Employee Buyouts
Circumstances may arise where employee ownership is a viable proposition in the case of ownership transfer of a business through either business succession or buyout.
Employee ownership based business successions are quite common in other countries and usually involve a “succession plan” where the business is transferred in a graduated fashion over time (making it more like an ‘employee buy-in’). For more on this approach, please see our “Business Succession and Exits” page.
Employee buyouts can involve not only direct share purchases but can also accumulate the majority of shares in a company through an ESOP trust, with the ESOP trust being used as the vehicle to finance the annual purchase of shares of the business and hold them on behalf of the employees.
Employees can contribute to the Trust in a number of ways to enable the purchasing of shares, but on the whole, the transaction is regarded as being financed out of the “future earnings” of the business (as the company makes the largest contributions from its cash flow) rather than from the employees’ savings
Employee buyouts are popular in the press and in community development circles, but usually, only work in a small number of cases when important pre-requisites are in place.
In Australia, there is no tradition of employee buyouts and little institutional support for them. Programs have been initiated in the past to encourage employee buyouts, but have proven to be both expensive and to produce very few new employee-owners for the effort expended. Their association with “failing businesses” has also been of concern regarding the way the public perceives what employee ownership is on about. Employee ownership, of course, is relevant at many different points in a business’s lifecycle, not just when it is “distressed”. EOA does not consider that employee ownership is a solution for ‘business insolvency’.
The experience of Employee Ownership Australia with the Australian Employee Buyout Centre (AEBC) is enlightening in this regard. See “Lessons from the Operation of the Australian Employee Buyout Centre (AEBC).”
From EOA’s perspective, the potential risk to employees posed by “business rescue” projects is high, though mitigated somewhat in circumstances where the business may be failing for non-financial reasons (such as through poor management) rather than loss of market.
There needs to be clear evidence that the “buyers and sellers” are committed to making the transaction work as an employee-owned company (or cooperative) and that finance is available.
EOA would not be involved in any project where the employees are being coerced into supporting the buyout and investing in it.
EOA would also not be involved in any project which was not applying industrial award standards in terms of wages and conditions.
Business success even after employee buyout is never guaranteed. As with any business undertaking, the reasons for failure can be legion – whether for employee-owned companies or worker cooperatives. On this, see also the page “Worker Cooperatives”
Nevertheless, Employee Ownership Australia supports the potential of employee buyouts and worker cooperatives and is happy to discuss any project where the circumstances are right and the proponents will have “skin in the game”. However, if it feels that there is a major risk for the reputation of “employee ownership” in any project that has not been soundly thought through, then it will say so.
For more on successful transitions of companies to employee ownership, see:
Exit strategy: How this company sold itself to its workers, 12 Aug 2024, Forbes Australia Business Magazine
A Practical Guide to Employee Ownership In Australia, November 2022.
Solving succession woes with Employee Ownership Trusts (University of New South Wales, November 2021).
Meld Studios: Australia’s first company to become Employee-Owned by Trust (July 2021)
Women lead employee-owned businesses lead the way in Scotland
When staff run the show: the true benefits of employee ownership
The following resources are recommended:
- The Coops UK handbook “Simply Buyout”, and
- The UK Business Service website “How to achieve an employee buyout”
- Our web-page 4 Reasons For Private Companies To Consider Employee Ownership As A Part Of Their Succession Planning.
- For information on the ‘Employee Ownership Trust’ employee buyout model, please see our blog post “A refreshingly different ownership model for private companies”.
- Our Employee Ownership Education page.
Project and media enquiries can be directed to info@employeeownership.com.au.
Related pages – “Public Service Mutuals” and “Employee Ownership Trusts”
