Canadian business owners would embrace employee ownership if it was easier

CFIB survey shows significant support for employee ownership trust policies similar to US, UK

At Social Capital Partners, we were thrilled, but not surprised, to see the results from the most recent survey by the Canadian Federation of Independent Business. It showed what has been proven in the US and the UK; that business owners care about a lot more than price when looking to sell their business, and that protecting their employees, communities and business legacy would drive them to consider selling to their employees if the path to do so was made easier.

Among other significant results highlighted below, 59% of Canadian business owners surveyed would support policies encouraging sales to their employees and 53% of owners would me more likely to sell to employees if these policies existed. 61% of owners said “protecting employees” was very important in a business sale, significantly more than said “getting the highest possible price” (49%).

As context, the US and UK have been very successful in encouraging employee ownership by doing three things: establishing an “employee ownership trust” (EOT) model as a regulated business structure, introducing incentives to encourage their use, and providing support to build awareness for the new model. As a result EOTs are common in the US, where 14 million employees own $1.4 trillion in shares at over 6,000 companies. Since their introduction in the UK in 2014, they have become increasingly popular, with almost 100 companies becoming employee-owned in 2019 alone.

Canada does not have a business structure comparable to the employee ownership trust, and as a result has low levels of employee ownership.

We have been advocating for Canada to introduce employee ownership trusts since the release of our report Building An Employee Ownership Economy in October, 2020. We made the case for supportive public policy in a recent article in Policy Options. Considerable research has been done on the outcomes of employee ownership. Employee-owned companies are proven to grow faster, pay better, are less prone to lay-offs or bankruptcies in economic downturns, and are more likely to keep jobs in local economies.

We believe more employee ownership should be a key component of rebuilding our economy in a fairer, more resilient way post-COVID and are greatly encouraged by the interest in the business community.

Here are the highlights from the CFIB, Your Voice survey, which polled 5,365 members from March 4–31, 2021:

Business owners care about a lot more than just the highest possible price when selling their businesses

When asked to rate various considerations in terms of importance when considering a sale, 61% of respondents said “protecting our current employees” was very important, ranking well above “getting the highest possible price.”

Other considerations were ranked as “very important” between 43.7 and 49.6 percent of the time:

• “Getting the highest possible price” — 49%
• “Ensuring our business remains in the community” — 47%
• “Selecting a buyer who will carry forward our way of doing business” — 47%
• “Ensuring the legacy our business has built will carry on” — 45%

While selling to a third party or transferring to family are the most common current plans for exiting, selling to employees is an option many owners are considering, despite complexity and limited benefits

• 40% of owners are currently planning to exit to a third party and 25% are planning to either sell or transfer their business to family.
• 15% are currently planning to sell to employees

Given a brief explanation of how employee ownership trusts work in the US and the UK, owners showed great interest in adopting similar policies in Canada¹

• 59% of respondents either strongly support (35%) or somewhat support (34%) adopting an employee ownership trust model, with only 5% opposed (the rest were neutral or did not know)

Most importantly, over 50% of respondents said they’d be more likely to sell to their employees with these policies in place

• 53% were either much more likely (31%) or slightly more likely (22%) to sell to their employees
• Given only 15% are currently considering selling to their employees, these results show incredible potential for EOTs to increase employee ownership in Canada.

COVID has affected the retirement plans of business owners, especially smaller businesses closed or partially closed by the pandemic, indicating the value of new succession options

• 41.7% of all respondents said they’d retire later due to COVID, while only 5.4% said they’d retire sooner
• Larger businesses have been less affected, with 26.8% of businesses with more than 50 employees said they’d retire later (3248 respondents)
• 67.7% of owners who were fully closed by COVID and 55.3% of owners that were partially closed say they will retire later because of COVID

¹ The explanation given is as follows: The U.S. and U.K. have introduced policies and tax incentives to encourage owners to sell their businesses to all their employees for fair market value (employee ownership). The way these deals are structured, employees do not pay out of pocket upfront. Instead, a trust is formed to secure a loan to purchase the company’s shares on behalf of the employees. Loans allow the owners to be repaid out of company profits over time.