One of Canada’s fastest-growing family businesses is becoming employee-owned. Here’s why that could be a major trend post-pandemic

Sixteen years ago, Steve Beauchesne was helping his father Tim think of a business idea. After a career in textiles, which was increasingly moving overseas, Tim wanted something new. Mulling it over with a pint of beer in hand, the pair settled on an idea: a brewery.

“If you’re serious about this, Dad, I’ll sell my house and move home and I’ll start a brewery with you,” Beauchesne recalls saying. “The next day we sobered up and it still seemed like a good idea, and we started working on it.”

The pair founded Beau’s All Natural Brewing Company in 2006 in Vankleek Hill, Ontario. Since then, the brewery has grown rapidly year on year, eventually employing around 150 full-time staff. It also became Canada’s first ever brewery to achieve B Corp status, a certification recognizing businesses that are socially and environmentally responsible.

As the business grew, they started by hiring family, then hired friends, friends of friends, and eventually new recruits with no direct connection. “We wanted them to feel like they were part of the family,” Beauchesne said, with “the same opportunity to take part in the success of the company as anyone else.”

Ten years later, therefore, that thought process developed into a full employee stock ownership plan, known as an ESOP. Virtually all of their employees are now invested in the company, and the plan is to hand majority ownership over to the employees in the next 25 to 30 years. While the family still owns a majority stake for now, they hope their long-term succession plan will help to keep the business independent in the future. By giving workers wealth and voting power in a company, research suggests ESOPs increase employee productivity and retention, and can distribute the benefits of capitalism more broadly.

As thousands of small businesses around the country deal with the impact of COVID-19, some thinkers in the social impact world believe more business owners could transition their companies to social purpose business models and ownership structures, like Beau’s did.

“Just to survive, many small businesses are having to think deeply about their business model, who supplies them, who their customers are and how they reach them, in a way they’ve never done before,” said Sean Geobey, Director of Academic Programs for the Waterloo Institute for Social Innovation and Resilience.

Just to survive, many small businesses are having to think deeply about their business model, who supplies them, who their customers are and how they reach them

“One of the things [COVID-19] does reveal is those small businesses that are a vital component of their communities,” he said. “These at-risk businesses have stakeholders who care about them beyond their current owners,” Geobey said, from customers and employees to philanthropists and local governments, some of whom “could be well-positioned to step in and keep the enterprise going.” However, he explained, “doing so in a way that involves real risk-sharing could involve a dramatic change in how the enterprise is run.” 

Even before the COVID-19 crisis, most small businesses in Canada were looking for new ownership, as many owners move towards retirement. According to a 2018 survey by the Canadian Federation of Independent Businesses (CFIB), 72 percent of small business owners intend to exit their business in the next 10 years and nearly half in the next five years, with four out of five owners citing retirement as their main reason. That means more than $1.5 trillion of business assets changing hands in the next decade. Despite that, just half of business owners have a succession plan in place.

Transitions to social impact businesses are still relatively rare, but “when they occur it is often during times of economic turmoil for the countries or industries in which those companies operate,” said Geobey. “COVID-19 is already lined up to be the most dramatic economic slowdown we have seen since at least the Great Depression.”

As the COVID-19 crisis causes unprecedented economic disruption and uncertainty, it has underlined the need to secure a resilient future for small businesses, many of whom were already looking for new ownership. When the smoke clears, advocates believe there has rarely been a better opportunity to transition these companies towards a social impact future. So what does COVID-19 mean for them, and what could an alternative future look like?  

Crisis and opportunity 

Especially in the short-term, the COVID-19 crisis is putting small businesses at existential risk. As of 2017, small businesses employed 8.3 million individuals in Canada, or 69.7 percent of the total private labour force. 

“The economic impacts are frankly disastrous, and it is very difficult at this point to underestimate what the scale of the impact could look like,” Geobey explained. “A lot of these businesses are going to be financially transformed by this crisis, some of them in ways which may be difficult to sustain long-term.”

The Waterloo Institute for Social Innovation and Resilience, which is housed within the University of Waterloo, has been working to mobilize a national ecosystem focused around converting traditional enterprise into social purpose organizations. COVID-19 has “dramatically accelerated” their plans, said Geobey. “Were we to continue on the initial plan, there just simply might not be very many viable small businesses left at the end of this to transition.”

Geobey believes the COVID-19 crisis offers an opportunity to make business owners think about bringing social purpose into their succession plans in a deliberate way. During a succession, said Geobey, “business model and ownership have to really be brought to the surface and examined closely,” and COVID-19 has pulled this into even sharper focus. “There are probably going to be enterprises which may not have considered different models before,” he explained.

The COVID-19 crisis offers an opportunity to make business owners think about bringing social purpose into their succession plans in a deliberate way

Startup social enterprises are a very high-risk way of creating social change, and often operate on the fringes of the economy, Geobey explained. Therefore, transforming mainstream enterprises into the social impact economy could provide social and environmental impact with a far lower risk. He gives the example of the clean energy space, where “renewable power generation capacity is critical to reducing our reliance on fossil fuels,” but “so are new windows and better insulation in buildings.”

Part of that challenge will be addressing a gap of knowledge about this kind of transition plan amongst owners looking to sell, said Michael Murr, Executive Director of the Centre for Social Enterprise Development (CSED) in Ottawa. “I don’t think it’s particularly visible, if we think of the average small business,” he explained. “Most owners are just simply looking to exit as easily as they can and hopefully being compensated for all the hard work they’ve put in.”

A new model for community recovery

For small businesses, their local community is often vital to their success. And for those promoting social purpose businesses, keeping wealth in the community is a core principle.

“That’s very much the story of craft beer,” explained Beauchesne, “the idea of having a local brewery, and a local brewery then is supporting its community. It really is a symbiotic relationship,” he said.

“The employee ownership model works so well with craft beer because of how community-oriented it is,” Beauchesne said. “I’m sure that it’s not just the consumers that care about working with a company that is socially progressive. I think suppliers care, financial partners care.” 

David LePage, Managing Director of Buy Social Canada in Vancouver, refers to this way of doing business as the “social value marketplace,” built on community capital instead of financial capital alone. “If we look at business as being a way to build healthy communities, then co-ops and social enterprises are the natural models, because they’re built on the idea that you reinvest the profits into the value of the business, you’re not extracting [value],” he said.

“The conversation about social enterprises and co-ops, of supporting businesses when they close or when people retire, is not new, but because of the [COVID-19] crisis the conversation is coming to the forefront because people are looking for solutions,” LePage said. The idea of a social value marketplace actually dates as far back as traditional Indigenous trading, he said.

LePage fears rural communities are in particular trouble with COVID-19. “In an urban area there are more customers, so the recovery will probably be different than losing the hardware store, or losing the grocery store,” he explained. “If we don’t shift the business model, our communities are going to be really, really fragile, and what COVID[-19] is proving is how fragile the economy is.”

The pandemic’s impact is also highlighting the “significant downside of having extended global supply chains in the context of major world events,” said Murr. There is an increasing recognition of the value that comes from local purchasing, he said. “The whole rise of microbreweries, that resurgence is part of that theme where people are looking to buy local.”

Building new structures

Social impact businesses can take several different forms, depending on the situation.

“Really what we’re talking about is a potential change in business model, which often involves a real change in ownership structure,” Geobey explained. “We’re looking at taking enterprises that already exist, that already have viable business models, and trying to think about how those can be restructured in a way that has greater social and community impact.”

A social impact business model could involve putting a mission at the core of its product or service, such as a company creating renewable energy or a mobile phone app for mental health. Or social impact businesses can create more “traditional” products or services, but might apply social purpose principles to its operations, for example by employing those who have struggled to participate in the labour market. 

Then there are various legal ownership structures that businesses could decide to transition into to become more social purpose-oriented, from ESOPs, which give employees the option to buy shares, to full-blown cooperatives where enterprises are not only owned but run jointly by their members. Cooperatives are often formed by workers in a company, producers in a sector or consumers.

“Worker co-ops tend to work really well when you have very high-skilled labour,” such as those who work with expensive machinery or have specific expertise, said Geobey. Producer co-ops, meanwhile, have been popular in some sectors as a way to negotiate better prices with buyers by working together. The dairy industry co-op Agropur, for example, is owned by 3,161 dairy farmers who pool resources and share profits. 

Consumer co-ops, such as the outdoors shop Mountain Equipment Co-operative (MEC), set up by mountaineers in British Columbia, “tend to function well where there might actually be a mismatch between what investors and consumers might want in terms of how services or products are delivered,” Geobey explained.

These different structures can be complex compared to a traditional private ownership model. “Probably the hardest part is communicating to staff that maybe don’t spend their day-to-day in the world of finance, and making sure that everybody fully understands the program,” said Steve Beauchesne. “It’s new to a lot of people who aren’t independently wealthy.”

Choosing a social purpose business like an ESOP or cooperative, therefore, certainly can be more of an undertaking for whoever is taking it on. Beauchesne and his father could have sold to private buyers for a big short-term profit, he said. But “now that I’ve got employee owners, I think much more about the value of the shares of the company.” 

“Making decisions now means I’m impacting every single one of my employees,” Beauchesne explained. “It’s more meaningful to me because it’s no longer just mine and my father’s money, it’s everybody’s here.”

With that bond, however, comes social ties, which a small business can leverage in difficult times, said Geobey. “The faith, the reputation, the trust that the community already has in those enterprises” can help them be more resilient, he said. “It means people are willing to make sacrifices to ensure that those enterprises survive.”

Setting the table

Despite sensing an opportunity, social purpose business advocates are realistic about the infrastructure and support that will be needed to promote the new models to small businesses creating succession plans on a broader basis, from the government to financial institutions, the non-profit sector, and other local actors.

“In order to make it successful, we’re going to have to guarantee that these new business models have access to the same resources that the traditional businesses have had,” said LePage. “All of our business supports for small- and medium-sized enterprises have been built to maximize and support the traditional individual or corporate ownership,” he explained. 

And for now, while the extreme economic uncertainty brought on by COVID-19 “sets the table for more conversations,” said Murr, it is much less certain how much deal-making will be able to take place in the near-term. “I suspect that a new round of interest will be generated in terms of owners looking to make a move some sort,” he said, but this will be offset by the difficult business environment.

I suspect that a new round of interest will be generated in terms of owners looking to make a move some sort,” he said, but this will be offset by the difficult business environment. 

Steve Beauchesne certainly doesn’t think he could have launched employee ownership during these uncertain times. The ESOP model comes from a place of generosity for most owners, he said, so if a business-owner is worried the company is at risk, they might be hesitant to offload that onto employees. 

“I think this crisis might be getting [owners] to do more hard thinking” about their legacy, though, Beauchesne said, which could lead to more social purpose businesses in the long-term. “If it’s gotten people thinking about their exit strategy, by 2022 you might start seeing a real uptick.”

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