and legal services by Lindsays.

If you’d to know more about employee ownership and how it could help your business, please get in touch with us here using the ‘expert support’ option.

Employee Ownership Explained – The Role of the Legal Adviser in the EOT Transaction

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The latest webinar in the Employee Ownership Explained series took place on Wednesday 21 September. This month, the focus was on the role of the legal adviser in employee ownership transactions. Having worked on a number of these transactions himself, Bruce Farquhar of Anderson Strathern gave an insightful overview of the process from a legal adviser’s perspective.

The presentation began with a useful summary of the tax advantages that employee ownership trusts offer and an explanation of the structure of an employee ownership governance model. This was particularly useful as the majority of attendees did not have direct experience of implementing an employee ownership trust.

Bruce then went on to discuss the key aspects of an employee ownership transaction. He highlighted that there are some essential decisions that need to be made, including:

  • the share price;
  • the number of shares being sold;
  • how the transaction will be funded;
  • the timing of the payment of the purchase price; and
  • the choice of trustee.

Once these matters have been decided the key legal documents can be drafted. Typically, this will include a share purchase agreement, a trust deed and new articles of association for the company. Final drafts of the documents should be submitted to HMRC for tax clearance prior to completion. The whole process usually takes around 3 months.

Bruce emphasised that it is important that the founders of the business are involved from the outset and that good lines of communication are established between advisers. He also highlighted that in employee ownership transactions all interests are aligned. From a professional adviser perspective, this offers a different rhythm and balance to standard M&A transactions.

The presentation was followed by an interactive Q&A session, a summary of which is outlined below.

A poll carried out during the webinar highlighted that 52% of attendees felt that a lack of awareness was the main thing stopping business owners from considering an employee ownership transaction as an exit route. Following the session, however, the majority of advisors who attended said that they would be likely or very likely to discuss a sale to an employee ownership trust with a client considering succession.

A recording of the webinar can be found here:

A copy of Bruce Farquhar’s presentation is available here: The Role of the Legal Adviser in the EOT Transaction

Questions & Answers

Very few business owners present. Is this a concern?
This stream of webinars is aimed at professional advisers with the objective of supporting them in presenting the EOT option to their clients.  The lack of knowledge of employee ownership was one of the key barriers identified in the Nuttall Review. In response to this, CDS launched an initiative to support advisers in finding out more about this.  This initiative has been running for 6 years now with encouraging results.

Are there common messages to ensure that employees’ ownership is more than just a financial ownership?  For example, do they get involved in appointing Trustees to the Employee Ownership Trust?
Yes, it would be usual for employees to elect Trustees, and it would be usual to have employees as trustees. It is also the case that some companies opt to elect employees to serve as directors on the trading company board. The employee ownership structure is very flexible and what matters is that the model fits the business. It is imperative that any directors should receive full training prior to taking up these positions.

How many Employee Ownership Transactions fail to complete once they have formally started?  I would imagine with the collaborative nature of the transaction it would be a lot fewer than traditional sales routes?
Correct. Very few of these transactions do not complete. There can be a long incubation period while the owner considers their options, and the CDS Feasibility Report helps with that decision-making process. Sometimes business gets in the way and can delay the transaction. It is very rare that these deals do not reach a successful conclusion.

Is there any support for companies in terms of financial help with the cost of advisers? It sounds as if there is a lot of advice required and could be costly.
CDS can offer an Ownership Succession Review which will explore all the exit options and should employee ownership be judged viable, CDS can provide a free Feasibility Report to companies looking to find out more.  This feasibility report also gives some indication of what the costs of the transaction would be.

How do you see the taking of security over deferred consideration working in the context of maintaining compliance with the controlling interest requirement?
It is clear that the Trust can’t give a charge over the shares that it owns in the trading company for the deferred consideration element. In the transactions which we have worked on, no securities have been taken over the company’s assets by the founder, perhaps because of the founder’s confidence and their continuing role in the business.

It was mentioned that due diligence is usually “light touch”.  As a Trustee would you not want a more robust due diligence process undertaken in the event you might be taking on an undiagnosed issue?
The Trustees are effectively acquiring a controlling interest and paying a considerable sum of money and they have to be satisfied the valuation is correct and there are no potential material issues that will impact that. In reality, the stakeholders in the transaction are inextricably linked with the business and know what the issues are.

25% is the threshold at which an employee can be called employee-owned.  Do you see examples where the employee stake is higher than this and is it usual for more shares to move to the EOT?
It is now usual for more than 50% of shares to be placed in the Trust to enable the company and the sellers to benefit from the tax incentives. It can get complicated when there is a mix of direct shareholding by employees and indirect shareholding by Trust.

Have we seen any professional firms, in particular accountancy practices move to employee ownership?
There are a few examples of professional firms who have adopted employee-owned models.  We are not aware of any in Scotland and that may well be due to the regulatory requirements of the relevant professional governing bodies.

Do the owners have to work until the full amount has been paid to them?
No, the owners can choose how long and in what capacity they remain with the business and this position is usually protected while there is money outstanding to them.

The CDS team is happy to provide information and signposting to companies and their advisers who may wish to find out more.

NEW CAMPAIGN TO SHOWCASE THE ROLE INCLUSIVE BUSINESS MODELS CAN PLAY IN THE RECOVERY OF THE ECONOMY LAUNCHED

CDS Inclusive Model Businesses

We’ve launched a new campaign to showcase the role inclusive business models can play in supporting the Scottish Government with its aim to create a fairer, stronger and more democratic economy, particularly following the COVID-19 pandemic.

To launch the campaign we commissioned a new survey which revealed that half of Scots (48%) agree the pandemic has provided an opportunity to make Scotland’s economy stronger and fairer, with under 35 year olds more even more likely to agree (59%).  64% also said that the pandemic has already made their business more socially responsible.

When asked what should be the top priority for businesses going forward, three out of four people said protecting jobs (74%), followed by staff wellbeing (67%) and creating innovative solutions to problems (53%).

We caught up with Head of Co-operative Development Scotland, Clare Alexander, to find out more.

While discussions on the social aspects of the economy have become more vocal in recent years, COVID-19 has undoubtedly fuelled its relevance and urgency. The world has been shaken, many of our norms have been questioned and as our survey shows, there is a desire not to return to life as before. Business leaders have prioritised wellbeing, communities have responded to help and support each other and new and innovative ways of being economically viable have come to the fore. There has also been a focus on a collective, rather than individual, call to action. Employee ownership, community ownership and consortium co-operatives are effective examples of plural ownership that can help us drive that necessary change across our business communities and support is available to make it happen.”

This approach to business is at the heart of the Scottish Government’s Programme for Government, which recognises the critical benefits of Community Wealth Building – a people-centred approach to local economic development which redirects wealth back into the local economy and places control and benefits into the hands of local people. The models promoted by CDS are effective examples of plural ownership, one of the five pillars of Community Wealth Building deemed integral to effect the necessary change for local communities and national wellbeing.

“An employee-owned business is one in which the employees hold the majority of the shares, either directly or through an employee ownership trust.  Selling to employees allows owners to manage their exit and achieve fair value while safeguarding the long-term future of the company. Employee ownership gives employees a meaningful stake in their organisation together with a genuine say in how it is run.

“Evidence shows employee-owned businesses consistently outperform in terms of improved business resilience during times of economic crisis. They tend to be more productive with higher levels of staff engagement and wellbeing, particularly relevant during a time in which people are spending more time working from home.”

The employee owners at Highland Home Carers, the Highland’s leading home care provider and Scotland’s largest employee-owned business, used its employee-owned status to support the staff financially through the crisis via pay increases, a profit share pay-out, an enhanced sick pay programme and a share buy-back scheme.  It also introduced an Employee Assistance Programme in which staff can access a range of support services including the use of physical and mental health professionals.

Our survey also revealed two out of three (66%) Scots are pessimistic about the future of the economy following the COVID-19 pandemic. In addition over one in three said job security was a concern, followed by over one in four saying closures of local amenities such as shops and pubs was a worry.

“Setting up a community co-operative can be an effective way for people to safeguard public services, for instance coming together to take over a local shop or pub and prevent it from closing, something which could be relevant in the current climate. Community businesses can have a significant positive impact on areas whether they provide a local service, deliver economic growth, or contribute towards the health and wellbeing of the local community – often all three. They are important to the economy because they can retain jobs, bring economic opportunity and retain vital services and amenities.

“The economic and social potential of community business is significant, and could be more widely adopted in Scotland. Combined with the greater community spirit that has been cultivated during COVID-19, now is the perfect time to champion community business models and the wider economic, social and environmental benefits they can deliver.”

Community co-operative The Crunchy Carrot, a community-run shop in Dunbar, East Lothian, went from supplying 60 vegetable boxes per week before the pandemic to 350 during the early stages of lockdown, responding to the community in its time of need. Strong and well-established local supply chains with mills and farms, something local chain shops didn’t have, meant all orders were fulfilled and deliveries to vulnerable customers were guaranteed.  Whilst demand has eased as people return to normal shopping patterns, the Crunchy Carrot has still significantly grown its customer base on the back of the reliable and reassuring service it was able to provide during difficult times.

“With 33% of Scots stating that working collaboratively with other businesses should be a priority, we’re advising business owners to consider the advantages of formally joining together via the consortium co-operative model.  These are established when businesses come together for a shared purpose; to buy or sell in scale, market more effectively, share facilities or jointly bid for contracts. 

“We know collaboration has been a vital part of the response to the pandemic, so formalising a consortium co-operative could be an effective, low risk way for businesses to improve market presence and achieve new goals whilst retaining their independence.”

The Glasgow Canal Co-operative, which aims to ‘unlock the potential of the canal to create a vibrant neighbourhood for people to live, work and visit’, is a consortium co-operative made up of 25 member organisations. Whilst it has been a difficult time for many of its members, they have pooled resources, shared risks and have worked together during the pandemic to develop projects for the wider consortium which also support the members’ own activities. Having a platform for members to share experiences and to help each other has been very important and has enabled them to respond to the effects of the pandemic more strategically.

“Whilst businesses with plural ownership have experienced many of the same challenges around job retention, cash flow and uncertainty as others during the pandemic, they are often more resilient, putting them in a strong position to either weather the economic storm or to recover well afterwards.  During the initial response to the pandemic many of these businesses were able to unite behind a common goal, helping their ability to adapt and innovate during the crisis.

We are enormously passionate about these business models and their contribution to both the communities and sectors in which they operate as well as the wider Scottish economy.  The economy needs to have the best possible chance of recovery, with businesses that can be resilient, adapt and offer a fairer more inclusive economy.  We know there is a significant role for inclusive business models to play in helping to build back better and would urge any business owners reviewing their options to consider adoption of these models.”

Jamie Hepburn MSP, Minister for Business, Fair Work and Skills, is supporting our campaign. He added: “COVID-19 has had a massive impact on the global economy and Scotland, like all countries, has been deeply affected. This forces us not just to respond in the immediate term, but also to make choices about the sort of economy we want to have and to focus our efforts on building back fairer and stronger.

We are committed to ensuring everyone can access work that is fair and offers flexibility and opportunity for all, and recognise the benefits of community wealth building – economic development that ensures local people and businesses have a genuine stake in producing, owning and enjoying the wealth they create.

“As this survey shows, the pandemic has increased the importance businesses place on social responsibility. To help protect jobs and improve staff wellbeing, it is important that we build on that and keep these initiatives going.”

SHORE BECOMES EMPLOYEE-OWNED

Scotland’s largest product design company Shore has become employee-owned, with over 30 members of staff given a stake in the business.

The company, which operates from Leith in Edinburgh, designs, engineers and develops class-leading drug delivery products, diagnostic devices and medical training products. It has a huge global customer base with over 80% of its customers in the USA, EU, Switzerland and Japan.  Its clients include some of the world’s biggest medical and pharmaceutical companies such as Johnson & Johnson, Amgen, Smith & Nephew, Eli Lilly and Ypsomed.

Shore was founded in 2003 by current owner and managing director Nick Foley.  Nick wanted to plan for his eventual exit by considering succession options early, therefore allowing for a smooth transition. He wanted a solution that would ensure the business remained independent and retained the company’s strong values and culture.

Whilst all options were considered, employee ownership was suggested by Scottish Enterprise, who put Nick in touch directly with Co-operative Development Scotland (CDS), and it quickly became the favoured route.

We spoke to Nick to find out more.

“In due course I will want to exit the business, however having founded and developed it into a market leading company over the past 17 years, I didn’t want to sell to a third party and see the team’s hard work absorbed into another organisation with different values or a long-term strategy that might not match ours.

We have developed a strong team ethic and a culture based on collaboration, support and respect. We’re not a group of individuals sharing an office – we are a team. Our people are hand-picked for the skills, creativity, experience and spirit they bring to our company, so it was important to me to give the company, the jobs and the brand the best chance of continued independent existence following my exit. The business should work for the employees, rather than the other way around, so employee ownership was the perfect fit for us.”

 The move to employee ownership comes despite economic turmoil as a result of the COVID-19 pandemic, with Nick viewing the transition as an effective way to bolster staff morale and maintain engagement and productivity as the team work from home.

“The staff are very excited about the transition, so it’s been a very positive experience and they’ve been really engaged in the process. Moving into employee ownership gives the opportunity for continued job security for all staff and enables them to have collective control of their future.

Thankfully we’ve not been negatively affected by the impact of the virus; we’re very busy with both new and ongoing projects given our work in the medical and pharmaceutical industries and we’re very fortunate that the team is able to work from home.

“The whole process has been really smooth; essentially everyone is on the same side of the negotiating table which has made it much more straightforward than a typical trade sale.

“I firmly believe that the transfer to employee ownership is key for building a successful and long term sustainable business. It helps reinforce our existing internal culture and values whilst providing a fantastic service for our clients.”

An Employee Ownership Trust has been formed and will hold a majority of the shares on behalf of the employees.  Nick will remain a significant shareholder in the business. The transition was supported by Co-operative Development Scotland (CDS), with the process managed by Ownership Associates, legal services by Anderson Strathern, and accountancy services by Scholes.

If you’d to know more about employee ownership and how it could help your business, please get in touch with us here using the ‘expert support’ option.

The Shore team pictured at a company event in pre-Covid times.

The Shore team pictured at a company event in pre-Covid times.

Employee Ownership Explained – The role of the accountant in the EOT transaction

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The increasing interest in employee ownership was reinforced on Wednesday 16 September when our webinar attracted over 60 attendees. Dougie Rae, Partner, EQ Accountants has worked on a number of employee ownership transactions and shared his experience in what was agreed to be a tremendously valuable presentation, followed by a lively Q &A session.

The audience was largely advisers, and as the title would suggest, this webinar attracted mostly accountants.  More than half described their knowledge of Employee Ownership Trusts (EOTs) as basic or non-existent. Half had no direct experience of working on an EOT transaction. Encouragingly, more than 60% of advisers who attended said they were likely or very likely to discuss EOTs with their customers following their attendance at the seminar.

Dougie Rae talked through the requirements of the legislation.

To qualify for the Capital Gains Tax relief:

  • The company has to be a trading company, or the principal company of a trading group (Trading Requirement)
  • The EOT must hold the controlling interest in the company (Controlling Interest Requirement)
  • Any benefit must be paid on the same terms to all eligible employees (All Employee Benefit Requirement)
  • The number of continuing shareholders who are directors or employees (and people connected with them) must not exceed 40% of the total number of employees of the company or group (Limited Participation Requirement).

Dougie advised that clearance is sought from HMRC to ensure that the 0% Capital Gains Tax rate applies to the transaction.

The process for valuation is exactly the same as it would be for an external buyer; the difference is that, as a non-adversarial sale, there is no tortuous due diligence process seeking reasons to reduce the price.

The presentation was followed by a comprehensive Q&A session, demonstrating a genuine interest in how the EOT, and employee-owned companies, work in practice.  The questions and answers are detailed below.

Attendees were asked what barriers they believed to be in the way of wider adoption of EOTs. 49% thought lack of awareness is the major obstacle, with 20% believing it’s a lack of leadership capability within the business with15% ascribing the key hurdle is availability of funding.

Feedback from the session has been overwhelmingly positive with 90% of respondents to the post-session evaluation assessing the webinar as Excellent or Very Good.

A recording of the webinar can be found here: 

A copy of Dougie Rae’s presentation is available here: Dougie Rae, EQ Accountants

Questions & Answers

Q: Are the employees required to put funds into the Employee Ownership Trust (EOT)?
A: Not usually.  The EOT can sit alongside a share scheme where employees would have the option to invest, but it’s not usual for employees to fund the transaction to any extent.

Q: Are you seeing the EOT being implemented across any specific sector or industry?
A: No. There is a very diverse range of businesses taking the EOT route, covering almost all sectors, company sizes and locations.

Q: From your recent experience do you find business owners have undertaken sufficient personal financial planning when considering their exit and in light of a low yield environment do they know how best to manage their net proceeds as the transaction completes?
A: Difficult to give an accurate answer. Probably fair to say that most individuals do not invest sufficient time in financial planning and maximising monies raised from a disposal.

Q: On valuation, have you seen the HMRC challenge or request any further detail on methodology/multiples used?
A: As far as panelists are aware, to date there have been no challenges on valuations submitted to HMRC.

Q: On an exit from an EOT, are the net proceeds distributed to employees treated as employment income?
A: Expert advice must be sought.  However, in the three incidences of an exit from an EOT that we are aware of, two resulted in distributions to employees. In both cases, once the Trust had paid any Capital Gains Tax due, this income to employees was treated as coming from employment and therefore subject to Income Tax.  National Insurance must also be paid by both employees and the company at prevailing rates.

Q: Who do you normally see driving the transaction?  Presumably the vendors are pushing the transaction as a means of obtaining a sale?
A: Yes, it would normally be the majority shareholders who opt to do this, and then shape the transaction going forward. The driver isn’t always the sale; often it’s because of loyalty to staff, desire for company to remain in situ, or because seller has plans to remain in business and phase their exit, rather than be subject to targets/tie-ins from new business owner.

Q: Shares/bonus/dividends should be based on factors such as time served or salary. Can you provide some further examples and how this works in practice?
A: The legislation is quite specific in how the EOT bonus can be distributed and companies take different approaches to this.  The implementation of an EOT does not impact on the company’s general remuneration policy; companies can pay bonuses and award shares as they see fit.  Dividends can be paid to shareholders as normal.

Q: How do you see the Scottish Government supporting this and how? Through Scottish Investment Bank or others?
A: All parties within the Scottish Parliament are supportive of employee ownership.  CDS has been a key driver of employee ownership in Scotland, and Scotland is unusual in having a funded, dedicated resource.

Q: Have you seen any transactions where bank funding has been available to support the transaction?  Would this be raised by the company and then gifted to the trust or can the Trust raise debt itself?
A: There is an increasing appetite for banks and specialist lenders to part fund EOT transactions.  It would be usual for the company to take on the loan and gift the cash to the Trust to repay the vendor.  So far, in the experience of the panellists, there has not been an instance where the Trust has assumed the loan.

Q: What if seller’s expectations are too high?
A: It is usual for seller’s ideas around valuation to be quite realistic. However, as with any company sale, a mismatch of expectations might lead to an open and frank conversation about what is affordable.

Q: Is there Corporation Tax deductions for the tax-free bonus?
A: Yes, this is treated as payroll and therefore the sum is deductible for Corporation Tax purposes.

Q: What sort of timescales from start to finish in a typical transaction?
A: 2-3 months would be normal, although some companies take longer if there are multiple shareholders, or business demands that must be addressed first.

Q: Could a hybrid model be good for a family business e.g. 51% EOT and 49% in family ownership
A: The EOT structure is quite flexible and it would be quite possible to combine an employee trust with a family trust or direct shareholdings.

Q: Can an EOT still implement a tax advantaged share scheme such as growth shares or an EMI scheme?
A: Yes, quite acceptable.

Q: If dividends are declared by the trading company, then presumably the EOT then acquires a share of the total dividend pot as well as payments to any original shareholders who still hold a small percentage of share capital?
A: It is usual for the EOT to waive its right to any dividend (as it has no requirement for cash) and this money returns to the company to fund the bonus.

Q: What level of due diligence is typically performed on behalf of the EOT to protect their interest?
A: As the former owner is usually remaining with the business in some form until all money is repaid then any due diligence is normally quite ‘light touch”.

Q: Is there full transparency to all staff of salaries in an EOT and does this cause any difficulties?
A: Although there does tend to be increased transparency around company finances this does not usually extend to remuneration.  Salaries are usually still confidential within most employee-owned businesses.

Q: What is the current level of CDS support to interested parties?
A: CDS offers a fully funded ownership succession review and employee ownership feasibility study to companies interested in exploring whether employee ownership is an appropriate model for them. 

The CDS team is also happy to provide information and signposting to companies and their advisers who may wish to find out more.

Community Owned Businesses- The Journey

There is growing recognition of the value of community businesses, preserving community assets and generating economic value for their communities. COVID-19 has clearly demonstrated the importance of supporting communities to be innovative and take the step towards generating wealth locally, avoiding the return to normal economics.

Community imageIn partnership with the Plunkett Foundation, and Community Shares Scotland, Co-operative Development Scotland ran their second Community Business: Making it Easy event this month providing key insight to the realities of establishing a community business and information about the support available

Brian Connolly from the Co-operative Development Scotland was there on the day and shares his key learnings from the event.

Eleanor Porter chair of  Dunshalt Community Shop was the first speaker at the event and she shared the shops story with the audience. She described their journey as a puzzle, looking to recognise the specific pieces which came together. Initially this consisted of a community recognition of loss through the closure of the local shop, risking both a source of groceries, but more importantly a social hub. Having taken steps to prevent a change of property function, this led to the start of external conversations to take the asset into community hands. Through the creation of a business plan and extensive community engagement, a Community Benefit Society was formed. Calling on funding from organisations like Leader, National Lottery and the Scottish Land Fund, a Community Share Issue created a platform to ensure residents were invested in the use of this space and raised over £31k in two months. Despite opening just before COVID-19, the shop has already become an invaluable asset, quickly providing a delivery service for local residents during lock down.

Dave Hollings, chair of the Dog Inn spoke about the experience of running a community owned pub. He highlighted the role the asset plays in providing a service to the community. Alongside the pub, the facility offers community space both internally and through its gardens. It has become a place of music and celebrations, bringing together residents and helping cement its importance in forming social bonds. Adopting a similar approach, the Dog Inn relied on a Community Share Issue allowing it to refurbish the premises on initial purchase and after only two years, create a return on investment. Importantly, the pub is a key employer locally, with 16 of their 25 staff being young people in the area.

Getting Community Buy-in
Following the case studies, there was a chance to hear from the support organisations in terms of how to undertake this journey and what help is available along the way. The first session explored the role of Community Engagement, recognising the need to invest both time and money in securing buy-in for the community business throughout. The act of pursuing community engagement serves several purposes including assessing local need, allowing residents to have their say, reducing opposition and bringing in volunteers / investors. To effectively undertake engagement, there is a need to firstly identify what we are defining as a community; are we referring to a geography or an interest group? There is often a need to specifically target a demographic group and use different language to reach them. Through the journey itself, there are four key elements:

  • Refining your message: What do you want to say and how do you ensure it is both clear and consistent.
  • Consulting: Using a set of pre-agreed questions, there is an opportunity to weave a story about why you are on this journey and gather contacts from interested parties
  • Engaging resource: The need to establish working groups who can take forward actions and utilise volunteer time as it becomes available.
  • Using the right methods: Whether questionnaires, film making, public meetings or informal discussions, selection of the right communication can be vital in securing the support needed.

Choosing the Right Model
The next session explored the role of Governance with the need to ensure the identification of the right model. The selection of the correct organisational structure for your community business impacts future decisions and development.  There are an extensive range of forms from a co-operative society, a private company (by shares or guarantee), or a community interest company. One of the most common forms utilised is the community benefit society which allows the issue of community shares and ensures a democratic approach to change (with one member, one vote). Equally important in selecting a legal form is exploring the governance with a need for clear constitution and a structure which puts members at the heart.

Raising the Finance
Following this was a discussion on the role of Community Shares as a way to raise money for a community enterprise. This is a method of crowd funding that achieves community ownership This is typically part of a larger funding package bringing in partners such as the Scottish Land Trust etc. This approach has been used in the past to finance projects from shops and pubs to harbour developments and renewable energy. A share issue is a great way to grow membership and ensure community involvement as the project develops. This small video will act as a useful explanation for how you can explore this approach: https://youtu.be/q6w-311GBIM

At the heart of any successful community business is a clear development journey. This enables the project to go from idea to a thriving organisation. Every community organisation is different, yet there is always value in learning from the experiences of others. The Plunkett Foundation have produced an invaluable guide to the steps you can expect to take, including some of the challenges you can expect.

Co-operative Development Scotland, Community Shares Scotland and the Plunkett Foundation work in partnership to raise awareness of community business and the available support in Scotland. If you are ready to move forward, please get in touch and we would be delighted to help you.

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