Selling to your staff seems like the perfect exit. They already know the business, it rewards their loyalty, and you avoid the grueling process of finding an external buyer. But relying on the wrong type of ownership model can cost you years of wasted effort and derail your eventual retirement.
Employee Ownership (EO) continues to be championed as an effective way to drive business productivity, improve staff retention, and increase the rate of succession for Australian small business owners.
However, on top of a ‘not so straight forward’ spread of EO model types (collectively ESOPs, ESPs, EOTs, ESSs, & Equity Plans), recent budget changes have only added to the potential challenges of achieving a widespread rollout of SME owners selling to employees.
In theory, it’s a resounding "yes" to the question of whether employee ownership makes sense. In practice, it’s much more unclear as to whether it can be structured to actually work.
The Reality of Selling to Your Staff
With tens of thousands of business owners approaching retirement with no obvious buyer, selling to your staff makes a lot of sense.
From my experience working deep inside many SMEs, you need to start by viewing your employees as one of your most natural buyer groups (especially in service businesses). If employees don’t see a future for themselves—something a potential change of ownership often brings into focus—they will leave. When that happens, the business becomes much harder to sell to anyone else.
But being a natural buyer group comes with two major caveats:
- It doesn’t automatically mean they see themselves as buyers.
- It certainly doesn’t mean they are ready and able to take on ownership.
When we talk about employee ownership as a succession plan, it asks a fundamentally different question. It is not just, “Do you want to share in the upside?” Instead, it asks, “Are you prepared to take on the risk, uncertainty, and long-term responsibility?”
Being ready and able isn't just about leadership capability. It is also about their financial capacity, risk tolerance, and willingness to commit to the business for the long haul.
TWO Actions Before You Talk Structure
Too many owners start at the 'structure' end of the process. Enticing as it may be to jump straight into tax or legal models, you need to take these two steps first:
1. Plan a Structured Conversation
The most practical starting point is not, “I want to sell to you.” Instead, start with: “What does this business look like without me in 3–5 years?”
From there, you can safely:
-
Test their genuine interest.
-
Assess their true capability.
-
Introduce the concept of ownership carefully.
2. Define What "Employee Ownership" Actually Means
Not all employee ownership is about your succession. Part of the confusion comes from how broadly the term is used. In Australia, many “employee ownership” models are actually:
-
Incentive schemes
-
Profit shares
-
Minority equity plans
These can absolutely improve performance and engagement. But they don’t solve your succession challenge. They share income—not necessarily ownership or long-term wealth.
“A structure that works commercially but fails tax-wise won’t proceed. A structure that works tax-wise but fails commercially won’t survive. Employee ownership only works when both align.”
The New Complication: Federal Budget Changes
Since the recent Federal Budget, there is another layer of complexity added to this conversation.
Proposed changes to how discretionary trusts are taxed may have unintended consequences for employee ownership structures. Many Australian models—particularly Employee Ownership Trust-style arrangements—rely on trust structures to hold shares on behalf of employees.
If those trusts are treated in the same way as traditional discretionary family trusts, the tax outcomes may become significantly less attractive. At the same time, the proposed rollover relief period may create a window for business owners to restructure, potentially into more formal employee ownership models.
The detail is still unclear. And that matters, because employee ownership isn’t just about intent—it is about execution.
A Final Thought on Execution
There is a range of pathways for small business owners to exit their business, and employee ownership is definitely not 'one size fits all.' For SME owners, the core question has to move away from whether EO is “right” in principle, to whether it actually works:
-
Commercially
-
Financially
-
Structurally
-
And with the specific people you actually have in the room.
As an SME succession tool, EO won’t succeed through broad enthusiasm alone. It requires clear structures, informed advice, and a realistic understanding by all parties of where it fits—and where it doesn’t.
All the best,
Michael
Your Next Step: Stop Guessing, Start Knowing
If you are considering an employee buyout, you cannot afford to guess what your business is worth.
The best place to start is VSD Stage 1: Understand Value.
We conduct a comprehensive, data-driven diagnostic of your financials to give you an objective baseline value, so you can plan your succession strategy with absolute confidence.
Explore VSD Stage 1: Understand Value
Get Insights Delivered Directly to Your Inbox
Join other Australian SME owners who receive our monthly breakdown on how to build, protect, and realize the true value of their businesses.