Over the next decade, Canadian small and medium-sized businesses face two transitions. One arrived suddenly this year, with widespread pandemic lockdowns leaving our main streets littered with “for lease” signs. The other has been quietly approaching for years, as a generation of business owners prepare to retire and sell their companies. How these transitions play out could mean the difference between broadly shared prosperity and hollowed-out local economies. But Canada confronts these transitions without a critical tool that has had great success in both the United States and Britain: the employee ownership trust.
The vast majority of the owners of Canadian businesses are over the age of 50. Seven in 10 owners of small and mid-sized companies plan to sell in the next decade – businesses that account for two-thirds of Canada’s GDP and the core of our main streets. You won’t see these statistics reported alongside exchange rates, stock indexes, or oil prices. But who owns our businesses matters a great deal for the prospects of companies, their employees and their communities.
When owners look to move on, even successful businesses in Canada can struggle to find local buyers. Beyond keeping a business in the family, founders are often left choosing between financial investors or competitors. Both of these options often lead to international ownership, greater industry consolidation and, most critically, fewer jobs and profits in Canada.
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It doesn’t have to be this way. Using employee-ownership trusts, business owners in the U.S. and Britain can sell their companies at fair market value to their employees, often funded by loans, without those employees needing to invest their own savings. In the U.S., where employee-ownership trusts have a 45-year history, 14 million workers at 6,600 companies share in US$1.4-trillion of wealth. In Britain, where a new policy was introduced in 2014 to support employee ownership trusts, they are growing quickly in popularity. Yet in Canada, this model does not exist.
Business owners want to see the companies they have built over decades stay intact and thrive in their local communities. Employee-ownership trusts allow them to secure that legacy and reward employees without financial sacrifice. This structure also allows exiting owners to stay involved in the business for the long-term if they wish, working with existing management to continue building the business.
For workers, employee-ownership trusts offer a chance at an ownership stake in their employer and an unmatched opportunity to build wealth. Unlike other approaches to employee ownership, trusts ensure that all employees – from the front line to the C-Suite – can earn a significant ownership share. In the U.S., they have allowed grocery store cashiers to build $1-million stock payouts, and the median wealth of workers at employee-owned companies is nearly double that of equivalent workers at companies with traditional ownership. Employee-owned companies also pay more, offer better benefits and are more likely to have company-funded retirement plans.
From craft breweries to recycling to manufacturing, these trusts can work in companies large and small. But the benefits aren’t just for owners and employees. Employee ownership helps preserve businesses in local economies because companies owned by local employees are more committed to protecting and creating local jobs. They tend to grow faster, are more profitable and are more resilient in the face of economic downturns. U.S. companies with employee ownership were much less likely to have layoffs or go bankrupt in the 2001 or 2008 recessions. The Canadian economy has weathered three economic crises in 20 years, and employee-ownership trusts would better position it to weather the next one.
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When supportive public policy was introduced in the U.S. and Britain, it was followed in both cases by significant growth in employee-owned firms. Conditions in Canada are ripe for the same kind of growth – as long as we get the barriers out of the way. That means we need an “off-the-shelf” legal structure for companies to work with, targeted tax incentives and effective oversight that protects employees' interests. We can take the best of what works elsewhere to create a “made in Canada” employee-ownership trust.
The economic effects of COVID-19 are revealing and amplifying the weaknesses of our economy. Opening up a route to employee ownership provides another path for Canadian businesses toward a fairer, more prosperous and more resilient future.
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