What is an Employee Buyout (EBO)

An employee buyout (EBO) may refer to a restructuring strategy in which employees buy a majority stake in their own firm or a method to cut staff numbers. The former definition of employee buyout is an example of an company takeover by its workers. In the case of the latter, an employer will make an offer to select employees of a voluntary severance package. It may be used to reduce costs, or avoid or delay layoffs. In either example, EBOs are most often employed when companies are in financial distress.

Breaking Down Employee Buyout (EBO)

Either definition involves a decision-making process that is led by employees. A change in company ownership led by employees is a difficult and time-consuming endeavor because it requires that employees reach an agreement to pool their assets to buy a majority stake in their company from ownership. In effect, the employees become the owners.

In the other definition of employee buyout, employees must balance the value of any severance payment with their overall job prospects. There is the potential that if they decline an employee buyout offer from an employer that their job may eventually be eliminated via downsizing with less-generous severance.

Employee Buyout: Corporate Restructuring

Employee buyouts of companies are a form of buyout that are often done as an alternative to a leveraged buyout. Companies being sold may beĀ  healthy financially, though are more frequently executed in periods of significant financial distress. In such cases employees are typically unhappy with how their company is being managed. Executing such a buyout is a significant financial risk but the rewards can be great.

For small firms, an employee buyout will often focus on the sale of the company's entire assets, while for larger firms, the buyout may be on a subsidiary or division of the company. The official way an employee buyout occurs is through an employee stock ownership plan (ESOP). The buyout is complete when the ESOP owns 51% or more of the company's common shares. Employees at Polaroid and United Airlines both utilized ESOPs to buy their companies out of bankruptcy.

Employee Buyout: Voluntary Severance

Employee buyouts used to reduce employee headcount (and therefore salary overhead costs) can take many forms. A common formula is four weeks of pay and an additional week for every year of employment. Some employers may tack on extended healthcare coverage, or assistance in finding new employment or education/training. Such EBO offers are most often made to nonessential staff, though older employees who are approaching retirement age and are easier to replace with younger, lower-paid workers are often targets of buyout offers.

In evaluating an EBO, employees must consider a number of factors, such as their career prospects and goals. For example:

  • For near-retirees, will a buyout bridge the period between termination and claiming Social Security?
  • Older employees may find it harder to find a new job, so any offer should be big enough to cover expenses during the job-hunting period.
  • Will a buyout payment be able to fund new education or business startup costs?
  • How will accrued vacation time or other personal leave be accounted for?
  • How will it be paid? Lump sums are worth more than payments over time, especially if an employer may become insolvent.