Canada’s small business landscape will transform in the next decade as small business owners look to exit their businesses. Employee Ownership Trusts, a novel way of structuring a business, offer a way for business owners to exit and hand it off to the employees who run it.
In this article, we’ll cover the basics of Employee Ownership Trusts to see if it’s the right fit for your unique business.
What is an Employee Ownership Trust (EOT)?
The Government of Canada announced the Employee Ownership Trust (EOT) regime in 2023. Since then, new tax incentives have been introduced, making an EOT an attractive business succession option.
An EOT encourages employees to purchase a business through a trust arrangement. This arrangement offers a way for business owners to cash out of their business without having to sell to a traditional buyer. Instead of a competitor or private equity group obtaining the business, its ownership can be transferred to the employees who work there.
Employees do not have to provide the up-front cash to purchase the business. Instead, the business funds the EOT, essentially functioning as a bank. Then, the EOT acquires a controlling interest in the business. Workers do not own shares directly, and the ownership of the business, with its benefits and profits, is distributed widely.
An Alternative Model for Business Succession
According to the Canadian Federation of Independent Business, 76 percent of Canadian business owners plan to exit their businesses in the next ten years. Still, only 9 percent have a business succession plan.
When an owner is ready to exit their business, there have traditionally been just two options:
- Sell the business
- Or shut down the business
When a business is sold, there are often major operational disruptions for the business, its employees, and its customers. When a business is shut down, it has a ripple effect in the community in which it operates, affecting customers’ lives and changing the lives of employees who need to find new work.
The employee ownership trust is an alternative model, a way to “sell” the business to its employees. Through this model, many major operational disruptions are minimized or avoided completely, leading to smoother outcomes for employees and customers alike.
Incentives, Benefits and Drawbacks
Incentive – Tax Efficiency
An EOT is a tax-efficient structure for business succession. The first $10 million of capital gains on a company sale are tax-exempt, making it an extremely attractive option for owners looking to sell and retire.
Benefit – Stronger Economy
Keeping these businesses thriving in BC will benefit the overall economy. Canada-wide, the potential closure of small businesses that don’t have a succession plan in place will have an estimated $2 trillion impact on our GDP. In BC, right now, 33 percent of all GDP comes from small businesses.
Benefit – Better for BC’s Small Towns Communities
Many small towns and communities in BC with less than 2,500 residents are often supported by a handful of critical types of businesses like grocery stores, gas stations, hardware stores, farm supplies, credit unions, auto repair, pharmacies, et cetera. Their closures can have a devastating impact on the communities they call home, leading to a cascade of closures that hollow out local economies and reduce attractiveness to tourists. EOTs keep ownership of a company and its profits within its community rather than selling to a large, multinational corporation.
Drawback – Complexity
An EOT is a complex, sophisticated business structure. It can require help from lawyers, accounts, and consultants to ensure that it’s set up correctly. Sometimes, it may be simpler to sell your business than set up an EOT.
Resources and Further Reading
- Employee Ownership Trusts (EOTs) from the Government of Canada
- An Alternative Exit Plan: Selling Your Business to Employees with ESOPs
- How to Exit Your Business: The Legal Requirements
- The 9 Key Players of Succession Planning
Small Business BC is Here to Help
SBBC is a non-profit resource centre for BC-based small businesses. Whatever your idea of success is, we’re here to provide holistic support and resources at every step of the journey. Check out our range of business webinars, on-demand E-Learning Education, our Talk to an Expert Advisories, or browse our business articles.
