Employee Buy Outs

Employee Buyouts and Worker Cooperatives

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.

There have also been cases where a “benevolent owner” has transferred the business gratis to its employees, usually under a long term “Trust” arrangement.

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.

“Employee buy-ins” of this nature can accumulate the majority of shares in the company on behalf of the employees 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 life cycle, not just when it is “distressed”.

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 co-erced into the 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 major risk for the reputation of “employee ownership” in any project that has not been soundly thought through, then it will say so.

The following resources are recommended:

  1. The Coops UK handbook Simply Buyout”, and
  2. The UK Business Service web-site How to achieve an employee buyout

Project and media enquiries can be directed to Angela Perry, Chair, Employee Ownership Australia at: info@employeeownership.com.au.

Related pages – “Public Service Mutuals