Ireland's Silent Sell Off and the Employee Ownership Solution

0:00To understand the economy, you have to understand human nature.

0:06David McWilliams: This podcast is powered by Acast. Before we begin, a quick note that this bonus episode is brought to you in a paid partnership with Wolfgang Digital. Now, John, one of the strangest things about modern capitalism is that we all understand how wealth is created, but we rarely ask who gets to keep it. Think about it. A company starts with 10 people, let's say, in a room. 20 years later, it employs hundreds. It generates millions and creates enormous value. But when that company is sold, who actually benefits? The founders? The investors? Or the workers who spent decades building it? This is an old Irish dilemma, because for centuries, Ireland was a country where assets were owned by people who lived somewhere else.

0:53David McWilliams: The profits left, the ownership left, and the decisions were made elsewhere. Today, we face a modern version of the same issue. Every week, six Irish businesses are sold into foreign ownership. Now, that's not necessarily a bad thing, John, right? It's not necessarily a bad thing. A lot, though. It is a lot. Because foreign investment has been hugely important for Ireland. But it does raise a fascinating question. Can capitalism work without billionaires? and can workers share more directly in the ownership of the companies that they build? Today, we're exploring one idea that tries to answer these two questions.

1:34David McWilliams: And now on the line to answer that question, we've got Alan Coleman of Wolfgang Digital. Alan Coleman, I believe it's your birthday, number one. It is. And number two, great to see you again. How are you? I'm great, David. Delighted to be here talking to you again. Thanks very much for having me back. On this special auspicious day, Alan, let's get straight into this, right? We have spoken before about a corporate and ownership, arguably an equity dilemma in Ireland, a solution that you have to a problem that is increasing. every day you open the papers here. There are big companies being sold off to foreign investors.

2:13David McWilliams: There have been small companies. When you hear stockbrokers talking about a boom in M &A, what this actually means is people selling out, which is not a bad thing. They can do whatever they want with their own money. But the question is, who do they sell out to? You believe we have a problem in Ireland. Alan, let's look at the problem first. Outline the problem. Then we look at the solution. Let's do it. Yeah. So there's a silent sell-off of Irish businesses taking place. The numbers are staggering. I'll share them with you. But they're quite frightening. And the fear is that the roots of economic catastrophe are silently spreading beneath our feet.

2:49So it's really important people are aware of these figures. And it's really important that the government is taking action. So in a normal economy, the biggest spender in the state is the state itself. Okay? Big spender is the state. And come budget time, the media coverage of the announcement of the government budget is wall to wall. Everybody has an opinion on this and they should because when the biggest spender in the state decides how it's going to spend, it impacts all of us. So last year, the capital budget was 14 billion. So that's the investments in the assets of Ireland, infrastructure, roads, electricity grid, 14 billion.

3:24At the same time, last year, overseas acquirers spent 14 billion buying Irish businesses. So that bears repeating that overseas acquirers spent the same amount of money buying Irish businesses as the Irish government invested in the assets of the country as a whole, beyond the businesses, everything. When we zoom out, the picture actually gets worse. So the data goes back as far as 2018. Since 2018, the overseas acquirers have spent over 100 billion, 103 billion buying Irish businesses, while the Irish government's capital budget over that time has been 81 billion. So the government's been eight spent by over 20 billion and I believe it's 27 % over that period.

4:03So this is huge consequences for everybody, you know, and back since 2018, it's accelerating. So every year, the number of transactions increases. Back in 2024, it reached every working day. So every day that the Irish Financial Service Centre is open, they're selling an Irish business into foreign ownership. And what does this mean? So the very day that the business is sold, the ownership is lost, the IP is lost, job security is gone. And really importantly, the profits are now gone. So the profits which would otherwise have been reinvested in the business are paid to the people connected to the business.

4:37So they would have been circulating the local economy. They're now gone. A lot of this acquisition activity has been financed by debt, by very large amounts of debt. So this puts us at peril because what's happening here is we're exchanging ownership by job security and profit, and we're bringing in foreign debt. So the profit needs to be used to pay that down. Man United fans will know that when foreign buyers come in, leverage your balance sheet with debt, bad things follow. You know, you now just become a profit center to pay down someone else's debt.

5:07David McWilliams: The great thing about Man United over the last 10 odd years is everything that could possibly go wrong has gone wrong. And on the pitch, off the pitch, in the balance sheet, no thing. But let's just come back. Okay, so listeners are aware. So what we're talking about is an Irish company that is founded by an Irish founder, that is built gradually, that has markets, that has clients, that has products, that has networks, that is based on a certain amount of love and care. Because I actually think businesses are not just balance sheets. They are a whole ecosystem that I know myself having, you know, started up a few businesses and still sitting on top of a few businesses, that they're actually personalities, right?

5:54David McWilliams: They're not balance sheets. And there's people and there's sales people and there's problems and there's marketing and there's dilemmas and there's emotion and there's relationships and all that sort of stuff. So a business is what I would call a vibrant living organism. That's the first thing. And particularly a small business that it's on its way to becoming a big business is even more emblematic of this vibrant living organism. Why? Because usually the systems aren't in place you get in big corporate structures and a lot of it is human nature how you're adapting how you're selling okay so what you're saying is these precious businesses now are becoming the focus of large spreadsheet debt driven entities and the reason I say spreadsheet Alan is because what you're doing in effect is you're looking at a business as a balance sheet you're looking at the EBITDA you come in as a foreign owner it's not even that you're foreign it's just come as a different owner and what you're trying to do is you're trying to what we call sweat the asset to pay back for the debt that you've incurred to buy the business in the first place is that the nub of the problem?

7:08Yes you've described it really accurately David a locally owned business owner can make values based decisions you know they can put trust in things like they want to be a good corporate citizen they want to be a good employer, they want to be a good local community, they want to have a good quality product. Whereas when the foreign acquirers come in, these people are experts in finance, so they know how to exploit a P &L and they know how to work a balance sheet. But anything that doesn't show up on the profit and loss account with a value beside it has no value in their eyes. The business now exists to pay down the debt that they took out to buy it.

7:40So there can be quite a culture shock when a locally owned business owner, who'll be sponsoring the local GAA team, you know they'll care about their reputation in the community they'll be looking after people it can be quite a culture shock when someone domiciled in a tax haven never met the customer never done the work never been in the business is now making decisions by way of spreadsheet and you don't need to be a Man United fan or an economist to understand this like in Ireland we have a long history of absentee owners for a long time kind of when farming was the lifeblood of the economy we had absentee landlords living in London you know they didn't care for the local community didn't care for the local economy.

8:15They just wanted to maximize their rent. And the kind of systemic extraction of wealth from Ireland through the absentee landlords created the scene for a plate of light to become, you know, the catastrophe that was, the Great Famine. So there's kind of parallels here with the foreign acquirers, the profit maximizing foreign acquirers coming in now. Back then, farming was the lifeblood of the economy. Now it's business. It's not good for us if this is all foreign controlled.

8:38David McWilliams: Alan, before we proceed, I'm going to ask you two questions, right? Number one is why have businesses in Ireland become attractive to foreign acquirers in a way that wasn't in the first place? Is it push or is it pull? By that I mean, is it the foreigners are being pulled in here because businesses are so attractive? Or is it because there's so much debt finance available? these fellows are coming down with money and they're scouring the globe to try and find things to put their money into because money is so cheap for them that's the first set of questions and the second set of questions why are Irish founders selling out in such numbers what is what's going on is it a generational thing is it a familial thing is it simply that if somebody waves a big check in your face you're like you know what I've done 20 years of this I've worked very very hard I wouldn't mind putting the hooves up or I wouldn't mind going again into some other business what do you think is going on just give us a sense of what's going on and then we can move on into solutions to this problem gotcha so question number one why are the foreign acquire is so attracted to Ireland like the rates are higher here than elsewhere when when an Irish business is sold 85 % of the money buying them is coming from overseas buyers okay so that's very high I believe this is an unintended consequence of successful government policy so Irish government has been marking it ourselves for foreign direct investment um for for many many decades and we're telling the business world Ireland's a great place to come and set up your business for you know a number of reasons.

10:24I think the unintended consequence of that is foreign acquirers, you know, are now saying, oh, this is a very pro-business government. They seem to be, you know, very attractive place for us to deploy our capital. So I think the unintended consequence of bringing in the value creating foreign direct investment is we're now getting a wall of value extracting foreign debt injection, you know, a different type of FDA altogether. It's an unintended consequence of government policy. On the second question, why are the Irish entrepreneurs so fast to sell out. This is a really good one. And we are. And kind of anecdotally, I've heard that Ireland is seen as very attractive, that the Irish founders, once they reach a certain point, they're really quick to sell out.

11:05So I guess there's different reasons. The first one might be, you know, it's not so long ago, Ireland was the poorest country in Western Europe. So a lot of the entrepreneurs grew up in 1980s Ireland or before. And they remember, they remember hard times. And maybe there's a part of us that's always afraid, you know, So we're going back there. That's one reason. But I think the other thing here is there's a real dearth of succession options. Probably getting on to the next part of the conversation now is there's a business succession crisis in Ireland. So when we talk about this, the silent set off of Irish companies into foreign ownership, it's not just that the Irish entrepreneurs all want to maximize the payout on the way out.

11:40It's that there's actually a dearth of options. And there's, in terms of when it comes to succession, you have two options. There's the keep it locally owned is normally the keep it in the family option. or else there's the trade sale. So there's demographic and economic reasons why keeping the family is just not as popular. Like people used to have four kids, they now have two, so there's less possible successors. The successors are now in an economy with full employment. So in the 1980s, you'd have four children scratching each other's eyes out to take over the family business. Now there's 1.5 or 2 and there's six figure salaries and smoothies available in Dublin too.

12:17And they've seen their parents be completely consumed by the family business for all their life. So a lot of children just don't want it. And I've even met a lot of entrepreneurs who said, I wouldn't want them to have to do it. Right, because it was so tough. It's all consuming. So, yeah, so another unintended consequence of successful government policy. Now, they focus on jobs. We've gone from 17 % unemployment, which encourages entrepreneurship, to full employment where, like, there's an easier option there. Why would you do it? So family succession is in crisis. And then on the other side of it, the only other succession option is the trade sale.

12:52What we're seeing there is 85 % of the money buying Irish companies is international. So if you take that route, highly, highly likely you're selling out to a foreign acquirer.

13:01David McWilliams: So the foreign acquirer will say, okay, look, we have systems, we have networks, we are integrated into different countries. Not only will we take you over, but there's an opportunity to expand further in a way that may be the small Irish family business, although these businesses are substantial now, but the family business might not necessarily have the firepower to do that. Is there anything in that for employees and our shareholders of companies to say, well, look, actually getting into bed with a bigger foreigner gives us leverage, gives us opportunities, gives us new markets, and it may well be the best thing for us?

13:41yes so that does the foreign acquisition strengthen the business so i guess i have a unique perspective here because we've been receiving in wolfgang digital acquisition approaches for for over a decade okay we've received them from all once we went north of 10 people they started once we went north of 50 people they became incessant so we get a lot of them from all over the world from asia states france netherlands the uk no matter where the approach comes from. The conversation is always exactly the same. Okay, so tell me the conversation. The conversation is that they're not talking about career opportunities for your employees.

14:18They're not talking about, you know, quality of product. They're not talking about the stakeholders like what is your operating profit? Is there an opportunity to aggressively grow this over the next three years? And when I had the conversations with them, what I learned is we make long-term investments in our people and in our work and in our local communities. And it was so obvious to me that none of these could survive the sellout. We spend more time upskilling, for example. So we're professional services. We bill hours, but we bill less hours than our competitors because we spend more time upskilling.

14:49I could see them licking their lips when they heard this because, you know, why would you do that when you're objective is short-term profit maximization? We launch a new service every year. We don't expect it to be profitable in year one or two. You'd never do that if you're on the urinator, you know, have done the trade sale. And, you know, we take a very small percentage of our revenue and we buy land and we plant trees. And, you know, this is the stuff that cannot survive the earn out. So, sorry, the earn out is just when the entrepreneur sells, often they're told you have three years to put 50 % in your profits to get the full payout.

15:21Yeah. So I call it infanticide. You know, I joke that Wolfgang's, yeah, I joke that Wolfgang's my oldest child. And, you know, I wanted to live long and prosper long after I'm gone. and it was it looked to me like i was going to have to if i took the earn out if i took the private equity deal more the corporate acquirer deal i was going to have to kill what was special about the company on the way out in order to maximize my payout your gain yeah yeah yeah no

15:46David McWilliams: i know what you mean so so in effect you're you're actually destroying what you've built for somebody else to pay back yes and the interesting thing about these acquirers is a lot of these acquirers are requiring i mean this might sound odd to our listeners particularly people who are not that much au fait with the corporate finance world, but a lot of the acquirers are acquiring assets to be acquired themselves. That's their exit strategy. So it's a whole big casino of buying, selling, corporate stripping, squeezing assets, buying, selling, with the view to selling yourself as the corporate asset acquirer at some stage down the road to somebody.

16:25David McWilliams: It's a big fish, it's bigger fish, it's bigger fish, all that sort of way. exactly and I've spoken to so many founders so I have a unique perspective because I can speak to people who sell their business and like my picture of it was this is a bad deal for your customers a bad deal for employees might be a good deal if you know it'll be as good as they tell you it is because the year and eight is often hard to accomplish and probably just a good deal for them in the end but I've spoken to a lot of founders and more than once I've been told I walked away from millions of pounds in a payout because I couldn't spend one more day working for those fuckers so that sentence i've gotten more than once i love it it's almost as if by design they know how to push an entrepreneur's button so the entrepreneur will walk away from the urinate and just say look i'll just take this i'll take the first half of the page well i can't bear working under these circumstances for another day between ourselves alan there is a reason why i have worked for myself not only this as my as my missus said to me you haven't had a proper job since the last millennium because you're always starting things and moving things and it's simply because for me there is a small but precious element of freedom despite the waking up in the middle of the night worried about this that and the other and once you squeeze yourself into a pre-ordained not always but sometimes corporate structure you have to start taking orders from other people.

17:49David McWilliams: You have to be in a certain place. You're looking at targets that don't actually mean anything to you because you're trying to create the best product rather than the best profit. But again, you need, you know, as I've always said, profit is the arbiter. If you don't make profit, you're gone. So you've got to, this is not touchy feely, airy fairy, let's all be nice to each other. You've got to make sure that the company makes a profit because without profit, but you have no business, right? So let us talk about the solution, Alan, that Wolfgang is offering and why that makes enormous amounts of sense, not just to the entrepreneur, but to the employees, but to the country in general.

18:33That's right. So business owners need a third option, okay? So family succession is birth rates continue to decrease, like the next generation of entrepreneurs are going to be dealing with even lower birth rates. So family succession is no longer a viable option for the majority of people. A lot of people don't want to sell out to the trade side. They want to get paid a fair rate, but they don't need to maximize the money by selling out. So we went through this process, we learned about what was happening in the UK, which was the Employee Ownership Trust. So that's becoming the most popular form of employee ownership and it's really taken off there.

19:07Tell me, what is an Employee Ownership Trust? What's the idea? So instead of selling out, the business owner sells in to their people. So the people become the owners of the business. Three things change. What's important to say is more stays the same than changes. So the board of directors still run the company, still run strategy, operations. The company still goes as it's been going. But three things change. So the employees now have skin in the game. So number one, that means they have a say. So there's systems within the employee ownership structure which allow the employees to make suggestions to strengthen the business.

19:40Board of directors can take them. They don't have to take them. But there's now a system in place where employees are systemically giving ideas as how to strengthen the business. And don't forget, these are the people who are closest to work, up front and personal with the customer. So really strong suggestions come in this way. Part two of skinning the game is employees, they get a profit share. So the better the company is doing, the more they're getting paid. Typically, it's paid as a percentage uplift on their basic salary. And the third change is the constitution of the company. And it's now owned by a trust which all the employees are members of.

20:13So the constitution changes and it says that the company must be run with the vision and values in mind and the company must be run with the employees' best interests at heart. So the vision and values actually become more entrenched and the culture becomes more entrenched. But there's now this other lens that it also must be run with the collective, the employees' collective best interests at mind.

20:33David McWilliams: Alan, can I just stop you there for a second, okay? Yep. So that's what happens after the event. Yes. But tell me, let's say the company's worth 10 million quid, right? So 10 million euros. We've figured out the value based on a whole variety of metrics, and we think it's worth 10 million euros. And the employees don't have 10 million euros to pay the founder, to allow the founder to orchestrate this shift in ownership. So how do the employees come up with the 10 million euros to incentivize the founder to sell and to give them a stake in the business? So this is why it's such a smooth succession solution is that it's called, from the employee's perspective, it's naked in, naked out.

21:18So they don't pay to get into the trust. And then when they leave the company, they're not getting paid out. The kind of benefit to them is the profit share as they're working. So if the company's valued at 10 million, often at the center of that calculation is the profit. So this is what, if the 10 million, if you sold out to the foreign acquirer, you get 10 million, the idea is, well, you can still get that from your people. It's just going to take a little longer to get it. So if you sell out to the foreign acquirer, your earn out is typically three years. However, when you sell into your people, they're going to pay you from future profits.

21:46Okay. And that typically takes six to seven years. So if you're valued at 10 million, you might be making, you know, 1.5, somewhere between 1.5 and 2 million a year in profit. So a large chunk of that is going to go to paying off the exiting business owner over six to seven years. So that's how the transaction works. Obviously, you know, for the business owner, business owners are commercially rational people. This is the biggest business decision they'll make in their life. So it is quite an ask for them to extend the payout period for twice as long.

22:16David McWilliams: And tell me, so given that it's quite an ask, and given that a lot of business owners are, when they're getting into their head to sell, they're probably in a sort of slightly escape mode right i've done that i'll get out right yeah is there any incentive tax-wise and or otherwise that would allow the business owner to say look you know i'm gonna actually gonna stay and i'm gonna be the custodian rather than just the owner i'm gonna be the custodian of this company for the next six seven eight years and in so doing I will build legacy I will make sure that the company is not destroyed the personality that I've built in the company will remain intact and the workers will have a share in that is there any incentive structure to to encourage to coax the business owner to go down the EOT route rather than the trade sale route so yes in the UK they legislated for this 10 years ago and they said to the business owner, in order to kind of mitigate you taking twice as long to get paid, you pay no capital gains tax on the deal.

23:24That makes a huge difference. Yeah, exactly. So they're going to wait longer to get it, but they're going to get more at the end. The net amount will be more at the end of the day.

23:31David McWilliams: Because capital gains is 30 % here. That's right. So the UK, they started with zero. It's now 50%. So you pay your capital gains bill as 50 % what it would have been. Canada trialed this a few years ago, went very well. So they're now introducing it. And the first 10 million of the sale is tax free. Unfortunately, in Ireland, that's not the case. So that's what I want to talk to you about, right? Because if we have a problem and you have a solution and that solution is persuasive, to say the least, right? Because what you're doing is you're creating a class of capitalists and shareholders rather than a class of employees alone.

24:11David McWilliams: and that I've always believed and anybody listening to the podcast over the years will know that I've always believed that shifts one's mindset into a different level of responsibility but also a different level of ambition because with responsibility and ambition these are tied to we call it skin in the game, stake in the business, whatever it happens to be. So I think this is a transformative emotional and I really mean this as a transformed emotional moment where you're shifting people from one type of participant in the economy to another type of participant in the economy. And the second type of participant, the shareholder, the person with a stake, behaves differently and usually behaves in a more commercially ambitious fashion.

25:01So let's go back.

25:03David McWilliams: The Canadians and the Brits have said, we recognize this and we're going to put tax breaks in. What have we done? So in Ireland, unfortunately, rather than tax incentives, there's a number of tax disincentives. So I fell in love with this idea. I learned about how operating the UK. I sought professional tax advice here and I was told, never been done, can't be done. And I said, oh, why is that? And they said, well, you're going to put your hand up to pay a number of taxes. You wouldn't in any other event. So I deeply believe that employee ownership trusts strengthen the business. And my big bet is that they strengthen it beyond what the tax costs are.

25:39But I've learned that that's a very unusual decision to make. When we became employee owned, a number of Irish business owners got in touch with me. They wanted me for coffee. They're like, I love this idea. I really want to do it. And I'd say to them, before we meet for coffee, let me just tell you the tax situation. No one's met me for coffee, David. Okay. business owners are commercially rational people if you disincentive it's not like smokers you know the government can put up the tax on cigarettes smokers are going to smoke business owners are very commercially rational people if there's disincentives they're just not going to do it however as we've seen in the UK and now in Canada and in the States actually they've had something similar since the 70s hugely successful and when you give business owners tax incentives to sell into their people, a lot of them will do it.

26:23David McWilliams: Okay. So is this an issue for the Department of Finance? Is it an issue for revenue? Who makes these decisions? Who makes these decisions? So I've been lobbying actually with a group called the Irish ProShare Association. So we've had a sequence of meetings with senior civil servant, start with finance, minister for enterprise, minister for finance, and they're listening. You know, we keep getting asked back for another meeting, which is a good sign. So they're listening and they can see it. But what we really need is them to understand, and I think they do, the problems associated with our homegrown economy even decimated in the way it is.

26:58I'm losing the business every day. The good news for the government is this is a, like, there's a decision maker here is the Irish business owner. So they don't have to convince a whole gamut of different stakeholders to do this. If they can just turn the Irish business owner's head with a tax incentive, this will work. And at the core of our success with foreign direct investment over the years is really two things. It's highly skilled workforce and tax incentives. Same things, you know, mean that employee ownership trusts can prosper. If you give the business owner a tax incentive, they now have a highly skilled workforce who's also highly motivated, who's skin in the game.

27:32And the beauty of being a co-owner through an EOT is there is a little bit to learn, but it's not like, you know, there's other forms of employee ownership where right, the governance structure has to completely change. And all the people in the company now need to learn how to govern this. Employee ownership trust is not like that. If you're a high-performance employee, you're, you know, 80%, 90 % through age being a high-performance co-owner.

27:54David McWilliams: So I'll tell you, Alan, before we go, because I mean, you know that I'm fascinated by this idea and I'm fascinated by its innovation, its opportunities, the possibilities, the way it changes the nature of work in Ireland. if there were a next chapter and you were to if you were to look at the next chapter what might that be in Irish development because we talked about you know direct foreign investment talking about multinationals or what all is this is sort of a next chapter in your head so oh I think Ireland would be the most fertile soil for the ideas of employee ownership trusts like there's economic reasons we've spoken about there we've highly skilled workforce that would do really well with this, the center points of our FDI strategy, we just aimed at Irish businesses, not at international businesses, and we can do that.

28:40But there's historic and cultural reasons as well. So we've spoken about, you know, the famine and overseas control, like a defining characteristic of Irish people is our distrust of foreign ownership and our, you know, deep want for independence and self-determination. That's what employee ownership is. It's independence, it's self-determination. also in Irish culture there's this ancient concept of the meho you know this kind of community work and this is something that goes back many centuries an example is in ancient Ireland when the couple got married the community came together that day on their wedding day and built their house so it's this idea of a community working towards the community's benefit and that's that's literally enshrined in the constitution of an employee ownership trust is that the company must be run with the collective employees benefit in mind so I'm really excited I think Ireland could be world leaders in employee ownership trusts.

29:32I think it would solve wealth inequality, it would bring job security, it would keep ownership rooted deep in the local community. And I'm really excited about what Ireland could become if everyone had the opportunities, not just out where they live, but out where they work too.

29:47David McWilliams: Alan Coleman, as always, it's an absolute pleasure. I know it's your birthday, so the last thing you want to be doing is talking to me on your birthday. Well, this is a great conversation, fascinating stuff. Where can people, if they want to find out more, find out more? Yeah, So business owners who are interested, I'm part of a lobby group called the Irish Pro Share Association. We have a newsletter. We update people on how we're getting on in our conversations with government. If you're thinking of selling and you're interested in this, hold on, you know, I'm optimistic that in coming years, there could be an opportunity for you to sell into your people rather than sell out to the farm money.

30:19David McWilliams: Alan Coleman, listen, thank you so much for this fascinating, fascinating and I think very innovative way of looking at succession and selling in or selling out. So cheers, Alan. Thanks very much. My pleasure. Thanks very much, David. That conversation was brought to you in a paid partnership with Wolfgang Digital. Now, what makes this employee ownership trust idea so compelling is it opens up a much bigger conversation about ownership, about wealth, and what a successful economy should look like. And I think the timing couldn't be more important simply because Ireland is now facing this massive transfer of wealth as loads and loads of Irish companies.

31:00David McWilliams: are being sold to foreigners. And we have a real opportunity now to rethink what the next generation of Irish business could look like. And I've said it before, I think that this has the potential to be one of the biggest ideas of the 21st century. Whether employee ownership trusts become a major part of a future economy remains to be seen, but it's certainly a conversation that I believe is worth having. Thanks for listening. Talk to you next time.

31:31Thank you.