Is it time to sell your business, but you’re unsure who will buy it?  Do you have a private business with no obvious successor? Perhaps you’re ready for retirement but you’re worried about how to preserve your company's legacy and culture.

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This was the problem Kurt Lustig and Bob Taylor faced, as founders of US-based Taylor Guitars. They’d grown from a small guitar repair shop in 1974 to a US $150 million revenue household name. Neither of them had children who wanted to take over the business. And they didn’t like the idea of selling to private equity or a strategic buyer. 

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Trust-based employee ownership models are well established in the US and UK, though they operate differently. Canada’s new Employee Ownership Trust model is designed to be a succession plan for mid-sized, privately held companies. If you’re looking for a full or partial sale, then selling to your employees might be your solution. 

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EOT transactions need to navigate several legal requirements, making the design and transaction costs comparable to selling to a third party. The cost and governance structures make it challenging for smaller businesses, but if you have more than 25 employees, then an EOT may be a good option. 

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If you have more than 25 employees, then an EOT may be a good option.

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From day one of the transaction, all employees are included in the EOT and the Trust holds the majority of the shares. The transaction is paid for through debt, usually with a combination of bank loans and seller financing. That means the company has to have a strong, stable cash flow to be able to make loan payments. This isn’t a great tool for early stage or fast-growth companies, nor is it great for struggling companies with weak profit margins. They may struggle to obtain financing or pay for the transaction. 

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But if your company is like Taylor Guitars with mature, stable cash flows, undertaking an EOT transaction could be the right next step. At Taylor, the company borrowed money from financial institutions, and Kurt and Bob leant some of it themselves to make all of their employees owners in 2021, and they’re paying back their lenders through future company profits. For Taylor Guitars, employee ownership was the only solution that would keep the company and its culture intact. Even better, it meant that the future of the company would belong to all the people who had made the company into what it is today.

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But if your company is like Taylor Guitars with mature, stable cash flows, undertaking an EOT transaction could be the right next step.

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Employee Ownership Trusts are designed as a solution for Canadian business owners who have built great businesses and want to protect it and their people into the future.