Employee Ownership Trusts: A new exit opportunity for Canadian Business Owners
2 min read.
As a company offering business valuation services, we want to keep our clients and partners informed of potential new options for business owners. Employee Ownership Trusts (EOTs) could soon become an additional avenue for Canadian business owners looking to sell their enterprises, allowing them to sell their businesses to their employees effectively. As a Canadian EOT framework may be on the horizon, it’s essential for business owners, advisors, and stakeholders to understand EOTs’ mechanics and possible advantages.
The Canadian government initially expressed interest in exploring EOTs in the 2021 Federal Budget. Recently, the Canadian Employee Ownership Coalition called for a tax-advantageous EOT framework under Canadian law in the 2023 Budget, set to be released on March 28, 2023.
EOT Mechanics
EOTs have been implemented in jurisdictions like the United States and the United Kingdom, involving four typical steps:
1. forming a trust with the target business’s employees as beneficiaries;
2. arranging debt financing for the trust to purchase shares of the target business;
3. negotiating the terms and conditions for the share purchase by the trust’s trustees; and
4. using the business’s earnings to repay the trust’s debt over time.
In essence, EOTs function as a leveraged buyout benefiting both employees and sellers.
EOT Advantages
Benefits for Exiting Business Owners
EOTs in other jurisdictions often allow deferred or eliminated capital gains taxes for business owners. An independent appraiser is usually required to establish the market valuation of the business being sold, ensuring a fair sale price.
EOTs also provide a way for entrepreneurs to preserve their company’s legacy and culture by avoiding sales to competitors or private investors, ensuring local community continuity and stable management.
Benefits for Lenders
Leveraged EOTs offer lenders attractive returns on their capital and solid debt coverage. Additionally, EOTs can enhance a company’s environmental, social, and corporate governance (ESG) metrics by creating wealth for employees. Businesses with an EOT structure often outperform their counterparts in employee retention, positively impacting the “social” aspect of ESG.
Benefits for Employees
EOTs can lead to increased wealth for employees, compared to non-employee-owned counterparts. EOTs also contribute to improved job stability during crises and protection from economic cycles, as employee-owned businesses retain jobs at a much higher rate, compared to non-employee-owned businesses.
As EOTs gain traction in Canada, our team is prepared to assist business owners and advisors implementing this new tax vehicle in determining the accurate value of the business. We believe that EOTs have the potential to create a positive impact on businesses, employees, and communities and provide business owners with more options to plan for their exit.