The Canadian Economic landscape is changing with 76% of small businesses due to retire in the next decade, leaving over $2 trillion dollars of business assets at stake (CFIB). With this ‘Silver Tsunami’ rapidly approaching, Founders may be left scrambling for options to sell their business.
The Problem
A third party sale only offers Founders one solution – getting their money out for retirement. It also opens the door for a lot of risk – the culture, the people and the legacy are all at stake, not to mention the time and headaches of traditional M&As!
Enter Employee Ownership
Employee Ownership Trusts (EOTs) are gaining traction as a powerful and sustainable alternative for ownership transitions. They enable Founders to sell their businesses while preserving the integrity of what they have built. At Firefly Insights, we specialize in guiding Canadian businesses through employee ownership transitions, recognizing that financial considerations are just one aspect of succession planning. In our ‘Your Legacy, Your Way’ series, we will break down the various employee ownership models, beginning with EOTs, and explore how this option can streamline the transition process and preserve your legacy.
What Exactly Is an EOT?
An EOT is a trust established to hold shares on behalf of a company’s employees and facilitates employee benefits when the company succeeds. This model not only secures the legacy of your business but also enhances employee motivation and retention.
Why Choose an EOT? Key Benefits for Businesses and Employees
- Legacy Preservation: Keep your business thriving within a trusted and loyal team.
- Employee Empowerment: Boost morale and productivity by giving employees a stake in the company.
- Smooth Transition: Benefit from a structured, well-regulated process designed to ease ownership transfer.
- Financial Incentives: Business owners could qualify for up to $10 million in Lifetime Capital Gains if the transition occurs before 2026.
How EOTs Work: The Basics
Creating an EOT begins with a fair market valuation to determine the company’s value. Once valued, at least 51% of the business is sold to a trust, typically financed by a major lending institution. This approach allows employees to share in the rewards by being beneficiaries of the trust without requiring personal capital, ensuring an equitable transition for all involved.
Once the trust is in place, excess company profits are directed first to repaying the initial loan. After the loan is fully repaid, additional profits—beyond what’s necessary to operate the business—flow to the trust, which then distributes them to employees. These distributions are calculated using a formula customized for your business, potentially based on factors like seniority or role. No need to worry about the details just yet; we’ll work with you to design the best approach for your team!
Is an EOT Right for Your Business?
EOTs are ideal for founders who:
- Are aiming to transition out of their business in the next 1-5 years
- Have midsize businesses with stable cash flow, and
- Want to create lasting change that reflects their company’s values
Other Considerations
At first glance, establishing an EOT may seem straightforward—but it involves many important considerations. What will the impact be on our governance structure and company culture? How can we foster an ownership mindset among employees? Additionally, how do we ensure they understand what this transition means for them? And, of course, there’s the matter of taxes!
While establishing an EOT can feel overwhelming, you don’t have to navigate it alone. We take a unique approach that emphasizes a smooth transition, fostering a culture of ownership that truly empowers your employees.
Your Legacy, Your Way
At Firefly Insights, we understand that every business is unique, and believe your succession plan should be too. An Employee Ownership Trust (EOT) can be a powerful choice for companies wanting to preserve legacy and foster a strong ownership culture, but it is not the only path. We guide businesses through all ownership options—including EOTs, Employee Share Ownership Plans (ESOPs), and Worker Cooperatives—to find the best fit for your vision, values, and goals.
Once the right model is chosen, we work with you to build a framework that fosters transparency, shared accountability, and a sustainable ownership mindset. Whether you are in the early stages of exploration or ready to start, let’s connect. Together, we will turn your vision into a strategic advantage that’s uniquely yours.