Mergers and Acquisitions (M&A) are complex, high-stakes endeavors that typically involve two main parties: the buyer and the seller. In traditional M&A transactions, these two sides are represented by separate advisory teams, often referred to as the Sell Side and Buy Side advisors. This structure, by its very nature, can create an adversarial dynamic, where each side’s interests are in competition.
However, what happens when you, as a business owner, are looking to sell your company to the very employees who have helped build it? Instead of being at odds, you and your employees are all on the same team, working toward a common goal. In such cases, the traditional “sell side vs. buy side” framework no longer fits. So, what is this model called, and how does it work?
Understanding Sell Side and Buy Side Advisors
To grasp the dynamics of an employee buyout, it’s essential to understand the roles of sell side and buy side advisors in a typical M&A transaction.
- Sell Side Advisors: These professionals represent the interests of the business owner who is selling. They help to prepare the business for sale, determine its value, and market it to potential buyers. Their role is to maximize the sale price and ensure that the deal terms are favorable for the seller.
- Buy Side Advisors: On the flip side, buy side advisors represent the buyer, helping them navigate the process of acquiring a business. They conduct due diligence, assess the risks and potential for growth, and negotiate on behalf of the buyer to secure the best possible deal.
In traditional M&A, these advisors work in tandem with their respective clients, often creating an adversarial relationship. The goal of the seller is to get the highest possible price, while the buyer is seeking to purchase at the most favorable terms. This dynamic can lead to tension, as both sides aim to maximize their own outcomes.
Employee Buyouts: A Collaborative Approach
When a business owner decides to sell the company to their employees, the traditional adversarial M&A framework doesn’t quite fit. The key difference here is that the interests of the seller and the buyers (the employees) are aligned. Both parties aim for the success of the business post-sale, with employees eager to maintain the company’s legacy, culture, and operational integrity.
In this case, Employee Share Ownership Plans (ESOPs), Management Buyouts (MBOs), and increasingly, Employee Ownership Trusts (EOTs) are typically the mechanisms that facilitate the transaction. These structures allow employees to gradually buy out the ownership stake of the founder or existing owners, often with financing options that make the transition smoother.
Employee Share Ownership Plans (ESOPs)
An ESOP offers a succession plan that allows employees to own shares in the company they work for. In an employee buyout situation, an ESOP can be used to transition ownership from the current business owners to the employees over time. From a business perspective, the benefit of an ESOP is that it often fosters a culture of ownership, with employees having a direct stake in the company’s success. Employees, in turn, gain a sense of security in knowing they are part of a long-term, employee-driven success plan.
Management Buyouts (MBOs)
A Management Buyout (MBO) occurs when the management team of a company, often with the help of external financing, buys out the current owner. In many cases, this structure is favoured by business owners looking to retire or exit but who want to ensure the continuity of the company under the guidance of trusted employees who understand the business inside and out.
In an MBO, the management team becomes the new ownership group. While it shares some similarities with an ESOP, an MBO is often more concentrated within the existing leadership rather than the broader employee base.
Employee Ownership Trusts (EOTs) in Canada
An Employee Ownership Trust (EOT) is an increasingly popular structure in Canada for facilitating employee buyouts. While the concept of EOTs is well-established in the UK, Canada has recently adopted this model as a viable alternative to traditional sale structures.
An EOT allows business owners to transfer ownership of their company to a trust. Essentially, the EOT holds the shares in the company, and employees become the beneficial owners.
This structure provides significant benefits for both the selling business owner and the employees:
- For the Business Owner: An EOT allows for a structured, tax-efficient exit strategy. The seller can receive a fair price for their shares, while avoiding some of the complexities and taxes associated with a direct sale to employees. The transaction can be smoother and more flexible compared to other forms of employee buyouts.
- For Employees: The EOT model aligns employees with the long-term success of the company. They don’t need to contribute up-front capital, and they typically benefit from their contribution to the business based on their tenure or role. Importantly, the EOT ensures that employees’ interests are centered on the company’s ongoing success, rather than a short-term payout.
- For the Company: The EOT can help maintain the continuity of the business and its culture. Because ownership remains within the company, employees are often more motivated and invested in the business’s success, leading to greater stability and higher productivity.
While Employee Ownership Trusts are not as widely known in Canada as in some other jurisdictions, they are gaining momentum, particularly in industries like manufacturing, technology, and professional services. For businesses looking to transition to employee ownership, an EOT can provide a smoother and more collaborative exit strategy.
Moving Beyond Adversarial Structures: Collaboration Over Conflict
The beauty of selling to your employees is that it fundamentally changes the dynamic of the sale. There is no longer a “winner” and a “loser,” no negotiation where the seller and buyer are at odds. Instead, the focus shifts to mutual success, with both parties—seller and buyer—invested in the company’s continued growth and prosperity.
While there may still be external advisors (such as legal counsel, accountants, or financial advisors), the need for a distinct Sell Side vs. Buy Side advisory split fades away. In its place, a more collaborative approach takes shape, with the focus on ensuring a smooth transition of ownership that benefits all stakeholders, with a focus on long-term sustainability.
The New Structure: Employee-Focused Advisory
Although there’s no formal, widely recognized term for the advisory structure in an employee buyout, one could describe it as a “Collaborative Advisory Model.” In this model, advisors on both sides of the transaction are likely to work more cooperatively, providing expertise to ensure the deal is structured in a way that benefits all stakeholders, with a focus on long-term sustainability.
Key Considerations in Employee Buyouts
- Valuation and Fairness: Even though the employee-buying group shares a common interest, it’s crucial to determine a fair valuation for the business. This ensures that the transition is equitable and that employees don’t overpay for their shares, potentially jeopardizing the company’s future.
- Financing the Deal: One of the major challenges in employee buyouts is securing the necessary financing. Employees may not have the capital required to buy the business outright, which is where an ESOP, MBO, or an EOT structure can help bridge the gap.
- Cultural and Operational Continuity: Since employees are taking on a larger ownership role, it’s essential that they also step up in terms of leadership and decision-making. Business owners should ensure that the leadership team is prepared for the responsibility that comes with ownership.
- Long-Term Success: The business will continue to need strong leadership and vision post-sale. Ensuring that employees are not just buying a stake, but also have the tools and guidance to succeed, is critical for a successful transition.
Conclusion
While traditional M&A transactions are often marked by adversarial structures, employee buyouts present an opportunity to shift the focus toward collaboration and mutual benefit. By moving away from the traditional sell side and buy side framework, business owners and employees can work together to ensure the continued success of the company. Whether through an ESOP, MBO, or an Employee Ownership Trust (EOT), the goal remains the same: creating a company that thrives under the stewardship of those who know it best—the employees themselves.
In this new, more cooperative environment, the sale becomes not just a transaction but a shared vision for the company’s future, built on trust, collaboration, and a common purpose. For Canadian business owners, Employee Ownership Trusts offer an innovative and increasingly accessible way to transition ownership in a way that benefits all stakeholders involved.