Is Foreign Ownership Good for UK Business?
Research from private equity firm Endless LLP indicates that a staggering 41 per cent of overseas owned Small and Medium Sized Enterprises (“SME’s) are either loss making or only marginally profitable. If these businesses were performing as well as the average foreign owned SME, they could deliver £8.6bn earnings before interest, taxes, depreciation and amortization (EBITDA). This would generate up to £2bn in extra tax revenue to the Treasury – enough to fund the Department of Business, Innovation and Skills on promoting UK business abroad each year.
The ‘Great Unloved’ research measured the performance of the 2,096 UK SMEs under foreign ownership with turnover between £25m and £500m. These businesses generate more than £188bn in revenue for the UK economy with net assets worth nearly £100bn and EBITDA of more than £19bn.
If a large proportion of foreign owned businesses are not generating profits in the UK, this creates significant uncertainty the employees, management, customers and other key stakeholders of those businesses.
Garry Wilson, managing partner at Endless, said: “There is no shortage of evidence that foreign ownership can bring huge benefits to UK firms – Jaguar Land Rover and Cadbury’s being prime examples. But this research highlights the large proportion of foreign owned UK businesses that do not seem to contributing healthy profits to their parents or the UK economy as a whole. While tax planning will certainly play a part in these statistics, many of the underlying businesses have become part of what we call the ‘Great Unloved’ – businesses that are non-core to their parent group, cut off from investment and failing to realise their potential.”
The vast majority of foreign owned businesses are from three industry sectors: manufacturing (28 per cent), real estate, renting and business (25 per cent) and retail and wholesale (21 per cent). Together these sectors generate almost three quarters of all sales from foreign owned SMEs, which is £135.6bn.
Nearly three quarters (73.6 per cent) of these businesses are owned by overseas parents from just 10 countries. US businesses lead the way, owning 669 UK SMEs, followed by France (171), Germany (160), Japan (150) and the Netherlands (91).
Wilson continued: “It is vitally important for shareholders to play an active and fully engaged role by setting out the priorities and financial targets for the business. Management teams’ interests, incentives and strategy must be aligned from the start and closely monitored over time, so that prompt remedial action can be taken whenever the business steers off course.
“Where overseas owners lack the appetite, time or resource to give their full attention, it is in the interest of both the business and UK economy for these unloved orphans to find a new home.”