What Is an Employee Buyout (EBO)?

An employee buyout (EBO) refers to when an employer offers select employees a volunt🐼ary severance package. The package usually includes benefits and pay for a specified period of time. An EBO is often used to reduce costs or avoid or delay layoffs.

An EBO may also refer to a restructuring strategy in which employees buy a majority stak꧅e in their own firm. This type of restructuring is a company takeover by its workers. In either example, EBOs are most often employed when companies are in financial distress.

How an Employee Buyout (EBO) Works

Employees that are offered severance via an employee buyout (EBO) must balance the value of the severance payments with their overall job prospects. If they decline an EBO offer from their employer, there's a chance that their job may eventually be eliminated via downsizing with a less-generous severance package.

If employees are considering buying out their company, the process can be challenging and time-consuming in part because it requires that employees reach an agreement to pool their assets to buy a majority stake in their company.

Employee Buyout (EBO): Voluntary Severance

EBOs are used to reduce employee headcount and, thus, salary costs, the cost of benefits, and any contributions by the company to retirement plans. One formula for calculating a 澳洲幸运5官方开奖结果体彩网:severance package might be a base of four weeks pay plus an additional week for every year of employment at the company. Some employers may tack on extended 澳洲幸运5官方开奖结果体彩网:health care coverage, assistance with finding new employment, or 澳洲幸运5官方开奖结果体彩网:outplacement services.

EBO offers are typically made to nonessential staff, though employees approaching retirement age are frequently approached if the goal is to consolidate the position or not fill it altogether. However, if a company has a pension plan, management must weigh the savings from the salary cost of employees nearing retirement and the annual pension amount due to be paid to each employee. Typically, but not always, the annual pension is less than the employee's current salary.

In♕ evaluating an EBO, employees must consider a number of factors, which can include:

• For near-retirees, would the severance from the buyout bridge the period between termination and the eligibility period for 澳洲幸运5官方开奖结果体彩网:Social Security benefits?
• Is the 澳洲幸运5官方开奖结果体彩网:severance pay the same as your current salary? If not, can you live off the lower amount?
• Older employees may find it harder to find a new job. As a result, any offer should provide enough income to cover expenses during the job-hunting period.
• Would a buyout payment be able to fund a new education, career, or retraining?
• Would a buyout allow you to start your own business? And would the severance amount cover the business 澳洲幸运5官方开奖结果体彩网:startup costs?
• How will accrued vacation time or other personal leave be accounted for (i.e., do you get paid for those days)?
• Will the company continue to contribute to your retirement plan? If so, for how long?
• How will the severance be paid out? 澳洲幸运5官方开奖结果体彩网:Lump sums are more valuable than payments over time, especially if there's a risk that the employer could become 澳洲幸运5官方开奖结果体彩网:insolvent.

Receiving an EBO from a company can be exciting if the employee was looking to 🌜begin a new chapter in life or for a ca🐻reer change. However, the money received from a buyout is likely to last for just a short period of time.

Additionally, employees that currently receive bonuses for performance wouldn't get paid that extra income under a buyout. And given 澳洲幸运5官方开奖结果体彩网:cost of living expenses, the money may evaporate quickly. As a result, a decision would need to be made by the employee a🐈s soon as possible about whether to work at another company, start a business, or retire.

Employee Buyout (EBO): Corporate Restructuring

EBOs of companies are a form of buyout that's often done as an alternative to a 澳洲幸运5官方开奖结果体彩网:leveraged buyout (LBO). A LB♚O refers to when a significant amount of borrowed funds or leverage is used to acquire another company.

While companies being sold can financially healthy, they're more likely suffering from 澳洲幸运5官方开奖结果体彩网:financial distress if an EBO is being considered. Additionally, employees might be unhappy with how their company is managed or might not like the direction it's heading. Executing such a buyout is a significant financial risk, but the rewards can be substantial. For small businesses, an EBO often focuses on the sale of the company's assets, while for larger firms, the buyout might be for a 澳洲幸运5官方开奖结果体彩网:subsidiary or division of the company.

The official way this type of EBO occurs is through an 澳洲幸运5官方开奖结果体彩网:emp🌞loyee stock ownership plan (ESOP). An ESOP is a type of 澳洲幸运5官方开奖结果体彩网:trust fund that can be created to allow employees to buy stock or ownership in the company over time to facilitate 澳洲幸运5官方开奖结果体彩网:succession planning. The buyout is complete when the ESOP owns a majority of the company's 澳洲幸运5官方开奖结果体彩网:common shares.

This type of EBOs isn't unheard of; employees at Polaroid and United Airlines both utilized ESOPs to buy their companies out of 澳洲幸运5官方开奖结果体彩网:bankruptcy in 1988 and 1994, respectively.

The Bottom Line

An employee buyout (EBO) is a tool for employers to cut costs and minimize the chance of layoffs. For employees, it means choosing between remaining in their current position and risking a less-generous severance package in the future, or accepting the offer and potentially not having enough to live off of while looking for a new job. If your employer presents you with an EBO, be sure to review the agreement carefully to confirm it's in your best interest.

EBO can also refer to a type of buyout that organized employees execute to give them a greater say in the direction of their company. As this is typically undertaken when a business is experiencing financial distress, it represents a substantial risk for the involved workers if they're unable to secure a majority stake, or they succeed but the company ends up going bankrupt anyway.