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What is Employee Buy-out?

By: Paul Geraghty - Updated: 12 Aug 2012 | comments*Discuss
 
What Is Employee Buy-out?

In some cases, redundancy will affect not just a proportion of workers at a site, but all of them. All of the workers within an entire country may even be affected if a multinational firm decides to close down its entire operation there. When a whole site is being closed down, an unusual response to the mass redundancy is sometimes possible : the employee buy-out.

Economic Viability of the Business

One option for responding to the closure of the site is for the employees to buy it from their former employer and begin to operate it on their own. Clearly this is an extremely bold step which is not appropriate in all circumstances. For it to make sense, the employees would have to be convinced that their was a strong market demand for whatever it is that the company produces or offers. If that is the case, why would the company close the site down? Management wrong-headedness perhaps, but, certainly, it is easy for a workforce to look at the world through rose-tinted spectacles when appraising the demand for their own labours. The economic viability of the enterprise has to be coldly and carefully considered whenever a buy-out is being contemplated.

Will the Company Want to Sell?

In many cases, a company will close a site down with the intention of continuing to supply the product or service from another site elsewhere. Sanctioning an employee buy-out of the existing site would therefore mean that the company was effectively promoting a competitor to its own business. Although this does occasionally happen, it should not simply be assumed that a company will agree enthusiastically to an employee buy-out.

Many employee buy-outs take place when the company is a small one which has been built up by a single individual over a lifetime. When the founding entrepreneur wants to retire, he or she may retain an emotional attachment to the company and its workforce and therefore be willing to go the extra mile to facilitate a buy-out by the employees.

Financing an Employee Buy-out

If the business is going to be bought, finance for it will have to be raised. Naturally, the redundancy pay cheques are likely to be the primary source of this. Are the workers willing to put all or much of their redundancy pay towards the dream of keeping the company, and their jobs, alive? Will that even be enough? If not, outside capital may have to be sought, for example from a bank. In this case, you would normally have to present a serious business plan and present evidence of some kind of managerial competence. Just saying “things will keep going the way they’re going, everything will be fine” isn’t going to cut it with outside investors.

Business Structure After the Buy-out

Once an employee buy-out has been decided on, you need to think about how the business is going to be structured. A related question is how it will be managed. Perhaps the managers were involved in the buy-out and so will still be there along with the employees. Or the workers may attempt some kind of cooperative in which the business is managed and operated jointly by workers who will make the decisions democratically. If this seems a little too much like pie-in-the-sky idealism, outside managers can be hired to superintend the workers who own the business.

Even in that case, however, potential problems present themselves. How does a manager discipline an employee who is a part owner of the business?Although for most people, owning a significant part of the company, and therefore sharing in its success, tends to be a powerful motivator towards hard work, exceptions do occur. What happens if a worker is not pulling his or her weight? Coming in late or taking days off? These are the kinds of issues that must be thought through when embarking on a buy-out plan.

Apart from co-operatives, employee buy-outs are sometimes carried out by allocating shares to each employee. Sometimes, some or all of the shares may be held in a trust fund. Choices on business structure have important tax implications. Expert advice should be sought on this issue.

Employee Buy-Outs – Conclusion

It can be quite a leap to go from being a worker facing the prospect of unemployment to a part-owner of the business you once worked for. It’s rare, but it does occasionally happen!

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