Strategic commercial interventions: exit strategy principles

4. Options for divestment

The National Audit Office’s Good Practice Guidance Managing the Commercial Lifecycle^[5] states that planning and preparation for a range of future options should always be in evidence from the outset, and built into cost estimation.

Consideration should be given to a variety of potential exit options for each asset, whilst also assessing any potential obstacles for each. Potential exit mechanisms to be explored could include but are not limited to:

• Continued SG ownership
  • This would be the do-nothing or status-quo option in which divestment is not pursued and the asset remains under public ownership of SG. This would be the outcome following evaluation of the exit objectives and criteria above and the consensus has been reached that it is not the right time to pursue divestment. This option may be pursed to stabilise the business before reconsidering options at a later point.
• Sale
  • If it is agreed that certain conditions have been met (business profitability, stable management, policy objectives met etc) then it may be deemed to be an appropriate time to put the asset up for private sale, seeking investors aligned with public interests to ensure continuity of SG’s broader strategic policy goals. In most scenarios, a return to the private sector is considered the optimal outcome.
  • Further detail on the process involved in a sale process, including due diligence considerations, is provided in Annex A.
• Management Buyout (MBO)
  • In certain circumstances an MBO, where existing management or employees purchase the business, may be a credible option to consider as a viable exit strategy for SG, especially in instances where the asset is deemed to have a stable, strong and motivated management team in place.
  • In the private sector such transactions are considered in instances where the majority shareholder (such as SG) is looking for an exit and this is coupled with a management team who believe they can use their expertise to grow the business, improve its operations, and generate a return on their investment.
  • The advantages of this type of transaction are:
    • that lenders are more likely to fund an MBO because it ensures the continuity of the business’ operations and executive management team;
    • the transition often sits well with customers and clients of the business, as they can expect the quality of service to continue; and
    • the drive and commitment of the management team gives Ministers confidence in the future of the business.
• Converting to staff ownership
  • Employee ownership trusts (EOTs) are a further option to consider. In this structure, shareholders sell their shares into a trust which is held on behalf of the employees of a company, a well-known example being John Lewis.
  • There are a number of perceived benefits to this type of transaction including:
    • Employees have a greater involvement in the business so are likely to be more motivated leading to higher staff retention;
    • Co-owned companies can be more successful, profitable and sustainable;
    • Sales to EOTs tend to be quicker and smoother than a sale to a third-party purchaser.
  • It is worth noting that under this structure, shareholders such as SG wouldn’t receive all of the funds from the sale immediately, as this is paid over time from the profits of the business, therefore they take on more risk.
  • Please refer to SG’s independent report ‘’Developing Scotland’s Economy: Increasing the Role of Inclusive and Democratic Business Models’’ which provides recommendations on increasing social enterprises, employee owned businesses and co-operatives in Scotland as part of NSET and Scotland’s wellbeing economy.
  • Similarly, when considering divestment strategy, the independent consultation analysis report on the Building Community Wealth in Scotland: Legislation Consultation analysis sets out inclusive ownership models to enable the wealth generated in a community to stay in that locality and provide for the public good.
  • For reference on practical applications for preserving employment levels in distressed companies, please refer to the research article ‘’ Financing Worker Takeovers in Italy: Unveiling the Functioning of the Marcora Act Framework’’^[6].
  • Please note that rights which would give workers support to organise a co-operative buyout or rescue when a business is up for sale or under threat is considered a reserved matter for UK Government at this time.
• Reduction of SG shares
  • Linked to the above, another option which the sponsor team may consider is a phased approach to reducing SG’s shareholding and therefore exposure and risk over time. This has the added benefit of also increasing the business’ ability to raise funds externally as SG’s shareholding is reduced.
• Joint Venture
  • SG can also consider the involvement of a private sector partner and the set-up of a Special Purpose Vehicle or Joint Venture Vehicle which will enable a partial exit by diluting Ministers’ ownership in an asset.
  • The rationale for considering this type of structure includes:
    • SG seeking to remain a shareholder for national security / strategic reasons;
    • § inviting private capital and finance, thereby, sharing risks with investors and having the benefit of private financial resources to increase commercial and managerial performance through market discipline, improving the governance and transparency of the company;
    • lessening SG’s expenditure; and
    • § increasing autonomy for the company in its commercial matters due to SG governance processes being less onerous in terms of spending limits, AO approval, Subsidy Control and Procurement regulation.
• Wind down / Liquidation
  • Whilst not desirable, there will be instances where a wind down or liquidation of a business is required, for example due to a combination of a lack of work, unsustainable losses, or a lack of interest from the private sector to purchase the asset.
  • In such circumstances consideration should be given to SG’s ability to continue to provide financial support to the business and what a private sector operator would do in the same position.
  • A Subsidy Control assessment should be undertaken to evaluate the implications of providing further financial assistance and whether this could be deemed an unfair advantage and therefore a subsidy.
  • If further SG support is no longer possible then liquidation may be required. This refers to the process of dissolving the company’s identity and selling any assets to settle liabilities. In this wind down scenario, whilst the company itself would not be put up for sale, any tangible assets such as plant, machinery, land or property may be sold to recoup some funds.
  • There are two forms of liquidation: Compulsory, when a company is unable to pay its debts and a winding up order is made by the Courts, and Voluntary, instigated by Shareholders or Directors.
  • In a wind down scenario external advice will be required to guide the process and SG Finance colleagues should be engaged to advise on SPFM reporting requirements.

An Exit Assessment Checklist has been developed to guide the development of an Exit Strategy utilising the principles as set in the guidance above. This can be accessed in Annex B.