How Employee Buyouts of Companies Work

Employee Buyouts

Turner Broadcasting announced a voluntary employee buyout offer this week for its U.S.-based employees at TNT, TBS, CNN and other divisions. “Employee buyouts” are solutions many business owners consider when looking to sell their firm or needing to cut staffing costs, which is the Turner case. But, when people in the media or friends talk about employee buyouts at companies, it is important to realize there are two different kinds, either of which may be a strategy for a business owner, and how they work very differently.

Company Buyouts of Employees

One definition of employee buyout is when an employer offers a group of employees a voluntary severance package. This voluntary offer is presented as a way to avoid layoffs and still reduce staff. There usually is an incentive to sweeten the offer, maybe extra severance pay, so the targeted group of employees accept the buyout.
Turner offered 600 of its 9,000 employees a buyout package to consider that reportedly included nine weeks additional pay plus four more for each year of employment. So someone there 11 years would essentially receive a year’s pay.

This type of broad voluntary has been way too common in recent years across a variety of industries. The company presents a financial incentive or severance pay offer to employees hoping that a percentage of them will staff accept. If too many accept the offer, not all will be given the severance package. If not enough accept, layoffs will usually be forthcoming.

In return for the proffered severance, employees usually have to sign an agreement not to sue and/or waive the right to any claims against the company. The bottom line is that the employee agrees not to sue the company in return for the buyout funds.

The advantage for employees in voluntary severance offers is twofold. Those who are offered the deal and may be thinking of leaving anyway, receive an incentive to exit. Those not offered the deal can hope enough take it to alleviate the need for involuntary severance offers.

Employee Buyouts of Companies

The other definition of employee buyout is when workers at a company purchase a majority share of and take over their firm. This type of employee buyout is not as common as management buyouts or public stock offerings, because they take considerable effort to orchestrate. However, they accomplish the same thing of infusing new money and owners into the firm.

Employee buyouts are simply a transfer of a company’s ownership to its employees. They are not that common because they require the staff to band together and organize. They need to decide, as a group, to invest their own money or borrow capital to purchase more than 50 percent of the company. In larger firms, the buyout is often handled through an employee stock ownership plan (ESOP), which is typically part of the retirement plan. Using an ESOP allows employees to conduct the purchase without coming up with funds individually. In smaller firms, an employee buyout will usually involve a complete change of ownership and the purchase of all company assets.

In many buyouts, the employees seek to protect their jobs. This can happen when a firm is in financial trouble and the employees believe their concerted efforts can turn things around.

In a healthy company, employees may choose a buyout because they are unhappy with the current owners or believe they have ideas to grow the business that current management wouldn’t support. Employee buyouts can also happen when the current management decides to sell the business. Selling to employees may be preferable than to a competitor or someone who may dismantle things. These types of buyouts may become more common as baby boomer business owners retire and want to ensure their firm remains intact.

Before initiating an employee buyout, employees need to weigh the potential costs and benefits. A company in financial trouble may not be salvageable and the employees are taking a tremendous financial risk. A takeover plan typically encourages employees to concentrate more of their retirement savings in the ESOP. However, common investment advice encourages the diversification of investments and not holding too much company stock.

Either type of employee buyouts involves a stressful decision for employees and leads to changes in work at the companies involved. In addition, some voluntary severance packages lead to welcome early retirements, whereas others lead to unemployment. Buying the firm is also a mixed bag. Enron, Polaroid and United Airlines were firms with ESOPs when they went bankrupt. (Employees at Enron and Polaroid did not have majority ownership, but they did at United Airlines.) Other more successful examples of employee-owned firms range from Parsons Corporation to the Hot Dog on a Stick chain.

By Dyanne Weiss

Sources:
CNN
Forbes
National Center for Employee Ownership
U.S. News

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