Employee Ownership: A Good Idea… That’s Getting Harder to Ignore (and Structure)

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.

On top of a ‘not so straight forward’ spread of EO model types (collectively ESOPs, ESP’s, EOT’s, ESS’s & Equity Plans) recent budget changes have only added to the potential challenges of achieving a more 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 more unclear as to whether it can be structured to work in practice.

On the surface, and as ten’s of thousands of business owners approaching retirement with no obvious buyer, selling to your staff makes a lot of sense.

I understand there are other real benefits from EO, like staff retention and productivity, but following is introductory guidance for SME owners to more effectively use EO in your succession (aka exit) planning.

From my deep experience in many SMEs you need to start with Employees as one of the most natural buyer groups (especially in service businesses)  .

If employees don’t see a future for themselves (a potential change of ownership often brings this into focus) they’ll leave — and the business becomes harder to sell to anyone else.

But being one of the natural buyer groups;

1. Doesn’t automatically mean they see themselves as buyers, and
2. It certainly doesn’t mean they’re ready and able to take on ownership.

Because when we’re talking about employee ownership as a succession plan it asks a different question:

Not just, “do you want to share in the upside?”

But, “are you prepared to take on risk, uncertainty, and long-term responsibility?”

Ready and able isn't just about leadership capability.

It's also about financial capacity, risk tolerance and a willingness to commit to the business for the long term.

2 actions for a small business owner thinking about Employee Ownership:

 

1. PLAN A STRUCTURED conversation 

Enticing as it may be before thinking about structures, tax, or legal models, the more useful starting point is a conversation.

A more practical starting point is not “I want to sell to you.”

But:

“What does this business look like without me in 3–5 years?”

From there you can:

• Test interest
• Assess capability
• Introduce ownership carefully

Too many owners start at the 'structure' end.

 

2. Get CLEAR ON WHAT EMPLOYEE OWNERSHIP IS FOR YOU & THE EMPLOYEES

Not all “employee ownership” is about ownership and 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 share
• Minority equity

These can 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.”

Final thought.

There are a range for pathways for small business owners to exit their business. Employee ownership is often presented as one of these solutions. As discussed earlier EO is broad. There are a range of models to address business challenges from productivity, to retention, to succession. So it's definitely not 'one size fits all'. Recent budget changes, for the moment, have added to the uncertainty.

Nevertheless for SME owners the core question will have to move on from whether it’s “right” in principle to whether it works:

1. Commercially
2. Financially
3. Structurally
4. And with the people you actually have

As an SME succession tool and for the broader business challenges employee ownership can help tackle in Australia, it won’t be through broad enthusiasm alone. It will require:

1. Clear structures
2. Informed advice
3. Far great awareness and education
4. And a realistic understanding by all parties of where it fits — and where it doesn’t.

A new complication: 

Since the recent Federal Budget, there’s another layer to this conversation.

Proposed changes to how discretionary trusts are taxed may have unintended consequences for employee ownership structures.

Many Australian employee ownership 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 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.

But the detail is still unclear.  And that matters. Employee ownership isn’t just about intent — it’s about execution.

And in the current environment, that means getting both the commercial logic and the structure right.

My article focuses on some steps to start to frame up the first.. The second requires the right, expert advice.

All the best, Michael