At just 35 years of age, Heather Payne is already thinking about succession.
The founder and chief executive officer of Toronto’s Juno College of Technology – formerly known as HackerYou, which built its reputation on coding boot camps – can’t help but wonder about the company’s long-term outlook.
The typical options for succession – such as selling to a competitor – aren’t so appealing to her. But Ms. Payne has found a niche alternative, which she presented to her employees last year: Ownership of the decade-old school will eventually be transferred to them.
“This is the plan for me,” Ms. Payne said. It would be “a cool way to leave a legacy, leave the business independent and have my team that’s been with me for a long, long time take over.”
Such a plan could become easier to execute in the near future. In its recent budget, the federal government said it would amend the Income Tax Act to create an employee ownership trust (EOT), following similar reforms in the United States and Britain. The design of the trust and its launch date are still being worked out.
The budget pledge follows a public campaign from Social Capital Partners, a Toronto-based non-profit financing company, to create a dedicated EOT in Canada. Boosters of employee ownership say it’s linked to stronger company performance and job satisfaction. It also gives entrepreneurs another option in exit planning.
The transfer often works as follows: A trust takes on debt to buy the company for its employees, with the loan repaid from earnings over many years; in return, the seller gets a more favourable tax treatment of capital gains.
Employee ownership does exist in Canada, in various forms. Some co-operatives are employee-owned, while many companies dole out stock options to workers, though generally to high-ranking executives. Construction giant EllisDon Corp. started the process of transferring some ownership to workers about two decades ago.
But there are relatively few examples of broad-based employee ownership, its proponents say, citing regulatory issues and few incentives for sellers. Social Capital Partners says there is no trust in Canada with the three key attributes that help facilitate such deals: an ability to invest largely in company shares, take on debt to finance the purchase and hold shares for a lengthy period without employees incurring a tax hit.
The U.S. and Britain offer a glimpse of the potential. About 14 million people participate in an employee stock ownership plan in the U.S. and hold a collective US$1.7-trillion in assets. The workers accumulate shares over time and sell them back to the company at retirement or if they resign. In some extreme cases, lower-wage, long-tenured employees have retired with more than US$1-million in company stock.
Benefits differ in Britain, where EOTs were introduced in 2014. Employees there receive a portion of company profit as a bonus, with as much as £3,600 ($5,930) distributed tax-free per worker each year.
Succession is a pressing issue. As Canada ages, so too have its business owners. In 2018, almost seven in 10 private enterprises were owned by someone 45 or older, according to recent Statistics Canada figures.
Much like Ms. Payne, Tim Masson is thinking about his company’s next chapter.
Mr. Masson, 43, is the CEO of Ian Martin Group, an Oakville, Ont.-based employment agency that was co-founded by his grandmother in the late 1950s. If he sold the company to a competitor or private equity group, “the value gets stripped out of a business that’s had a positive legacy,” he said.
Mr. Masson would like to see his company employee-owned, so he was pleased to hear that Ottawa will introduce EOTs. Even if the government plan falls short of expectations, he’d still be interested in finding a way to make it work.
Employee ownership “will protect the economic value of our small and mid-size businesses,” he said.
But it’s not always the best option. For one, companies need to be fairly valued – that way, workers aren’t stuck paying off a bloated loan. It’s also best for established companies with a track record of profitability.
And, of course, it’s tough to turn down a more lucrative purchase offer from a U.S. competitor.
“That would have been the smart thing to do in the short run. And that’s what most Canadian companies do,” said Geoff Smith, the president and CEO of EllisDon, in an online video last year. (EllisDon announced in 2020 that it would transfer the remaining half of its ownership to its workers.)
“For me, it’s the right thing to do anyway,” Mr. Smith said. “The employees generate all of the profits that we make. I’ve never frankly understood why capital gets all the excess profits.”
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