Building Resilience in an Uncertain Economy
Succession planning is daunting—and far too often delayed. A 2023 CFIB study found that only 9% of Canadian business owners have a formal succession plan, even though 76% plan to exit within the next decade. The challenges are significant: 54% of owners struggle to find a suitable successor, and family transitions face an even steeper uphill battle—with only 30% of family businesses surviving into the second generation, a figure that drops by more than half for the third generation.
There’s a promising shift underway. In the UK, Employee Ownership Trusts (EOTs) are becoming a key component of succession plans, and in 2024 Canada introduced new legislation to support them—empowering businesses to thrive under the leadership of those who know it best: their employees.
Employee Ownership remains an underutilized succession strategy—but it doesn’t have to be. Whether implemented as a standalone plan or combined with a family transition, it transforms succession from a compromise into a strategic move that preserves your legacy and ensures continuity. This approach empowers those who know your business best to lead it into the future.
What is Employee Ownership?
Employee ownership is, at its core, the sale of part of a business to its employees. It doesn’t automatically transfer decision-making power or alter the existing governance structure; rather, it creates an environment where employees become both financially and emotionally invested in the company’s success. Just as a rental car is treated differently from one that is owned, this subtle shift in perspective can significantly boost engagement and commitment. Moreover, it allows for a fair valuation of the business at the time of transition.
In Canada, there are three primary models of employee ownership:
Employee Share Ownership Plans (ESOP)
Under an ESOP, employees directly buy shares in the company. This type of plan can often take the form of a management buy-out, and is highly customizable. Owners can choose to sell as much—or as little—of the company as they wish, making ESOPs ideal for those who want to retain key employees while not completely stepping away from the helm.
Employee Ownership Trusts (EOT)
Introduced in Canada with legislation passed in June 2024, EOTs follow the successful model established in the UK. In an EOT, employees do not directly hold shares. Instead, a trust becomes the majority shareholder (holding at least 51% of the company), and employees are designated as beneficiaries. This eliminates the need for employees to personally finance the transaction, and instead the trust is established via a bank or vendor take back loan. For owners looking to exit, the EOT offers a compelling incentive—a $10 million Lifetime Capital Gains Exemption, available if the sale is completed before the end of 2026.
Hybrid Models
An emerging approach combines the benefits of ESOPs and EOTs. In these hybrid structures, owners enjoy the tax incentives of an EOT while also providing an ESOP—typically for senior employees—to acknowledge their significant contributions. This model can even be used alongside family succession, offering an opportunity to preserve a legacy while transitioning the business in a sustainable way.
Each of these models offers a distinct pathway to sustainable succession planning, ensuring that the transition not only protects the business legacy but also protects the company for the challenges of the future.
Building a Stronger Business through Employee Ownership
Employee ownership is often implemented as part of a succession strategy, yet its benefits extend well beyond leadership transitions. It serves as a powerful tool for enhancing both retention and engagement. Employee owned companies in the US boast significantly higher retention rates than non-employee owned counterparts. Similarly, research in the United Kingdom shows that after adopting employee ownership, businesses experience up to a 20% performance boost and revenue increases as high as 43%. Employees who have an ownership stake are more invested in the company’s success, which can lead to stronger performance and long-term growth.
Moreover, employee ownership provides a valuable safeguard against external economic pressures. A study by Rutgers University revealed that during the pandemic, employee-owned companies demonstrated remarkable resilience—retaining jobs at a four-to-one rate compared to other businesses, and maintaining stable salaries and hours. In an increasingly volatile economic environment, employee ownership could be the solution to building a more resilient business.
What Makes a Strong Employee Owned Business
Is employee ownership the secret sauce of success? Perhaps—but it requires several key ingredients.Financially, there must be something to sell – that means the business should have healthy cash flow and relatively stable revenue. Culture, too, is critical; employee ownership is no remedy for a toxic environment. Any serious cultural issues need to be resolved before considering this approach. Conversely, when implemented well, employee ownership can enhance company culture—but only with dedicated efforts to educate employees and foster transparent, open communication.
While starting succession planning may seem daunting, employee ownership presents a unique opportunity to both preserve a legacy and future-proof the business. Embracing alternatives beyond traditional mergers, acquisitions, or family transfers can transform succession planning from a reluctant obligation into a strategic advantage—empowering those who built the business and securing its long-term success.
