Inštitut za ekonomsko demokracijo

Economy recovery tools need support and promotion

Author: Elena Galevska

27 Day Cash Buffer

The COVID-19 pandemic has often led to disappointing business performance, and SMEs across all industries were affected. Many small businesses faced survival issues even in the first month of lockdown, and the crisis doesn’t seem to come to its end any time soon.

In addition to this, the silver tsunami threatens with a massive retiring wave. Numerous SMEs may find it very difficult in the near future to find a new owner and are at high risk of liquidation. Even those who manage to obtain a venture capitalist to buy their company may come to terms with a similar fate – draining the value of the company’s asset and eventually closing down the shop leading, in turn, to higher unemployment, lower tax revenues, depopulation, inequality, and many other social issues.

Thankfully, giving up is not the only option. Transferring ownership to employees can be done as fast as 30 days and it can save both the company, the employees, and the local community.

Employees are natural successors because they are directly concerned with the company’s performance and are usually citizens of local communities. They know all about the firm and how the business is run. Overall, putting the company in the hands of those who helped to build it makes perfect sense.

However, employees typically don’t have the necessary financial resources to buy the company and have problems or are unwilling of getting private loans.

Because of that, the focus of merger-and-acquisition experts shifts to the three common tools:

      • Bargain sale to a non-profit sponsor,
      • Charitable remainder trust,
      • Stock sale.

The bargain sale to a non-profit sponsor is a two-stage conversion, allowing employees to purchase the company at a below-market price.

Charitable remainder trust allows below-market price purchase while providing ongoing income to the seller.

Finally, the stock sale offers tax advantages, hence lowering the seller’s tax liability.

The stock sale is found to be the most viable model, according to the social benefit company Concerned Capital’s studies. There have been numerous successful employee-to-owner conversions using the stock sale model, hundreds of jobs are saved, and the capital remains anchored in the local community. The seller defers capital gains taxation on the sale, and the employees can assume the ownership to continue the years-long business tradition.

Soon, the political focus will turn from immediate and ad hoc crisis response to systematically support the recovery of the economy, saving businesses, and stabilizing the communities – all of which can be done through employee ownership. The tools for the much-needed conversions have already been developed, but further promotion and support are required to significantly increase the number of employee-owned companies. More information about the ownership transfer toolkit can be found here.

Several organizations around the world are putting the effort to spread the knowledge regarding employee ownership options to achieve the multiple benefits that stem from it. Our institute does it in Slovenia. We have recently drafted legislation that would incentivize conversions and started working with pilots, to implement employee ownership in Slovenian businesses. Write to us and we’ll tell you more.

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