How an Equity Partner Makes Employee Ownership Work
EOTs solve the succession problem. An equity partner solves the liquidity problem inside the EOT.
Written by: Andrew Lawlor, Director
Employee Ownership Trusts offer founders a tax-advantaged path to exit while keeping their businesses Canadian-owned and employee-held. However, the mechanics of funding an EOT create a real constraint: without an equity partner, the seller’s upfront liquidity is limited to what bank debt the business can support. The balance is often deferred through a vendor take-back note (i.e., seller’s loan) that may take a long time to pay down.
At the Canadian Business Growth Fund, we invest minority equity stakes in growing Canadian businesses to help them scale, while remaining majority owned by the Canadian entrepreneur. EOTs are a natural extension of how we already operate. In an EOT transaction, CBGF can provide a portion of the equity capital alongside bank debt and a VTB to fund the ownership transition. Our cheque increases the seller’s immediate proceeds, de-risks the transaction, and provides growth capital for the business post-close if required. CBGF’s minority focus and evergreen fund structure lend well to these transactions.
For founders, the result is immediate liquidity beyond what debt alone can provide, a capital gains tax exemption worth over $11 million (including Lifetime Capital Gains Exemption), the preservation of their company’s independence and culture, and the knowledge that the people who helped build the business become its owners. For employees, it means ownership without a capital outlay and a direct economic stake in performance. For CBGF, it means backing quality Canadian businesses with strong governance protections and alignment across all stakeholders.
The case for employee ownership extends beyond tax efficiency and succession mechanics. A meta-analysis of 102 studies encompassing nearly 57,000 firms found a statistically significant positive relationship between employee ownership and firm performance. Research from Rutgers University found that ESOP companies experienced sales growth 3.4% per year higher than would have been expected based on their pre-ESOP trajectory, with the most participative companies growing 8% to 11% faster. During COVID-19, for every person who lost a job at a majority ESOP firm, four people lost jobs at other firms. The UK’s EO Knowledge Programme has similarly found that employee-owned businesses outperform on productivity, profitability, and employee wellbeing.
These findings are drawn primarily from the U.S. ESOP context, which differs structurally from the Canadian EOT model. However, the direction of the evidence is consistent across geographies: employee ownership works.
Canada’s EOT legislation is less than two years old. The advisory infrastructure is still developing, and precedent transactions are scarce. CBGF has not yet closed an EOT transaction, but we are actively building capability, developing our structuring expertise and relationships with advisors, lenders, and business owners, so that we can execute as the market matures. Very few funds are currently active in Canadian EOTs. To our knowledge, no other Canadian fund is actively pursuing the minority equity partner role that CBGF is building toward.
One important uncertainty remains: the temporary nature of Canada’s current tax incentive. The stability of this policy will play a decisive role in whether EOT adoption reaches meaningful scale, similar to the flywheel effect that benefitted the UK and the US during their employee ownership transitions. More on that next week.
