Each Taproot worker receives an equal ownership stake at no cost, with dividend payments distributed according to hours worked during the fiscal year. Pictured are Taproot team members.Supplied
A British Columbia-based support services provider has become the largest company in Canada to transfer ownership to its employees through a new model designed to help owners sell their businesses without seeking outside buyers.
Taproot Community Support Services, based in Maple Ridge, B.C., announced to its workers Tuesday that it has been sold to its 750 employees through an employee ownership trust, or EOT, a structure only introduced in Canada last year.
The move makes Taproot the country’s largest EOT to date, according to Employee Ownership Canada, and highlights how the model could play a role in succession planning as thousands of small business owners prepare to retire.
Payouts for the many over the few: Employee ownership trusts take shape in Canada
“This employee ownership trust is the simplest way of transitioning ownership,” said Taproot’s chief executive Mike Fotheringham, who first learned about the concept while listening to a podcast on his commute last summer.
“It provided current shareholders an opportunity to sell their shares, which was really important for a lot of them. Some of them had retired and weren’t with the business any longer.”
Taproot CEO Mike FotheringhamRob Trendiak/Supplied
Taproot provides support services for adults with disabilities, as well as vulnerable youth and families across B.C., Alberta and Ontario. The company generated $54.3-million in revenue last year. Before the transition, it was owned by about 30 long-time and prior employees, some of whom are retired.
Finance Minister François-Philippe Champagne said in a phone interview that Taproot’s move is “something extraordinary.”
He said that EOTs are a way to help future generations carry their legacy forward.
For young people, “it gives hope, it gives opportunity, and they see possibilities that they have not seen before, to move from being an employee to an owner,” said Mr. Champagne, who attended Tuesday’s announcement over Zoom.
“I challenge them to think for future generations and be ambassadors of this great, new ownership model that we have created.”
Tax matters: New Employee Ownership Trusts may have a role in business transition
Under the new structure, Taproot is 100-per-cent owned by the trust and overseen by three trustees representing employees’ interests. Each worker receives an equal ownership stake at no cost, with dividend payments distributed according to hours worked during the fiscal year. Unlike traditional share sales, employees do not have to buy in.
In employee ownership trusts, the money to buy out previous owners typically comes from the company itself. The trust takes on debt to pay out a portion or all of the purchase price. The business then uses its profits to make contributions to the trust, allowing it to repay the debt. That means the model works best for established companies with steady cash flows.
Mr. Fotheringham said Taproot had previously tried to sell shares directly to employees, but few participated because the cost was too high. The trust model allowed for a broader, more equitable distribution, he said.
Ottawa paved the way for such deals last June when Bill C-59 introduced tax incentives for the trust model. Under the policy, which runs until 2026, qualifying owners can sell their business to employees through a trust and receive a tax exemption on the first $10-million of capital gains on a company sale. At top provincial tax rates, that means roughly $3.5-million in savings.
The government also extended the capital gains reserves period to 10 years, meaning on a qualifying sale, only 10 per cent of capital gains need to be reported as income each year, spreading the tax cost over a decade.
Taproot is now 100 per cent owned by the trust and overseen by three trustees representing employees’ interests. Pictured are Taproot team members.Supplied
If the program becomes permanent, Canada could see as many as 750 employee-owned companies within the next eight years, with 115,000 workers sharing close to $10-billion in wealth, according to a report from economist Brett House and Social Capital Partners, a non-profit focused on broadening access to home and business ownership.
“Employee ownership trusts give owners a really great vehicle to keep their business rooted in their community, to keep it Canadian owned, to maintain their culture and legacy, and actually, ultimately, to improve the company’s performance,” said Justine Janssen, chief executive of Employee Ownership Canada.
But Ms. Janssen said that the model is not a fit for every company. High-growth tech firms, for instance, may be better served by stock options which let early employees cash in if the company goes public or is sold, she said. For very small businesses, especially those with fewer than 10 workers, the trust structure may feel too burdensome for its size, she added.
The trust model can, however, present one solution for the pressing need for new succession models, Ms. Janssen said. A 2023 survey by the Canadian Federation of Independent Business found that 76 per cent of small business owners plan to exit within a decade, yet fewer than 10 per cent have a formal plan.
For staff, the change feels personal. “I never thought I’d be a part owner of a company. It’s like a dream come true,” said Talica Bautarua, 51, who has worked at Taproot for a decade as a community support worker in Vancouver.
“We’ve worked hard, so it’s really nice to be rewarded for that. Everything is so expensive nowadays. This is like an added bonus, financially, for me and my family.”