Analysis: Why employee ownership is gaining so much traction among firms in Scotland

“It would have perhaps been easier to sell the company to another business,” says Martin Super, director of Hamilton-based Dazzle & Inkspot, which has instead become the 100th firm in Scotland to adopt an employee ownership trust.

Mr Super says the retailer – which started out as a printing company in 1969 but now specialises in the likes of fancy dress, toys, and games – has taken such a course as it felt “the best thing to do was to reward the loyal staff who have contributed greatly to the success of the business over the years”.

The business follows in the footsteps of several north of the Border who have handed over control to their workers, rather than, say, faceless investors seeking to squeeze their new asset for every penny they can get.

Recent additions to the list of Scottish employee-owned firms include Allan Murray Architects, whose projects include the forthcoming St James Quarter development, and Stirling-based IT firm 2e-volve – which said it ignored multiple buy-out approaches to hand the reins over to its workforce.

Directors at Dazzle & Inkspot - which says employee ownership was 'without doubt the best way to move the business forward'. Picture: contributed.

But perhaps the most famous employee-owned firm of all is high-street stalwart the John Lewis Partnership, which claims to be the largest such business in the UK – and, indicating the scale of the wider sector, the Employee Ownership Association (EOA) states that companies that are employee-owned, or who have “large and significant” employee ownership stakes, now contribute £30 billion to the UK economy.

The EOA says this part of the market is growing because co-owned companies tend to be “more successful, competitive, profitable and sustainable”.

Also forecasting expansion is Douglas Roberts, a director at law firm Lindsays’ corporate and commercial team – and employee ownership (EO) specialist.

He is expecting to see new deals grow by about a quarter this year – amid what he sees as a wealth of potential benefits such as increased staff retention and lower absenteeism, plus higher productivity and more innovative employees. They “work harder and provide better service – because they are more engaged and benefit from the profits of the company,” he adds.

The main attraction for sellers, he also explains, is that they pay no capital gains tax, saving them thousands – and “possibly millions” – of pounds in taxes. “The process can be done far quicker and with reduced transaction costs, including legal and accountancy costs, because there is not the need for due diligence and extensive legal documents. There can also be a more orderly handover from the current owners to the new owners with the current owners staying on for a number of years,” he adds.

Also focused on EO is social impact fund Valloop, which “unlocks wealth by empowering employees to buy the companies they work for”. It says its social purpose buy-out model is to support small and medium-sized enterprises in adopting EO, while delivering “considerable” returns for investors – and says it has achieved 16.1 per cent compound annual growth for the last five years.

Valloop also says Scotland is leading the way in Britain as a “champion” of EO – home to more than a third of its employee-owned companies – and it cites data from the EOA, finding that since 2017 Scotland has been the second-largest growth area in the country for EO at 17.3 per cent, just behind London at 20.7 per cent.

Fostering EO north of the Border has been earmarked as a priority by the Scottish government, which set out a target of increase the number of this type of business fivefold by 2030 to 500 – while Scottish Enterprise has noted that as per a broad definition of EO, 7,500 employee-owners currently generate a combined turnover of around £950 million.

Mr Roberts calls for funding to help reach such a milestone, a target he says would in turn be massively beneficial to the Scottish economy because it would keep jobs in Scotland – and avoid losing key decision-making roles.

Reaping the benefits

The EO expert also cites examples of companies that have transitioned to EO and reaped the rewards – such as Palimpsest Book Production, which he says was likely to have shut down its operations in Polmont and moved to India or China had it been sold to a foreign buyer, and Gill Financial, which in December became the first wealth manager north of the Border to become employee owned. Regarding the latter, an improvement in staff performance since has been observed, Mr Roberts reports.

That said, he stresses that EO is not right for all companies. “It can really depend upon the current workforce and the sector. A potential downside for the sellers is it usually takes a number of years for them to receive the full price for selling their shares.

"Another key point is that there still needs to be a suitable new management team to lead and drive the business when the current owners leave. However, EO does allow for the new managers to be trained by the sellers over a number of years, which makes for a smoother handover.”

He last year cited a survey of such firms by Ownership Associates, finding that about three-quarters believed their EO model would ensure they saw the Covid-19 crisis out, and he now says that staff owners rally round and work harder – knowing that they will all benefit rather than just a few shareholders.

Ownership Associates, a specialist consultancy that guides firms into employee ownership, helped Dazzle & Inkspot implement an employee ownership trust, an option that was introduced in the 2014 Finance Act.

Mr Super sings the praises of EO, saying it gives every staff member the chance to flourish within the business. “It has certainly safeguarded the future of our employees, we all work hard for each other and so this decision was without doubt the best way to move the business forward...[EO] is just the next step on our journey.”

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