Strengthen your business by introducing employee co-ownership
What is sloESOP?
The Slovenian ESOP is a modern model for establishing and maintaining employee co-ownership in companies, developed on the basis of international best practices from Western economies. At the Institute for Economic Democracy, we have adapted it to the specificities of the Slovenian business environment.
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sloESOP is based on decades of scientific study and practical experience in the field of employee ownership. It successfully combines theory with best international practice, and addresses many of the shortcomings of other models. At IED, we have built on the best practices based on scientific analysis and practical improvements and introduced several innovations in the design of the sloESOP model that correct some of the shortcomings of international best practices.
Thanks to its interesting solutions, sloESOP has received a lot of interest around the world. We have presented the model's innovations in more than 20 countries around the world, including the UK, USA, Canada, France, Belgium, Denmark, Spain, Italy, Peru, Mexico, Argentina, Colombia, South Africa, etc.
Basic features of sloESOP
Employee ownership through a fund
The ownership of the company is anchored in a separate legal entity called an ESOP, which holds shares in the hands of each generation of workers.
Gradual leveraged buy-back
The ownership buy-out is financed by the parent company's available cash flow, allowing all employees to have access to ownership, regardless of their financial situation.
Right to capital value
Employees are entitled to capital value through their personal capital accounts, which motivates them to invest in the company for the long term.
Sustainability of employee ownership
New employees are included in the ownership, while employees who leave the company do not retain their ownership role in the ESOP.
ESOP model phases
Transfer of ownership
In this phase, the seller of the shares is repaid through the parent company's cash flow, allowing a gradual transfer of ownership to the employees.
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Employees or their representatives set up an ESOP. The legal form of an ESOP is a cooperative without liability, or z.b.o. This is the only membership organisation in Slovenia that allows profit-sharing.
The valuation of a company's shares plays an important role in the buy-out process. The valuation determines how much profit the company will have to pay out to cover the full purchase price - if this value is too high or the repayment period too short, the company may be depleted.
The ESOP model requires an annual valuation of the shareholding/shares, as this is how the value of the capital in the workers' personal accounts is assessed each year.
For most companies, we recommend that shares or interests for ESOP buy-backs are valued on the basis of the book value of the equity, which is often lower than the market value.
Why would an owner accept a price for a share or stake that is lower than the price he can get from a competitor or a financial investor? There are several reasons - ESOPs:
- reward the team of employees who helped build a business success story
- preserve jobs within the local community and provide stability for the community
- continue the legacy of the founder and preserve the organisational culture and business vision
- the seller can obtain tax relief on the sale of the business to the ESOP
- ESOP companies enjoy higher levels of productivity and stability in times of crisis
Maintenance of ownership
Once the ESOP has paid off the debt, employees start to accumulate wealth through their personal capital accounts (PCAs). At this stage, the surpluses are used to pay bonuses or to buy additional shares.
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The parent company's General Meeting, when distributing profits, respects the contractual commitments to fund the ESOP buyout, but is ultimately limited by the availability of cash flow - if there is no free profit, the funding is suspended.
The ESOP primarily uses the money to cover its liabilities to the owner or other lender, but if the ESOP has a surplus, it can also use it to pay bonuses or to buy additional shares in the company.
The value of the liability repaid each year is reflected directly in the assets of the ESOP workers. Each employee has a personal capital account (PCA) which is replenished in proportion to the repayment of the debt.
The distribution key between the OCRs is set out in the internal rules of the ESOP. It can be egalitarian, determined by the pay relationships between workers, or take into account the length of service in the company. Once the debt to creditors has been paid in full by the ESOP, the total value of the ownership is distributed among the workers. This is the point at which we reach Stage 3.
Long-term maintenance
In the third phase, after the debt is repaid, the ESOP cash flow is redistributed to maintain ownership among the current generation of employees.
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At the end of Phase 2, each employee has his or her own OCD, where capital value (assets) is accumulated. These assets are not freely disposable by the employees, but are paid out gradually and in accordance with the liquidity of the company.
Each year, the company's General Meeting decides how much of the free cash flow to allocate to the ESOP.
In Phase 3, the parent company's contributions finance the repayments of the value on the OKRs using the FIFO ("first-in, first-out") method. The employees with the oldest attributions on the OKRs are repaid first.
The value repaid at this stage is redistributed among all active members on the ESOP. In this way, value is also gained by new employees who are newly recruited to the company.
If a worker leaves the company, he or she does not get any priority rights - the value of his or her OTR is paid according to the schedule, exactly the same as if the worker had stayed with the company. Again, the oldest credits on the OTR are paid first.
The system allows ownership to be maintained over the long term between each generation of employees, in line with the liquidity capacity of the parent company. In the ESOP model, employee turnover does not jeopardise employee ownership.
Advantages of the sloESOP model
Better business performance
Employee co-ownership leads to better business results when done right
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Current practice in the field shows that employee-owned companies grow faster than comparable companies, are more stable in times of crisis, and have more loyalty and commitment from their employees. The best results are found in those companies that implement all key supporting processes during the transition to new ownership. First, employees need to understand ownership - financial literacy and ownership culture education. Second, employees need to have key information - targeted sharing of financial results that is important to understand the contribution of employees to the bottom line. Third, employees must have the opportunity to participate in decision-making - active suggestions for optimising work processes are encouraged. And fourth, employees must benefit from good decisions - ownership ensures that added value is shared among all those responsible for success.
Preserving
jobs
Moving to employee co-ownership means job stability in the local community
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Thousands of Slovenian owners will be looking for a succession route for their companies in the coming years. Currently, 75% owners do not have a suitable succession plan. What path will they choose? sloESOP allows for a gradual buy-out of the company by the employees in a way that the purchase price is financed from the future profits of the company. With a little financial engineering, employees can buy the company with their own labour, without having to pay unattainable sums of money for ownership from their own savings. The decision by entrepreneurs to buy internally through the sloESOP model is a decision to preserve a legacy in the local community, to preserve the business and the jobs of the collective that helped build the business success story.
All in the same
boat
Co-ownership means that good financial results are in the pockets of everyone who helps create them
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sloESOP encourages broad employee involvement in the co-ownership programme. This is how we realise our vision that all employees are in the same boat - when the collective is rowing in the same direction, fast and in harmony, we can expect superior business results that bring financial benefits to all those who are responsible for the results. Actively encouraging employee participation in work process improvement proposals and sharing the value created among employees are central building blocks for success in the transition to employee ownership.
ESOPs around the world
- ESOP legally backed
- Legislative support in the pipeline
The ESOP model has a strong tradition in the US, where it has been legally supported since 1974. ESOP companies in the US employ 14.7 million people, representing 10 % of the private sector workforce. In America, around 250 companies convert to the ESOP model each year.
The ESOP model was also endorsed in the UK in 2014, and in 2023 ESOP buyouts were the second most common way to deal with property succession in the UK. Today, there are almost 2,000 ESOP companies in the UK, employing around 250,000 workers.
In 2024, the ESOP model was endorsed by the Government of Canada, and in the same year the Government of the Republic of Slovenia approved the starting points for the Slovenian ESOP law.
Support for Implementation of the Workers' co-ownership in enterprises
OwnerWise
The transition to employee ownership can be challenging and domain knowledge and experience are important for a successful transfer of ownership.
At the Institute for Economic Democracy, our brand OwnerWise combine expertise with business Capital Genetics, which provides comprehensive advisory services to businesses.
Would you like to know more about what sloESOP is, how it works and whether it is suitable for your company? Contact us!
Frequently Asked Questions (Q&A)
Is the sloESOP model suitable for our company?
The ESOP buy-out model is suitable for owners who want to manage succession in a way that secures their legacy in the local community and, in the transition, takes care of the collective that helped them build their success story. ESOPs can resolve succession in a shorter timeframe (1-3 years), but it is recommended that owners phase out over 5-10 years. Employee co-ownership is also suitable for companies where the owners want to provide long-term motivation for employees.
Who provides the loan for the buyout under the sloESOP model?
The ESOP establishes a leveraged buy-back mechanism, which means that it is financed by a loan, and the loan is repaid from the positive operating results. The loan can be provided by the owner, who decides to be paid the purchase price over a few years, and in the case of IEDs, we can also secure the support of banks, which can provide part of the loan.
Will workers even value ownership if they do not pay for their shares out of their own pockets?
As ESOP buy-outs are financed from available profits, it is important to explain to employees that nothing is free. Employees pay for ownership out of good business performance - if they work well and perform well, the buyout will be repaid faster and they will get their ESOP benefits sooner.
What are the risks?
The central risk in the sloESOP model is the leverage of the ESOP Fund's ownership. The risk therefore lies with the lender - the owner or the bank, if the latter is involved. At IED, we take great care to reduce the risk, in particular through a patient financial structure that does not jeopardise the company's business. While ESOP leverage is extremely safe abroad, research shows that employees are concerned about the long-term viability of the company when they come into co-ownership.
Why can't I include only key employees?
Any company that employs "non-key" employees has a questionable employment policy. In practice, it turns out that it is crucial that the whole team is in the same boat. Growth, crisis resilience and innovation are found in employee-owned companies, where the whole collective thinks like an owner, and where all workers have something to gain from good business results.
Can I decide which employee ownership processes to choose and which not to choose?
IED is a professional organisation that establishes employee co-ownership according to the principles and rules of best practice in Slovenia and worldwide. We make sure that the models are inclusive, that they are long-lasting, and that they are accompanied by all the necessary support processes, such as financial literacy and ownership culture training, and the establishment of processes that provide employees with opportunities to make constructive suggestions within certain constraints.
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