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Secure your firm’s future
Employee-ownership offers a new paradigm for securing the legacy of businesses
September 8, 2023 By Nithya Caleb
At this year’s Graphics Canada Expo, I attended the presentation on “Employee-Ownership as a Succession Option” by Chad Friesen, CEO, Friesens Corp., Altona, Man., one of Canada’s largest book printing companies. Friesens is fully employee owned. Chad made a compelling case for employee-ownerships. In the ensuing paragraphs, I’ll highlight some of the reasons for PSPs to consider employee-ownerships, based on Chad’s presentation.
As a business model, employee-ownership “fosters sustainable ownership, improves financial performance, and provides a host of benefits to both the company and the country,” said Chad, who is a member of the Canadian Employee Ownership Coalition’s (CEOC’s) steering committee. He believes employee-ownership offers a promising alternative to the negative impacts of capitalism that are becoming more visible these days.
Need for change
According to a 2020 survey by Edelman Data & Intelligence, 57 per cent of people believe capitalism, as it exists today, does more harm than good. There is a stark wealth gap between owners and workers. According to Stats Canada, most wealth is held by relatively few households in Canada. The wealthiest households (top 20 per cent) accounted for more than two-thirds (67.9 per cent) of net worth at the end of 2022, while the least wealthy households (bottom 40 per cent) accounted for 2.6 per cent.
We are also seeing market consolidations in monolithic companies like Amazon as well as the rise of faceless private equity ownerships. Employee-ownership presents an opportunity to address these concerns and create a more equitable economy.
Benefits to the company
Employee-ownership offers several advantages to the company. Firstly, it establishes a sustainable ownership structure, ensuring continuity and long-term commitment from employees. Secondly, employee-owned businesses tend to exhibit better financial performance, driven by a shared sense of responsibility and dedication among workers. Moreover, being part of a company with an empowering ownership model attracts talented individuals who want to be part of a great story and contribute to its success.
Benefits to the country
Beyond the benefits to individual companies, employee-ownership is beneficial to Canada. It contributes to economic resilience by diversifying ownership and reducing dependency on select companies. By encouraging broader distribution of wealth, employee-ownership helps address income inequality, thereby fostering a more inclusive society.
According to a survey by the Canadian Federation of Independent Business (CFIB), 76 per cent of owners plan to exit within the next 10 years. But, 43 per cent of these businesses lack a succession plan, leaving them vulnerable to being sold to consolidators or private equity firms, most likely from outside the community, province, or Canada. With approx. 140,000 businesses in Canada employing between 20 and 500 workers, the implications are significant for roughly 5 million individuals.
As we all know, in the printing industry, many company owners are looking to retire. Employee-ownership would be an attractive option for these owners. A CFIB survey indicates 53 per cent of existing owners would be more inclined to sell to their employees if viable options were available. A majority of the surveyed business owners (61 per cent) said they’ll prioritize “protecting employees” during a business sale over attaining the highest possible price.
Employee-ownership ensures a smooth transition, and the local economy can continue to sustain itself. Canada will also benefit from the reduction in foreign ownership.
Role of EOTs
Employee ownership trusts (EOTs) provide a framework for implementing employee-ownership. EOTs hold shares on behalf of employees, allowing them to benefit from shared ownership without requiring upfront payment. These trusts often borrow money to acquire shares, and employees receive the benefits of ownership based on formulas tied to their tenure and pay. EOTs offer a simple, cost-effective solution to transition ownership and empower employees, said Chad.
In the U.S. and U.K., employee-ownerships have been successful for years. In the U.S., the employee stock ownership plan (ESOP) was established in 1974. Equity growth is the focus in the U.S. where 6,000 companies with 2 million employee owners have ESOPs. Most of these companies employ around 20 to 250 employees, and are in varied industries, such as manufacturing; professional, scientific, and technical; and financial services. Publix Super Markets is the largest privately held ESOP in the U.S. with more than 200,000 employee-owners.
In the U.K., EOT was established in 2014. Profit-sharing is the focus in the U.K. where 800 companies with 100,000 employee-owners have EOTs. Most of these companies employ around 20 to 250 employees, and are in varied industries, such as manufacturing; professional, scientific, and technical; and IT services.
In Canada, we have around 30 EOTs with profit-sharing as the focus. In 2010, Friesens adopted the EOT business model. Today, it has more 650 employee-owners. In 2022, $10,000 was the average EOT payment at Friesens.
Brett House, former deputy economist of Scotiabank, predicts Canada could have up to 750 EOTs by 2030 if appropriate policies and incentives are adopted. Per an analysis shared by Chad, the level of adoption would result in 50,000 to 114,000 new employee-owners; $4.3 to $9.6 billion in wealth generated for employee-owners; and over 100 new employee-owned companies formed per year, creating over 10,000 new employee-owners annually.
The federal government committed to creating an EOT framework by January 2024 in the 2023 budget. A draft legislation was also published for feedback. While the legislation proposes providing benefits to all employees at no additional cost, CEOC argues it lacks key measures that are needed to make Canada’s employee-ownership as successful as in the U.S. and U.K.
CEOC is asking the federal government to increase eligibility for EOTs; introduce clear and simple rules for an EOT; adopt a governance structure that promotes smooth and gradual transition of privately owned businesses to an EOT; and incentivize employee-ownerships for about-to-be sold businesses by providing capital gains tax exemption to owners who sell a majority of their company to an EOT.
Employee-ownership has the potential to shape a more equitable and resilient economy. If you’re struggling to draft a succession plan for your company, consider an employee ownership trust.
This article originally appeared in the July/August 2023 issue of PrintAction.
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