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What is an Employee Buyout?

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  • Written By: Mary McMahon
  • Edited By: Kristen Osborne
  • Last Modified Date: 25 September 2016
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An employee buyout is a business transaction that gives the employees of a company a majority share in the company, effectively allowing them to control it. Employees may buy out a company in trouble in order to keep it running, or they may buy a healthy company because they believe they can manage the company better than the current owners/management. Such transactions are relatively uncommon because employees usually lack the organization and access to capital needed for a successful buyout. When employee buyouts occur, they may attract the attention of the media, especially if they involve a story with a human interest angle, such as a group of employees attempting to save a failing company.

Not all of the employees have to be involved in an employee buyout, and the management may or may not participate. Buyouts can be initiated when a company announces that it is considering a sale or when employees believe that buying the company may be in their best interests. Negotiations can be conducted from a number of perspectives to reach an agreement that will be satisfactory to everyone involved.

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Typically, employee buyouts are arranged through an employee stock ownership plan (ESOP). The ESOP buys up shares in the company until it controls at least 51% of the stock, allowing the employees who have shares in the plan to control the company. With their large block of shares, the employees can vote on policy, elect or remove members of the board, and be involved in other aspects of the decision-making process.

For employees, an employee buyout can be a way to prevent a business from closing and to exert control on the work environment. Innovative employees may have ideas for improving business practices and making the company more efficient. The employees can develop ideas for new products and services and reorganize the company, using insider knowledge to prune unnecessary departments. Employee ownership can also become an advertising point for the company, as some customers like the idea of supporting companies that are owned and controlled by their employees.

Before initiating an employee buyout, employees consider the potential costs and benefits. A company in financial trouble may not be salvageable, even by dedicated employees, or it may not be possible for employees to raise enough capital to keep the business afloat. Intervening in the early stages of financial problems with an employee buyout, on the other hand, might allow employees to take control and redirect a company to prevent long term damage.

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