Employee Ownership: A 10-year VEER Reflection

After nearly a decade of helping owners pass the torch—and, in many instances, watching employees step into the role of new owner/entrepreneur—we’ve learned that internal ownership transitions are rarely about just numbers and deal terms. They’re about legacy, opportunity, and the shared belief that a company’s future can (and should) belong to the people who’ve helped build it. As VEER approaches its 10-year anniversary and reflects on more than 60 M&A and employee equity transactions, our team has taken a moment to step back and ask: What actually makes employee buy-ins work? Here are the lessons that continue to show up—deal after deal.

1.      We are only limited by our creativity

In the world of small business transactions (in our space, that’s typically companies with values < $15 Million), our team certainly has no preconception of “this is the way it’s done”. In this corner of the market, no deal is the mythical ‘all cash on close’ structure. Rather, internal ownership transactions typically have elements of some cash on closing provided by the employee buyers (we stress a “meaningful” amount, not necessarily a significant amount), a promissory note (vendor take-back) payable over time (typically with an interest rate and backed by security/collateral), and/or a conditional element like an earn-out or purchase price adjustment, where future payments are made based on future results of the company.  But how does that all come together? Financial modelling aside, understanding objectives – both of current ownership and the potential new employee owners – enables us to propose ideas and structures that iteratively and collaboratively help us get to a tailor-made transaction solution. While no single structure or formula is universal, understanding each party's objectives, motivations and perspectives on both opportunities and risks within their unique business are key success factors in devising a win-win deal.

2.      Flexibility and patience are critical success factors

Often when we start talking about internal ownership transitions with business owners, a common theme emerges:  The potential employee owners have been identified by the current owners as the ideal fit for many reasons, including their operating knowledge, likelihood of maintaining the owners’ legacy, strong relationships with customers/suppliers/staff, and entrepreneurial drive.  The catch usually is… they don’t have cash burning holes in their pockets (especially in one of Canada’s most expensive real estate markets)!   If cash is the only real limiting factor, we’re big believers that we have most of the winning conditions for structuring a deal.  What must be present, though, is the selling business owners’ open-mindedness regarding transaction structure, a willingness to be patient, and the mindset to see a win-win despite not getting most of their cash on close.  Selling to employees typically involves a generous amount of vendor financing – sometimes with payments tied to future financial results and repayment terms that can extend well past 5+ years. Rather than seeing these realities as deterrents to a deal, the most successful internal transactions include elements that allow vendors flexibility in exchange for their patience: potentially, they can share in the business’s upside over time, participate in future growth, mitigate against future risks, exit on their own terms, and take the time to ensure leadership transitions are well in place before they fully divest.  This option is certainly not for every business owner.  However, for those that are highly motivated to create opportunities for employee equity and ownership, our team is confident we can suggest structures that meet the objectives of both the vendor and employee buyers.

3.      Potential employee buyers need to be motivated by more than just ‘preserving their job’

Years ago, we met with a company whose employees wanted to buy their employer with the driving motivation of keeping their jobs: their fear was that the current owner (who was well into their 80s) wouldn’t be willing to sell to another party and would rather dissolve the company than divest.  While the intention is a noble one, other motivations need to be present for future success. Small business ownership isn’t for the faint of heart. Potential employee owners not only need confidence in their ability to operate the business effectively and profitably, but ideally a strategic plan also needs to be in place. Maintaining status quo simply can’t be the objective of acquiring a business.  How will they define success? How will they grow/diversify/de-risk the business?  Who else needs to be on the team with them, and how will they make decisions?  What resources will they need to have in place to execute on their vision? What’s Plan B (/C/D..?) if they are unable to meet their goals?  Are they (and, very importantly, their families) willing to give up the stability of a job for the risk/reward of becoming an entrepreneur? The buyer group needs to be on the same page with these key questions (and many more!) well before they sign a purchase agreement.

4.      The transaction structure is the easy part…

The hard part is what happens (or should happen) long before and after we’re involved.  The legal ownership transfer can be relatively simple when compared to the heavy lifting that both the exiting owner(s) and incoming owner(s) need to focus on.  Well before officially retiring from the business, owners need to ensure their succession plan is in place, that leadership, management and operational roles/responsibilities are transitioned, and that they’ve adopted a culture of cross-training and redundancy in their operations and business relationships.  While our team isn’t directly involved in leadership transition coaching, we’ve had the great pleasure of seeing some of BC’s best in action and refer clients in confidence to local talented consultants and business coaches.

5.      Financial literacy is a cornerstone

When we work with current owners and potential owners alike, we often reiterate a similar message: You don’t need to be THE numbers person in the business, but you need to be A numbers person in your business.  Understanding financial statements, how profit is calculated, and – most importantly – how cash flows through the business are all absolutely critical for business owners.  Knowledge is empowerment, and empowered owners are those that get curious about their business’s financial results, having the confidence to question where and how improvements can be made.  We recommend without hesitation courses for owners and key management that build a foundation of financial literacy  (for one such example, check out the Colour Accounting program!)

With recent momentum and interest around employee ownership transitions – especially with the legislated Employee Ownership Trust (EOT) structures –  we are incredibly excited about the future of employee ownership in Canada.  While the average small business will not qualify for an EOT, owners should know they still have many options available to them if they remain interested in employee ownership. Our team has many lessons learned in this space, and, being an employee-owned company ourselves, like to think we “walk the talk” on the power of equity as a tool to motivate, attract and retain.   If you’re interested in the topic, or know of a company that could benefit from exploring this further, please don’t hesitate to reach out!