Employee Buyout (EBO)

What is an Employee Buyout (EBO)?

An employee buyout (EBO) is a restructuring strategy used by employers to reduce costs and avoid potential layoffs. It is generally done by offering employees voluntary severance packages. If the package is accepted, the employee must leave the organization.

If the employee does not accept the severance package, their job is still at risk. It is because employee buyouts are generally offered when a company is approaching a layoff.

The ethical downsizing of the labor pool through employee buyouts allows the company to relieve some financial stress and potentially stop and or avoid the loss of jobs.

Forms of Employee Buyouts

1. Voluntary Severance

A voluntary severance package is an offer generally given to non-essential employees. It is used to entice employees to voluntarily leave an organization to reduce costs and to make room for additional employees or to decrease the labor force.

2. Corporate Restructuring

An alternate use of the term employee buyout is when the management and employees negotiate and purchase an entire organization by typically taking on additional debt (also known as a leveraged buyout). Buyouts are a method to turn around companies in financial distress or to manage a change in ownership. 

Why Offer Employee Buyouts?

Listed below are some of the reasons employers choose to offer employee buyouts:

• The cost of labor is reduced when an employee voluntarily leaves an organization.
• An employee buyout also reduces costs through benefits and retirement plans.
• Employee buyouts can potentially stop or delay layoffs.
• Reduces the labor force in a nicer, more ethical way.
• Reduces overall financial distress by eliminating costs.

What is Included in an Employee Buyout Package?

In order to entice employees, a typical buyout package is structured to contain generous compensation. The following can be included in an employee buyout package:

1. Severance Pay

Typically, severance is calculated as one to two weeks paid for every year worked in the organization. The rate can increase, however, and can be negotiated as high as four weeks paid for every year worked in the organization.

2. Benefits

In addition to a lump-sum payment, benefits can be included in an employee buyout package. The benefits may include RRSPs, pension contributions, medical, dental, vacation pay, sick pay, and fringe benefits.

3. Pension and Stocks

As mentioned in the benefits section, pension contributions may be included in a buyout package. In addition to pension contributions, the buyout package may include your retirement and stock plans that were obtained through the company.

4. Outplacement

An employer may include an outplacement plan in the buyout package. An outplacement plan is a service that helps a departing employee until another occupation is found. It may include job coaching, resume writing, and assistance in job searching.

What to Consider When Offered an Employee Buyout

Some of the considerations to keep in mind when deciding to accept or decline an employee buyout include:

• How much is the severance?
• If the severance is not reasonably close to your salary, are you going to be able to survive off that until another occupation is found?
• If you are older, it may be harder to find a new job.
• If the job searching does not work, will the buyout help start up a business?
• How is the buyout calculated and what will you be receiving?
• Are the benefits, vacation pay, RRSPs, and stock plans being accounted for?
• How will the benefits be paid? Will the severance be paid monthly for an extended period of time, or will it be a lump-sum payment?
• Review individual employment/union contracts.
• Make sure to negotiate the buyout terms to ensure a smooth transition into another occupation.

More Resources

In order to help you become a world-class financial analyst and advance your career to your fullest potential, these additional resources will be very helpful:

• Being Laid Off vs. Getting Fired
• Institutional Buyout (IBO)
• Management Buyout (MBO)
• Normal Retirement Age (NRA)
• Voluntary Termination
• See all management & strategy resources