Lessons from the Operation of the Australian Employee Buyout Centre (AEBC)

The AEBC operated under a short-term “Jobs Fund” contract (entitled “Jobs that We Own in Western Sydney”) in 2010/11 as part of the “Stimulus Package”, with the objective of “rescuing” companies where jobs were under threat as a way of “saving jobs”.

The project was not a success given a number of limitations – most especially the short time frame of the funding that was provided.

The lessons learnt from the operation of the AEBC were as follows:

  1. The initiative for rescuing a company should come from the employees (or their union), rather than the owners – though the owners must be willing to sell. Early employee commitment to the proposal is absolutely key to its turnaround and future success.
  2. The cost of turning around a distressed business should never be under-estimated. Several will always be “unsaveable” and money spent on them will be lost. Indeed, the economic argument that keeping alive such businesses actually drains resources from healthier firms – and job creation elsewhere – does carry some weight.
  3. There must be an investment fund available that specialises in EBO investments. Without such investment funds being available, it is not possible to do “employee buyouts” based on what the employees have available themselves, what they can access/raise locally and what the company owners might put up as vendor finance. Without external sources of finance being available, large amounts of funds will be demanded from employees, substantially putting their livelihoods and families at risk.
  4. Employee buyouts of “distressed businesses” (companies in severe financial trouble) can only be undertaken with “early warning” on the situation to give enough lead time to consider turnaround strategies. This should occur prior to the company going into administration or receivership. The intervention of a dedicated “EBO Fund” to enable the business to be bought out by the employees at a very early stage appears essential to success in this area.
  5. Once the business closes, an EBO is unlikely in the Australian context because of:

(i)            loss of markets

(ii)           loss of assets

(iii)          dispersal of workforce

(iv)         lack of capital to restart operations.

In the end, the AEBC considered that the employee buy-in would be the best course of action for employee ownership “culture” to develop – but only through an ESOP based “business succession” in a company that is still in good condition.

Employee buyouts of distressed businesses do not always work (employees can lose their savings if invested in them) and – most relevant of all – research on the topic shows that they do not seem to last as employee owned businesses, either being sold when the employee owners want to get out of the business and move on, or the employees do not share the business with incoming employees as the original employees leave, and thus the employee ownership “degenerates”. This is probably because the initiative is focused on saving jobs rather than creating employee ownership. When the jobs are saved, employee ownership “culture” doesn’t seem to stick.

Overall, the key lesson of the AEBC is that employee buyouts should not be put forward as a solution in all cases for “saving jobs” – the commercial viability of the ongoing business must always be paramount and drive decision-making regarding supporting the project. Employees should never be mislead about the potential risks posed by business rescues to them as employees and investors.

The AEBC did have a very useful “Social Value Proposition” designed as part of it’s strategic plan to give guidance to the “social value” that employee buyouts can create for local communities when such activity is targeted at job rescues or job creation (usually as part of a community economic development strategy). See: Australian Employee Buyout Centre – Social Value Proposition for Employee Buyouts

 

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