Employee ownership sounds unambiguously good and is not. It has real advantages for an owner who cares what happens next and real drawbacks that an honest seller should understand before presenting the route to their staff as a gift.
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Employee owned company meaning, in practice
An employee owned company is usually one where a trust holds shares for the workforce. Employees do not run the company; management does, under a board. What employees receive is a beneficial interest that grows with the value of the business and is paid out when they leave or retire, subject to vesting. Day to day, most people notice very little at first.
The advantages
For the owner: continuity, confidentiality, certainty of process, and the tax treatment. For employees: a stake in the outcome without paying for it, and an owner that is not going to move the business somewhere cheaper. Companies with broad employee ownership frequently report better retention, which is worth real money in a labor constrained trade.
The drawbacks, including the disadvantages of ESOP for employees
The employees' stake is concentrated in the same company that pays their wages, which is undiversified risk. The company carries acquisition debt for years, which constrains investment. Payouts to leavers create an ongoing cash obligation the business must plan for. And an ESOP is expensive to set up and administer, which is dead weight for a small company. None of these is a reason not to do it; all of them are reasons to know what you are choosing.
Questions people ask about employee-owned companies pros and cons
Do employees get a vote?
Usually not directly on business decisions. The trustee votes the shares, subject to limited matters where participants must be given a say.
What happens when an employee leaves?
Their vested interest is paid out over a period set by the plan, which is why the company must plan for that cash requirement.
Is this the same as a co-operative?
No. A co-operative is owned and usually governed directly by its members. An employee owned company through a trust keeps conventional management and governance.