Selling to your Employees is Still a Sale

Embarking on the journey of selling your business to an Employee Ownership Trust (EOT) in Canada is a significant step, one filled with opportunities and responsibilities plus a unique blend of collaboration and trust. Since the management and staff remain the same, it may feel like nothing is changing. But the change is significant and the sale of the business is still a sale.

In an EOT transaction, the Trust is buying the shares and the Trustees of the EOT are the buyer. Just like an outside buyer, they will need to go through all the preparations for a purchase. Although the Trust is a collaborator in the transition to employee ownership, it is also independent and the counterparty to the sale. In a situation like this, Trustees have a legal obligation to ensure that they are acting in the best interest of the Trust (and its beneficiaries) and can be held personally liable if the EOT breaches the terms of the Trust.  

In order for the Trustee to purchase the shares and prove they have done their duty in the purchase process, they need to complete due diligence on the company and its activities, just like an outside buyer. While this includes financial statements, it also includes a host of other items that are needed to confirm the company’s value and operations. Due diligence generally includes requests for information including legal documents, board resolutions and notes of shareholder meetings, existing employee and vendor/buyer contracts, sales and marketing materials, lists of personnel and resumes of senior management, descriptions of intellectual property, details of off-balance sheet assets or liabilities, any existing plans or forecasts, management interviews, plant and site inspections, and reviews of technology and security, among others. 

Depending on the complexity of operations and the state of readiness, preparing all this information can be a big job, spanning several months. Companies need to budget the time and resources to make this happen.

Like any sale, selling to the EOT requires all the usual legal documentation to be produced, such as a purchase agreement and shareholder agreement. In addition, there will be the creation and design of the EOT entity itself, and the Trust document that governs its relationship with the employees.  

Given the changed nature of the company’s structure, it is also important to review the Corporation’s bylaws to reflect the new Board composition, harmonize compliance with Canada’s EOT laws, and account for employee feedback and participation in the company. While these documents must adhere to Canada’s EOT laws to keep the company compliant, they are also bespoke, designed to capture the unique qualities and objectives of each company and fuel its success going forward. Having a very clear set of outcomes and goals attached to the design of your employee-owned business will help to streamline the process of transition. 

There is a lot of work in preparing for the sale of any business, and the sale to its employees is no different. But it is of the utmost importance to remember that the sale is not the finish line—it’s the start line for your employee-owners. So while the due diligence is important and must be done well, the change management and communication needs of your company for the day after the sale are just as important.

You can smooth the process with clear goals, good planning, and collaboration with EOT experts to make a seamless transition.