Hands Off: Investing in employee ownership can ensure Canadian businesses stay Canadian | ImpactAlpha

Canada’s investors and businesses are focused on the economic attacks by the Trump administration on the Canadian economy. Trump’s tariffs are creating higher prices, job losses and uncertainty in both countries. But for many Canadian businesses, there is a bigger existential risk.

A weak Canadian dollar, low interest rates and expected liquidity challenges for some Canadian businesses that rely on exports to the US all create the conditions for an acceleration of private equity-led buyouts of Canadian firms. While Canada’s policymakers try to figure out how to make the Canadian economy less vulnerable to Trump’s whims, many Canadian businesses are going to look like a good deal for American investors – even in the context of America’s own economic turmoil.

Predatory foreign ownership, focused on stripping assets and extracting wealth for American investors, will be bad for the long-term resilience of the Canadian economy. These kinds of acquisitions will hurt Canadian economic sovereignty and the local community economies in which many of these businesses have thrived for decades.

Just a few weeks ago, iconic Canadian department store chain Hudson’s Bay—founded in 1670—was forced into liquidation. The company’s slow death began in 2008 after it was acquired by National Realty and Development Corp. Equity Partners out of the US. Now, at a time when Canadians are racing to protect and shore up their economic security and control of their assets, Canadian communities may lose 80 local stores, along with 9,400 employees at one of Canada’s most iconic brands.

Employee ownership

Many Canadian entrepreneurs have been thinking about retiring and are looking to sell to secure a comfortable retirement. Some 76% of business owners are planning to retire in the next decade – with business assets worth over $2 trillion, according to the Canadian Federation of Independent Business.

It is of course perfectly reasonable for a business owner to sell to the highest bidder, including private-equity buyout funds. But many of these retiring baby boomers are deeply torn, knowing that if they sell their business to American investors, they might be doing long-term damage to their community, the workers who they have relied on and Canada’s economic independence. Policymakers are currently designing solutions to these challenges.

One approach: making it easier for new Canadian entrepreneurs to buy existing businesses, via a program modeled after the US Small Business Administration’s 7A Loan program, which helps finance working capital, equipment purchase and business acquisitions.

Another is to significantly increase the number of employee-ownership transitions, which Canada calls Employee Ownership Trusts, or EOTs. Canada passed a new EOT legislation last year and should be ramping up to achieve a goal of 10% of all sales of Canadian businesses to their employees by 2030. We know this target is achievable because it’s happening in the UK. More than 400 businesses were sold to employees in the UK last year.

Not only did that improve economic security for 40,000 new employee-owners in the UK, those businesses remain domestically owned and rooted in their local communities. Achieving similar employee-ownership conversion rates in Canada would take 300 businesses a year off the market from American buyouts, with head offices staying in Canada and improving the resilience of the Canadian economy in the face of an autarkist American administration.

Mobilizing capital

To achieve these targets, Canada needs to mobilize capital to support these transitions.

Canada already has a number of funds and intermediaries working on employee-ownership conversions, but they generally target risk-adjusted market returns. At a time of extreme vulnerability and risk, there are legitimate obstacles to making EOT conversions work. Business owners are far more likely to accept a buy-out offer in cash, rather than deferred payments from an EOT.

Capital could be mobilized more urgently in different ways. Through the government’s public financial institutions, including the Business Development Bank of Canada, concessionary capital should seed a fund to crowd in investments from banks, philanthropic foundations and other investors. This could be stylized as a sovereign fund, making low-interest loans focused on employee-ownership conversions of viable businesses that need time to overcome liquidity crises and re-tool away from dependence on the American market.

The federal government could guarantee a benchmark rate of return to ensure that foundations’ capital is not at risk, which would make the fund more appealing to both Canadian and American impact investors.

Some advisors within the field suggest there is enough capital already in private financial institutions to finance many EOTs, but that financing often comes with onerous conditions that make these employee-ownership transitions too risky for many workers. In particular, employees are often required to sign personal guarantees for the amount of the loan, which transfers all the risk onto workers and makes the deals far less likely to happen.

We need to expand pathways to wealth and ownership for workers, which is why we suggest the federal government also offer a loan guarantee program. This would reduce risk for employees and business owners undertaking employee-ownership transitions and protect all types and sizes of lenders, including banks, pension funds and foundations. Other blended finance models could be considered, but transferring more of the risk onto the government in the form of a loan guarantee probably makes the most sense.

As Canada faces Trump’s mercurial and predatory approach to trade and economic policy, employee-owned companies, which are shown to be more innovative and resilient during economic downturns, can bring much-needed stability and less economic vulnerability. Canada should mobilize capital to scale employee-ownership transitions through loan guarantees, blended finance and concessionary capital to build and secure more economic resilience and wealth for working people.