FAQS
Canada’s Employee Ownership Trust (EOT), is a new way for business owners to sell their companies. Instead of selling to an outsider, the EOT lets the owner sell to a trust that will own company shares on behalf of the company’s employees. The owner gets paid the fair market value of their shares. The trust acquires the shares through a combination of bank debt (serviced by future company cash flow) and seller financing. In the Tallgrass model, a minority number of shares are acquired by Tallgrass Employee Owner Equity Fund, which is also owned by its own EOT. While the company may be owned by two trusts, the result is the majority of company shares are still owned by employee-owners of both trusts. The company can continue to run as it always has, in its local community, but now all future financial benefits will go to employees.
Yes, but it was only just introduced, so it’s hard to know how many. But EOT is gaining a lot of attention. This ownership model is very popular in the UK, where over 300 companies sell to EOTs every single year. We also know that there are over 6,000 employee-owned companies in the United States. So, we’re confident that Canadian business owners are going to get just as excited about employee ownership as they are in the UK and the US.
Canada is facing a succession crisis, with 75% of business owners looking to sell in the next ten years. It is in the best interest of our country, our provinces, and communities to keep those companies in their communities, providing good local jobs. Employee Ownership Trusts do that. They also grow faster and are more productive than their peers. That’s why the government is providing a $10 million tax incentive for business owners who choose to sell to an EOT.
In an Employee Ownership Trust, employees don’t pay out of pocket to participate in ownership benefits. All employees participate, regardless of their own personal financial situation. EOTs use a combination of vendor financing, bank financing, and sometimes a Tallgrass investment, to buy the shares from the seller. If bank debt is available, that money goes to the seller and the company repays the bank. If that’s not enough to pay for the shares, the company will then pay the seller back over time until the full price is paid. This approach works great in the UK, where over 300 companies a year are sold to an EOT.
For business owners, selling to an Employee Ownership Trust means the company they’ve built can remain in its local community. Owners have more control over their exit, at a fair price, with a very powerful tax incentive. All employees benefit from the EOT, as their job and culture won’t be threatened by an outside buyer, and they will get all the financial proceeds of the company once the owner has been paid out. Canada also benefits by keeping more companies Canadian-owned, with profits and influential jobs remaining in local communities.
The federal government has introduced a $10 million capital gains tax incentive to encourage owners to sell to an EOT. There are a number of criteria that determine whether you’ll qualify, so you should talk to your advisor. There are four main criteria:
- That you own the shares personally.
- That you’ve worked in the business for at least two years.
- That your company is an active Canadian company, which means its revenue doesn’t mostly come from passive assets.
- That the company employs at least 75% Canadians.
Talk to your advisor. If you meet these four criteria there’s a good chance you qualify.
In an Employee Ownership Trust, shares are held by employees indirectly, through the trust. That means they don’t vote on management decisions and the way the company runs doesn’t need to change. The purpose of the EOT is to maintain company continuity and stability, while all employees get to share in the financial benefit of ownership. A worker co-operative is a form of democratic direct ownership, where all employees have a say in how the company runs. Each approach works, depending on the type of company.
Yes. But the process can be a little more complex than other ownership models, thus why Tallgrass works with companies that are a little larger and have some extra accounting and human resources capabilities.
Tallgrass is willing to invest in a broad spectrum of businesses. Most important though, are the people within the businesses; we look for owners that are motivated to leave a legacy and for companies led by leaders motivated to build an employee ownership culture.
It depends on what you want. Both options work, but they achieve different outcomes. It’s important not to confuse a management buy-out with employee ownership, they are not the same. A management buy-out is likely a little easier and may rely less on the seller for financing. If you are trying to leave a legacy of broad-based and long-term ownership, an Employee Ownership Trust might be a better option.
They don’t. One of our fundamental beliefs is that all employees should have equal access to participate in employee ownership, regardless of their personal financial situation. Employee Ownership Trusts “even the playing field” and give everyone a chance to benefit from their collective work.
An Employee Ownership Trust (EOT) holds the shares on behalf of the employees. The EOT acquires the shares from the owner with financing by a bank, by the seller themselves, and sometimes Tallgrass. This is what allows for broad-based employee-ownership.
No, unless you want them to. With an EOT, companies can be managed the same way they’ve always been. EOTs are often referred to as “indirect ownership” because employees benefit from the financial success of the company without being involved in day-to-day management. The EOT is overseen by Trustees, some of whom are employees of the company. Trustees make a limited set of decisions on behalf of the employee beneficiaries. But the company will be operated by a Board and/or a management team that will make the decisions required to run the company.
In order to qualify as an EOT, at least 51% of the company needs to be sold in the initial transaction. The EOT needs to be the majority shareholder of the company.
In an EOT, you are required to sell to a trust that will hold shares on behalf of all your employees (both current and future). Today, many sales to employees in Canada are management buy-outs, where a management team will take some of their own money and buy out an owner, often with a promise to pay over time. That’s of course a perfectly legitimate succession plan, but the EOT is designed to be more inclusive. In an EOT, once employees have fulfilled their probationary period, which can be up to one year, they qualify as beneficiaries of the trust. Now, this doesn’t mean that everyone gets equal benefit right away. The trust indenture outlines the various factors that influence each employee’s portion.
First, benefits: Employees are the beneficiaries of the EOT, which means if the company has enough cash to pay dividends, or if it is sold to a third party, the proceeds go to the employees (according to the percentage owned by the EOT.)
How it gets divided between the employees is determined by a formula that is set up in the initial EOT indenture. The selling business owners and the initial trustee board will determine the formula. The formula can allocate benefits based on three different criteria, alone or in combination: wages, hours worked, and the number of years worked at the company. There can also be different formulas for different events, like an annual dividend payment or a sale of the company.
Second, rights: While they don’t vote on every decision, employees do have important rights in an EOT.
They have representation on the Trustee Board, which must be at least one-third employee representatives. For example, a Trustee Board of three requires at least one employee representative, and a Board of five requires at least two. In summary, the company can continue to be managed the same as it was before, but the employees now have a voice, have to be consulted if the business is going to be sold, and share in the proceeds of any cash distributed by the company.
It’s often less about the company, or the industry, but about the owner themselves. Business owners who sell to EOTs are generally very passionate about their companies, and very much against the idea of selling to the most common buyers, like competitors in their industry or private equity companies. They worry about losing the culture they’ve worked years to build. A lot of Canadian business owners feel this way, as shown in this survey of business owners by the Canadian Federation of Independent Business.
In the US and UK, companies from all industries and of all sizes have sold to their employees. However, there are industries and sizes where it tends to be more popular. Common industries are construction, wholesale distribution, light manufacturing, retail, finance and IT consulting and professional services.
The vast majority of companies are between 25 and 250 employees when they sell, with a tiny minority larger than 1,000. Small companies typically just don’t have the administrative capacity to manage an EOT structure.This still leaves a lot of companies! There are about 150,000 companies in Canada between 25 and 250 employees, employing about five million people.
The best candidates for EOTs are companies with strong and consistent cash flows in mature industries with a thoughtful management transition either in place, or in progress. These factors lower the risk of the transaction, and help ensure that there’s sufficient cash to pay the purchase price of the company, leaving substantial future benefits for the employees.
Questions?
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