Employee Ownership Trusts a good option for business owners when selling their companies
Canada’s small and mid-size businesses are heading toward a tidal wave of change, with close to three-quarters of private business owners in the country saying they plan to exit their business in the next decade.
While some will choose to pass the business on to family members, many others will decide to sell and either retire or start something new. Currently, there are only two viable options for selling a business in Canada — selling to a private equity firm or selling to a competitor, possibly located outside of the country.
As a business owner, I do not think these options are ideal. Going with private equity or a global competitor would likely result in job losses for Canadian employees, who have been integral to the company’s success. Selling to outside entities would also feel like I was selling the soul of the company that I worked so hard to build. We need a better alternative.
Fortunately, there could soon be one.
The federal government has committed to establishing Employee Ownership Trusts (EOTs) by the end of this year. EOTs would enable any owner to sell their business to their employees through a trust that the owner creates. The trust would take out a loan to buy shares in the company and distribute them to employees over time. All employees would hold shares, not just company executives.
As a business owner, I put my heart into my company and I want to ensure that it continues to exist into the future even when I am no longer leading it. I am excited about the benefits EOTs offer.
EOTs would allow me to gradually transition company ownership to my employees and leave a positive legacy in our community.
For workers, EOTs would offer a stake in the company. This would not only help employees build their wealth over time, it could also reduce turnover and lessen the chance of layoffs; research shows that employee-owned companies are more resilient.
The government put out draft EOT legislation for consultation earlier this summer. While it addresses many of the current obstacles facing owners who want to sell their business to their employees, one giant obstacle remains.
The draft legislation lacks financial incentives to encourage owners to participate in EOTs. Opting for an EOT over selling to a private equity firm or a corporation is less lucrative and riskier for business owners. Instead of receiving the full amount for the sale of the business at once, an owner selling to an EOT would sell at a lower price and would be paid over time as the trust buys company shares.
To address this big obstacle, the government needs to ensure that there are capital gains tax incentives for any owner who sells their company to an EOT.
The UK has successfully used a capital gains exemption to encourage employee ownership. After decades of virtually no uptake, the UK government introduced such an incentive in 2014 and there has been rapid adoption ever since. This past year broke another record for adoption, with over 320 UK business owners selling to their employees — representing over 30,000 employees becoming owners.
If set up properly, an EOT almost seems like the ‘easiest’ exit for entrepreneurs and the best outcome for employees — no sales process, no layoffs, no restructuring.
With thousands of Canadian business owners expected to exit their businesses over the next 10 years, it is crucial that the government introduces legislation this fall that includes an incentive — and keep businesses in Canadian hands and the money and innovation with Canadian workers.
Photo courtesy of DespositPhotos
