Secret Value: The real secret of added value

Banks seeking deals with sustainable returns should put employee-owned companies at the top of their list, argues SARAH DEAS. They produce more and live longer.

There’s every good reason for banks to support employee-owned businesses. They’re typically well established and profitable, with a good credit history, cashflow and debt servicing record.

Research suggests that employee-owned companies are generally 5% more productive and survive 20% longer than conventional companies. They are more able to withstand changing economic climates, providing banking custom for the long term.

Selling a business to its employees allows it to remain in the local community, meaning the banking stays local, too. In contrast, trade sales or management buyouts often result in rationalisation or relocation, taking the banking business elsewhere.

Decisions are taken for the long term, rather than short-run gain. Performance improves. Between 1992 and 2008, for example, the Employee Ownership Index outperformed the FTSE All-Share by 200%.

London’s Cass Business School recently reported that employee-owned businesses create jobs more quickly than conventional businesses; are often more profitable and add more value to output and human capital.

These benefits are fuelling increasing interest in employee ownership across the UK and internationally. The UK's three main political parties are leading advocates and widely promoted cooperative and employee owned business models in their election manifestos.

In the private sector, a new generation of employee-owned businesses is joining established names such as Britain's John Lewis Partnership, the USA's WL Gore & Associates and Canada's Golder Associates.

In Scotland, co-operative and employee-owned businesses make a significant contribution to the economy, employing 28,600 people and producing just over £4bn in turnover. Some of our best known employee-owned businesses include seafood specialist Loch Fyne Oysters, fund manager Martin Currie and paper and board manufacturer Tullis Russell.

Co-operative Development Scotland, a subsidiary of Scottish Enterprise, was set up to increase the economic contribution of these businesses and has a growing pipeline of enquiries. We recently helped advise the employee buyouts of Clansman Dynamics, the East Kilbride-based robotic handling specialist, and West Highland Free Press, the campaigning Isle of Skye newspaper founded in 1972.

Bank debt is a crucial component of these deals. But lack of critical mass has inhibited awareness and understanding of employee buyouts. Employee Benefit Trusts (EBTs) – the vehicles set up to buy the business on behalf of the employees – are poorly understood. Contrary to popular belief, the employees don't have to dip into their own pockets, because the EBT generally borrows enough money, secured by the company, to buy all the shares. The trust then repays the debt from the company's profits over a period of time.

Employee buyouts are a win-win for all the stakeholders. The exiting business owner secures the future of the company and leaves a legacy. The employees reap the fruits of their labour by becoming owners. And the lenders secure a high quality business offering sustained, longterm growth. In an age of economic uncertainty and austerity, there has never been a better time to support employee ownership.

SARAH DEAS is Chief Executive, Co-operative Development Scotland. For more information: www.cdscotland.co.uk

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