Employee-Buy-Out (EBO) Model in Business Transfers

REINO PROJECT WORKING PAPERS NO.
5
(March 2008)
EMPLOYEE-BUY-OUT (EBO) MODEL

IN BUSINESS TRANSFERS
Tapani Hirvonen
DO NOT FORGET THE FUTURE

www.reinoproject.eu
ISBN 978-952-5721-14-0 (NID)
ISBN 978-952-5721-15-7 (PDF)
KOSEK, Kokkolanseudun Kehitys Ltd

Ristirannankatu 1
FI-67100 Kokkola, Finland
Mainostoimisto Heinäkuu / Kirjapaino A. Välikangas, Kokkola

Kokkola 2008
PREFACE
According to estimations the companies which are transferred to the emp-

loyees achieve are more innovative and the employees are more motiva-
ted. Thus, the employees taking over the company seems beneficial also
in terms of business sustainability and in increasing the profitability and
competitiveness of the company. However, in many cases the entrepre-
neurs do not see Employee-Buy-Out (EBO) as a real opportunity as they
are too fixed to the traditional company hierarchy. Other issues that are
hindering the possibilities to implement EBO are, that this method is qui-
te unknown and thus for instance the employees do not know how they
should proceed in the matter and/or they are afraid to overtake a new role
as an entrepreneur.
In Eastern Finland EBO method has not been tested until now. JOSEK
launched the idea of EBO in the region of North Karelia by arranging two
workshops on the issue. The target group of these workshops was very
wide (local business advisors, consultants, entrepreneurs, employees,
auditors, accounting firms, business mentors etc.). There were also nine
companies with whom EBO method was concretely tested. Case studies
of each of these companies are included in this report.
During this pilot project, an EBO plan was constructed. The idea of EBO
PLAN is to tap into the intimate knowledge that the employees have on
the company they are buying and to depict the future based on their ex-
perience and vision. EBO PLAN aims at to implement a comprehensive
action plan for the ownership transfer, where the company’s key person-
nel prepares to continue the business operations and to take the entrep-
reneurial risk in continuing to run and develop the business.
This report is the fifth working paper of the REINO project (Renewal and
Innovation to Business Transfers of Micro Companies). The REINO project
aims to create a service with lasting support structures to assist busi-
ness transfers of micro companies. During the two-year project, part-
ners in Denmark, Finland, Greece, and Italy will map out and test the
implementation of support services in different stages of the business
transfer process. The REINO project is a transnational venture co-ordi-
nated by a Finnish development company KOSEK and is funded by the
DG Employment of the European Commission under the European Social
Fund, Article 6 - “Innovative Approaches to the Management of Change”
programme.
Kokkola, March 2008
Antti Porko Ari Peltoniemi

Managing Director Transnational Co-ordinator
EMPLOYEE-BUY-OUT (EBO) MODEL
IN BUSINESS TRANSFERS
Tapani Hirvonen
Josek Ltd
SUMMARY .�� 1
BUSINESS STRUCTURE IN NORTH KARELIA.��3
BUSINESS TRANSFER IS A PROCESS!.��6
WHAT IS EBO?.�� 8
WHAT OPPORTUNITIES EMPLOYEES HAVE TO CONTINUE BUSINESS?.��10
PILOT PROJECT OF JOSEK LTD IN REINO PROJECT.��13
EXPERIENCES FROM PILOT PROJECT COMPANIES.��18
PROBLEMS OF EBOS IN THE PILOT PROJECT COMPANIES��35
EBO PLAN.�� 37
THE THREE KEY QUESTIONS.�� 37
COMMUNICATION AND PUBLICATION IN EBOS.��40

SUMMARY
The term “Employee Buy Out” (Employee Buy Out) means an acquisi-
tion, where the buyers are the employees of the company. All emplo-
yees can be involved, but the actual employees (not management) buy
the majority of the company. Usually the ownership and voting rights
are evenly distributed between the buyers. One of the most important
differences in EBO (Employee Buy Out) in relation to other acquisitions
is that it always aims at continuing the operations of the company as
such or in a larger or smaller scale.
Employee-run companies tend to be successful and employees moti-

vated. EBO-method would seem beneficial also in terms of business
sustainability and in increasing the profitability and competitiveness of
the company. The objective of the JOSEK pilot project was to launch
the concept of EBO in the region of North Karelia. This report aims to
promote EBO model into a well known, accepted and recommended
method for ensuring the sustainability of the company.
In the pilot project, two workshops were organized for local business
advisors, consultants and other parties involved in business transfers
(e.g. accounting firms, bookkeepers, auditors, bank employees, busi-
ness mentors and employment authorities) to make them familiar with
the EBO process and to enable them to advise entrepreneurs as well
as interested employees also in this process. Also nine companies were
engaged to participate in the project.
During the pilot project a completely new model for making a business
plan for EBOs was developed. Consultant starts EBO PLAN process by
going through all phases of the EBO process with buyers. Next phase
is the start-up analysis, in which the determination of starting point for
EBO is made. In this phase the value of the business is negotiated, and
analysis of buyers’ possibilities to carry out the acquisition is made. The
last step is to decide, whether or not the EBO is carried through.
The basic idea of the EBO PLAN is to tap into the intimate knowledge
that the employees have on the company they are buying and to depict
the future based on their experience and vision. In this regard, an EBO
differs essentially from a ’normal’ acquisition, where the buyer is not
familiar with the object of purchase; on the contrary he has to spend
much more time on acquainting himself with the object.
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The EBO PLAN aims to prepare a comprehensive action plan for the
ownership transfer, where the company’s key personnel is preparing to
continue the business operations and to take the entrepreneurial risk in
continuing to run and develop the business.
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BUSINESS STRUCTURE IN NORTH KARELIA
There are approximately 6 500 businesses in North Karelia and appro-

ximately 20 % of them will face a business transfer within the next
five years. This means approximately 1 200 businesses, out of which
the majority (over 90 %) is micro companies, employing less than four
people. Figure 1 below shows the distribution of businesses in North
Karelia according to the line of business. In North Karelia, the propor-
tion of businesses in construction, commerce and services is lower and
the proportion of businesses in manufacturing is higher than the natio-
nal average.
Figure 1. The distribution of companies by the line of business.
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Figure 2 below illustrates the age structure of entrepreneurs in the year

2000. In the 832 businesses, whose owners were 55 to 59 years old the
year the study was conducted, the transfer of ownership should already
have been carried out and the next group (50-55 years old, altogether
1786 businesses) should start the process soon.
Figure 2. The age structure of entrepreneurs in North Karelia.
Figure 3 shows the problems that entrepreneurs consider as main ob-

stacles to business transfer. The figure was published in the autumn
2007 in an economic survey executed by Finnvera plc and Pohjois-
Karjalan Yrittäjät (The Regional Organization of Enterprises in North
Karelia). The figure indicates that finding a successor is proportionally
an even larger problem in North Karelia than in the rest of Finland.
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Figure 3. The anticipated problems related to generation change or ownership transfer.
A group of students at the North Karelia University of Applied Sciences

conducted a study on business transfers in spring 2005. The study was
carried out by interviewing by telephone all entrepreneurs of over 50
years of age in the North Karelia region. Due to the interview method
(by telephone), the response rate was nearly 80. In the study several
specifying questions were used in order to discover for instance whether
the business had a successor. The purpose was to find out how certain
the successor really was. The problem is that the entrepreneur can
think/hope that one of the children will take over the company, but the
matter has not yet been discussed with them at all.
These specifying questions revealed that only 30 per cent of the retiring
entrepreneurs had an almost certain successor lined up!
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BUSINESS TRANSFER IS A PROCESS!
A business transfer is always a long-term process, regardless of the

way it is carried out. In Finland, the process is often illustrated with the
following chart (Figure 4), where it is divided into four phases.
The first phase is called ‘the awakening phase’. The awakening often ta-
kes place either as a result of changes in the transferor’s health or when
other entrepreneurs are starting their business transfer processes. At
this stage the transferor participates in business transfer events, gat-
hers information on the subject and considers what the business trans-
fer means for his own finances, business, family and time management.
The transferor is very active and gathers together all available informa-
tion. The awakening phase as a whole is more about getting acquainted
and thinking than about actions. If the transferor can have the support
of a competent business adviser or a business mentor at this phase, it
will have a great impact on the result. The transferor does not yet need
actual expertise help but rather a sparring partner. The support person
can also be for example his own bank manager, bookkeeper or auditor.
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The next phase is the preparation phase, which might even take years.
During that time the transferor starts to reflect his own business in the
light of the received information and to consider concrete issues. He
considers realistically options such as can he find a successor within the
family or should he sell the business. He also thinks about the adequa-
cy of his own retirement plan and how to contribute to it. In relation to
business operations the transferor ponders the potential change of the
company’s legal form and whether the business is in a proper state for
selling/transferring. At this stage the transferor should also consider the
possibility of EBO operation. The transferor still needs an external spar-
ring partner with whom to discuss what kind of experts they might use
in the transfer process. In the preparation phase the problem is that it
really can take years and the danger is that the transferor loses interest
in the process. Here the sparring partner also has an important role in
guiding the transferor along the path.
In should be noted that during the awakening phase the transferor has
been the active side while in the preparation phase the successor is also
invited to take part in the process, especially when the business trans-
fer takes place within the family. Also in the case of EBO the successor
could be invited to the process already at this stage.
The third phase of the business transfer process is called the ownership
transfer phase. The phase includes the actual work needed to carry out
the business transfer. Experts are being used in determining the value
of the company or in changing the company’s legal form, for example.
If the aim is to sell the business, the transferor starts an active search
for a successor by using different sales channels and by conducting a
buyer survey. Trade negotiations are conducted with potential buyers
and a letter of intent might be reached. In a business transfer within
the family the financing of the successor is examined and an advance
ruling on the company value might be requested from the tax authori-
ties, especially if the sale is a so-called giftlike sale. (selling price over
50 % of the market price) The successor’s skills and training needs are
mapped. This phase of the process can also take a long time, especially
if the aim is to sell the business.
The last phase is called the takeover phase. It includes the “hard staff”
such as signing the deed of sale, paying the selling price etc. Informing
the public on the acquisition is usually left until this phase, in other
words nothing is told until it is in black and white. The takeover phase
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can also last a long period of time, because one of the terms of the sale
could be, for example, that the former entrepreneur has to offer sup-
port for the successor for a certain period of time. The training of the
successor is also started in this phase according to the plan made in the
previous phase.
The takeover phase is also important for the future of the business, be-
cause it is the time to launch for example new development programs,
update business plan and make other important strategic decisions.
WHAT IS EBO?
The term Employee Buy Out means an acquisition, where the buyers
are the employees of the company. All employees can be involved from
errand boys to managers, but the actual employees (not management)
buy the majority of the company. Usually the ownership and voting
rights are evenly distributed between the buyers. In EBO the some-
times quite different views between groups of employees have to be
taken into account and prejudices have to be dispelled. MBO stands
for Management Buy Out, which is an acquisition made by the ma-
nagement. The employees can also be involved in MBO, but only as a
minority shareholder.
One of the most important differences in EBO in relation to other acqui-

sitions is that it always aims at continuing the operations of the com-
pany as such or in a larger or smaller scale. When comparing potential
buyers in an acquisition situation, this aim is most explicit only when
the employees are one of the candidates. Studies have also shown that
businesses transferred to the employees have been more successful
than the average and are growing faster than others.
International experience has shown that there are three main types of
suitable situations for carrying out EBO: crisis, business transfer and
outsourcing.
When a company is in crisis its operations have already ceased in a

bankruptcy. A case where the employees continue the operations is
called the Phoenix – the re-emergence of the company. This is the most
common way employee-owned companies emerge in Europe. Restarting
business is usually easy in terms of the law and technicalities, becau-
se the situation is clear-cut. The seller (the official receiver) does not
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have any emotional reservations about the value of the company. The
buyers seldom have any other notable employment opportunities and if
the process is carried out fast the customers will not disappear. Despite
the easy technicalities, Phoenix is a very demanding process. A detailed
account has to be made of why the previous company went bankrupt,
in order to avoid the same mistakes. It is worth remembering that the
employees usually know very well why the business failed!
Another case of rescuing a company in crisis is when business opera-

tions have not yet ceased and employee-ownership is used to continue
the operations. This is called the Rescue EBO.
Rescue EBOs are usually very difficult, because the rescue has to be
performed quickly. In these situations the previous owner is often gre-
atly involved in the process, which is not entirely an asset, because it
can be a hindrance to making necessary changes. Often the employees
also have difficulties in accepting that the business is unprofitable and
the acquisition is an attempt to continue the operations.
A business transfer usually takes place when an entrepreneur is relin-

quishing the business as a result of ageing and a successor is not found
within the family. In this case the motive of the employees is clear: they
want to keep their jobs by buying the business. However, the starting
point is better than in the previous cases, because they buy an active
company which might even be highly profitable. In some cases the
transfer could also happen partially within the family, because some of
the buyers might also be inheritors of the entrepreneur. Employee ow-
nership can also be a suitable method in cases where the selling price is
so high that the risk has to be distributed among several buyers.
The problem of this method is that because the entrepreneur does not
usually perceive the employees as potential buyers, he first tries to sell
the business to external buyers in every possible way and EBO is only
the last option.
Outsourcing usually means closing down or selling a part of a large

company. In close-down situations the problem might be that if the
employees continue the business, they are regarded as competitors and
therefore the purchase is not encouraged.
On the other hand, if the aim is to sell a profitable part of the business,
it can be an excellent opportunity for the employees. The important
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thing is to start the process in time, because if the negotiations to redu-

ce personnel have already been started, important key persons might
apply for a new job. Another potential problem is that there might not
be enough work for everyone if the operations are made more effecti-
ve.
Another case of outsourcing is the need to privatize auxiliary activities

in a large business or municipal services, for example privatizing the
transport service of a large business or municipal day-care centres.
The situation usually gives the employees a head start, because safe-
guarding their jobs is also important in order to save the seller’s face.
The employees are also most familiar with the service that is being out-
sourced, and the conditions set upon it. Similarly they are usually well
aware of the pricing of the product.
Contract law has an important role in the privatization of operations and

services. It helps to ensure, for example, the extent to which the seller
is going to buy the outsourced services in the future. On the other hand,
it has to be assured that services and operations can also be sold to a
third party. It also has to be ensured by agreement that the seller does
not engage in the outsourced operations again.
Privatizing enables the buyers to obtain the outsourced operations at

an affordable price for the company they have established and, among
other things, the term of payment for the purchase price might be more
flexible than in a normal company acquisition.
In the privatization of a municipal service the problem might be that

there are many negotiators on the seller’s side of the table: officials, po-
liticians and even other employees. Setting the price might be a prob-
lem simply because the seller thinks that the buyers will make money
by doing the job they were formerly paid for as an entrepreneur!
WHAT OPPORTUNITIES EMPLOYEES HAVE TO CONTINUE

BUSINESS?
The largest problem in the business transfers of micro companies is that

the business is identified too much with the owner. In other words, the
only substance the company has is the know-how in its owner’s head.
Therefore it is difficult to find an external buyer for a company, even if
it was profitable, if no one from the family wants to take it over.
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However, in many SMEs the employees are closer to the entrepreneur

than the members of his own family; after all, in practice he spends
more time with his employees than with his family. Often these reliab-
le employees have been working at the company even as long as the
entrepreneur and therefore they know the company at least as well as
he does. In fact, they might know much better than the entrepreneur,
especially the matters which need to be changed to improve the flexi-
bility of business. The entrepreneur himself has shut his eyes to these
matters and does not listen to the employees’ proposals for improve-
ments.
In the light of these facts the employees of the company would be

the best successors for the company in many cases. However, the
entrepreneur’s opinion is without exception, “My employees don’t have
what it takes to become entrepreneurs.” Other reasons why the seller is
against employee ownership are:
• not knowing how to start the process
• not wanting the employees to know too much about the econo-
mic conditions of the company (and the entrepreneur)
• being afraid that the business has to be sold to the employees at
a price lower than the market price
• it is difficult for the entrepreneur to regard the employees as
equal negotiators while trying to keep the normal business opera-
tions running (the employees own adviser has an important role)
• the entrepreneur’s family, friends and stakeholders (e.g. accoun-
ting firm) think an EBO method is unusual and they might deve-
lop prejudices and start opposing it, which has an influence on
the entrepreneur’s activities
The employees can also regard employee ownership as strange; the

jump from a worker to an entrepreneur seems a distant thought. In ad-
dition, the following reasons prevent the transaction from proceeding:
• it is difficult to start asking economic details from a familiar emp-
loyer
• not knowing what entrepreneurial activity means in practice
• being afraid of financial risks
• not knowing how to proceed with the matter
• being afraid that the entrepreneur will cheat in the transaction
• because all employees usually do not want to be buyers, what
will happen to the working atmosphere?
• the only reason to buy the company is to secure one’s job
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From a social point of view, the problems in EBOs are still related to
the outdated employee-employer role typing. Trade unions do not bring
employee ownership up in any of their publications or training; it is still
a taboo, which is not talked about. Moreover, trade unions are not able
to support their members in these changes, for example by offering le-
gal advice and counselling.
Furthermore, Finnish society does not support employee ownership,

although as previously stated, the employees can have a closer rela-
tionship with the entrepreneur than his direct heirs. For example, the
section 55 of the Inheritance and Gift Tax Act, which provides for the
capital gain from selling a business to be entirely exempt from taxes
in the seller’s taxation if certain conditions are fulfilled, is often used in
business transfers within the family, but it does not apply to non-family
members.
In addition, business-transfer relief in giftlike sale (payment over 50%

of the market price) and gift tax relief (value of the gift 40 % of taxable
value) only apply to arrangements within the family.
Usually corporate acquisitions always include mapping potential finan-

cing options. However, financial institutions do not offer tailored finan-
cing solutions for EBOs, for instance. Furthermore, no funds, common
in the USA, have been developed, for example through pension trusts,
to support EBOs. For example the well-known ESOP (Employee Share
Ownership Plan) functions like a pension trust and can grant a long-
term loan to the employees for buying the business. In exchange the
ESOP obtains shares from the company that is bought as collateral.
Some of the facts in support of employee ownership are as follows:

• buyers know the company, also its weaknesses (e.g. investment
requirements)
• there is no need to deal with the acquisition in public, because
often the aged entrepreneur sees selling the business and the
publicity connected to it as a personal defeat
• a public sale of a business might also cause problems such as:
-- key persons feel their jobs are insecure and apply for a new
job
-- key customers suspect products will no longer be delivered
normally to them and start to look for a new supplier
-- suppliers sense economic difficulties and tighten their terms of
delivery
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-- competitors get a look-in and start marketing actively to the

customers of the business or tempt key persons to work for
them
• ownership transfer can be carried out gradually, at first the object
of purchase might be only part of the shares (an external buyer
is seldom interested in buying a minority shareholding)
• the employees buy the business only to continue its activities,
not to sell it on quickly to seek profit
• the employees buy the whole business, i.e. the shares or part-
nership shares, and do not split up the company by buying only
the most profitable parts of business
• the company and the jobs remain in the region, the business is
not bought to be relocated
• the tax revenue stays the same, because the business is not
bought as a affiliate of another company (which might have its
head office elsewhere).
PILOT PROJECT OF JOSEK LTD IN REINO PROJECT
The aim of the JOSEK pilot project was to launch the concept of EBO
(Employee Buy Out) in the region of North Karelia. The launching inclu-
ded distributing information to pilot project companies and other stake-
holders during the project as follows:
1. Two Workshops were organized for local business advisors,

consultants and other parties involved in business transfers (e.g.
accounting firms, bookkeepers, auditors, bank employees, business
mentors and employment authorities) to make them familiar with
EBO process and to enable them to advise entrepreneurs as well
as interested employees also in this process.
Workshops were marketed with a direct marketing letter sent among

others to all members of the Regional Organization of Enterprises
in North Karelia and all accounting and auditing firms, banks and
advisory organizations in the region. In addition, advertisements
marketing the workshop were published in a local newspaper.
The EBO Workshop held in March 2007 concentrated on distributing

general information on EBOs and the REINO project. Mr Erkki
K. Kangas from Cooperative Sataosaajat gave a lecture on the
practicalities of EBOs and the situation in Finland.
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Psychologist Pirkko-Liisa Antikainen from Psykologian Tietotaito

Ltd told her personal experience of changing from the role of an
employee to the role of an entrepreneur.
Ms Hanna Koponen, chairperson of the local steering group, is

working as Business Analyst at the Joensuu regional office of
Finnvera plc and was able to present Figure 5 on how the different
types of corporate acquisitions financed by Finnvera are distributed.
The figure shows that employee ownership is exceptional also from
the point of view of the financier, because only 5 % of the financing
for corporate acquisitions is channelled to EBOs.
Figure 5. The distribution of different types of acquisitions financed by Finnvera.
The EBO Workshop held in November 2007 comprised mainly

teamwork, although it also included a lecture on the determination
of the company’s value and contract law in corporate acquisitions.
Especially in EBOs, contract law has a crucial role, because
ownership might often be divided even into equal shares between
the new owners (who are usually not related). Therefore, for
instance a thoroughly prepared shareholders’ agreement can be
the cornerstone of the whole activity.
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Most of the time was used in workshops and therefore all

participants were divided into five groups. Some participants had
already chosen a suitable group when registering for the workshop
and others were divided evenly to all groups. The groups were led
by chairmen, most of whom were members of the local REINO
steering group. The groups discussed the following questions:
• How the trade union movement and organizations of enterpri-

ses could promote employee ownership i.e. EBO?
• How to make it more attractive to continue an existing busi-
ness than to start a new?
• New ideas for financing corporate acquisitions?
• How entrepreneurship education and training can support busi-
ness transfers?
• How business mentors can promote business transfers?
This type of business transfer workshops had not been organized in

North Karelia before and therefore many were interested and took
actively part in developing new ideas in the groups. The results of
the Workshop were compiled in a file, which was distributed to all
participants.
2. There is an EBO guidebook being prepared (16 pages, A5) for

the use of all interested in the subject. The booklet is intended
to guide both parties of the sale. Half of the booklet is for the
sellers’ guidance and the other half is to aid the buyers’ in
the EBO sales process. The guidebook will be distributed to
unemployment offices, enterprise federations and to chambers
of commerce, as well as to all consultation organizations in the
region. An electronic version will be available on JOSEK’s web site.
During spring and summer 2008 there will be significant changes

in the legislation of taxation of ownership transfers in Finland.
These changes will be included in the booklet to ensure up-to-date
information.
3. Information on the employee-ownership model was distributed

regionally in the publications and events by different trade unions
and professional organizations as follows:
a. Articles on EBO in NEUVOKAS, a magazine for the members
of the Regional Organization of Enterprises in North Karelia,
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and in the publication for the members of the local Chamber

of Commerce.
b. An article in Karjalainen, the main local newspaper, in
January 2007
c. An article in the North Karelia Yritysmaailma magazine in
March 2007
d. Presentation at insurance company Pohjola’s Starttipäivä,
day for starting entrepreneurs, in March 2007
e. Several presentations in different advisory organizations and
events organized by local organizations of enterprises and
banks.
4. Micro companies, women-led businesses and their employees were

encouraged to participate in the pilot project by offering them
consulting services and long-term follow-up of activities as a carrot.
Nine pilot project companies took part in the project, and manage-
ment consulting was used in the EBO process of four companies.
The consultants used in the EBO process were local management

consultants, lawyers and experts in financial administration.
JOSEK Ltd had already chosen them through a competitive bidding
procedure to be used in its Business clinic project. The results and
experiences from the pilot project companies will be dealt with
later in more detail.
An active steering group has had an important role in distributing infor-

mation on the pilot project. The members of the group are:
• Ms Hanna Koponen, Business Analyst, Finnvera plc, chairperson
of the steering group
• Mr Keijo Mutanen, Managing Director, JOSEK Ltd
• Ms Tiina Tolvanen, Project Manager, North Karelia Chamber of
Commerce
• Ms Merja Blomberg, Organization Manager, Organization of
Enterprises in North Karelia
• Ms Satu-Minna Piiroinen, Project Manager, North Karelia Adult
Education Centre
• Mr Teemu Purmonen, Project Manager, Employment and
Economic Development Centre
• Mr Jouni Mänkkönen, entrepreneur, Tilitoimisto Optimus Ltd, de-
puty chairman of the steering group
• Mr Pertti Hartikainen, Chief Shop Steward, Perlos Corporation
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The convener of the steering group has been Project Manager Tapani
Hirvonen and the secretary has been Ms Minna Koskimies, both from
JOSEK Ltd The members of the steering group also took part in the in-
ternational conferences in Joensuu, Haderslev, Venice and Athens.
The pictures below are from the Joensuu Conference held in September
2007, which had participants from all countries involved in the REINO
project. JOSEK Ltd was in charge of organizing the conference.
Mr Keijo Mutanen, Managing

Director of JOSEK, and Mr
Tony Brunello of Studio Centro
Veneto during a break at the
conference.
Mr Poul-Georg Jertrum
(UdviklingsCenter Haderslev)
and Mr Michael Ahring
Petersen (Business Link South
Denmark) from Denmark with
Heikki Luukkonen from Finland
(Kosek Ltd).
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EXPERIENCES FROM PILOT PROJECT COMPANIES
Part of JOSEK’s regional business consulting consists of advising ageing

entrepreneurs when they have to sell their business or transfer it to the
younger generation. JOSEK Ltd has developed its own service for busi-
ness transfers – the OSUVA counselling. It is the main responsibility of
one business consultant to operate the service in the whole region.
The most visible part of the counselling is OSUVA-YRITYSPÖRSSI, a

marketplace for buyers and sellers of businesses, available at JOSEK’s
web pages www.josek.fi/osuva (in Finnish). It is a non-profit marketp-
lace, where sellers can offer their businesses for sale anonymously. All
contacts go through the business consultant coordinating the service,
and financial statements and other information on the business is given
out to the interested party only after they have signed a nondisclosure
agreement.
The pages also have a form for people who are interested in continuing
a business, but did not find a suitable one from the list. The companies
only need to pay a registration fee of €60 + VAT per year, which inclu-
des:
• making an analysis of the present state of the business and pre-
paring a proposal for action
• one year of visibility on the list of companies in the OSUVA mar-
ketplace
• looking for buyer, exploring the background and examining finan-
cing options for the acquisition
• ensuring the confidentiality of the acquisition (e.g. nondisclosure
agreement)
• copying and posting business specific material and other practical
issues
• organizing meetings between the seller and the buyer, making
experts available to support the process
• the national advertising and marketing of the OSUVA marketplace
• business specific counselling and advice on the acquisition
The businesses that participated in the JOSEK pilot project have all
been customers of the OSUVA business transfer counselling; for most
of them the reason for ownership arrangements was ageing. Some of
the pilot project companies have also been advertising in the OSUVA
marketplace and in some cases EBO was chosen already during the first
negotiations.
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1. Building maintenance company in Kontiolahti

-company form: limited partnership
The company had operated in the area for almost twenty years
and had established a strong market position. The main task was
taking care of the maintenance of municipal rental flats, which was
based on a written agreement with the town. Besides the owner,
the company had one full-time employee and in addition part-time
labour was hired for cleaning work.
When the entrepreneur first contacted JOSEK, his intention was

to sell the business, either to another company in the field or
to somebody else. Because the selling price had not yet been
estimated, the value of the business was determined. The value
determination was made for both the current value of net assets
and the capitalized earnings value, and the final asking price was
a compromise between them. The machinery of the company
(special machines for building maintenance) was of good quality
and therefore the current value of net assets was a substantial
sum. The business was also profitable and therefore, even if the
profit and loss account was adjusted with the expected salary of
the entrepreneur (in a limited partnership), the business also had
capitalized earnings value.
In terms of the taxation of the entrepreneur, the best possible

alternative would have been to sell the partnership shares of the
limited partnership, because it would have enabled the entrepreneur
to deduct the anticipated acquisition cost, i.e. 40 % of the selling
price, in taxation, because he had owned the partnership shares for
more than ten years. In practice, 40 % would have been deducted
from the selling price and the rest would have been subject to
capital income taxation. (at present the tax rate in Finland is 28
%)
When buyer candidates started to emerge, it became evident that

they were all interested in an asset purchase, which would result in
higher taxes for the seller. Quite many where interested in buying
the business and especially other companies from the same line
of business saw it as an opportunity to reach a new market. The
business was put up for sale at the web pages of JOSEK Ltd’s OSUVA
market place (www.josek.fi/osuva) and the Finnish Employment
Office (www.mol.fi).
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Even though many were interested, the purchase price was

generally considered too high and therefore the initial interest did
not lead forward. For example, for the other companies from the
same line of business the problem was that they would have to buy
a lot of ‘unnecessary’ equipment, which they already had enough
of.
The sale took an unexpected turn, however, when the long-term

employee of the company contacted the contact person of the
OSUVA market place and told him he had heard that the company
he is working for is for sale. The son of this skilled worker was
willing to become a partner in his fathers business, if the purchase
would take place.
It had not occurred to the seller that a buyer might be found that
close. His first reaction was doubt about financing. However, the
thought of an employee continuing the business felt very good to
him and therefore they proceeded with the transaction. At this stage
the buyers were offered the services of a management consultant
with the support of the REINO project. The expert services were
of importance, because the buyers did not have any experience of
business activities or the corporate acquisition process.
With the help of the expert the buyer candidates wrote business
plans and presented it to the financiers. Although the plan was
considered realistic, the buyer’s ability to cope with the large
loan roused suspicion. The purchase of partnership shares (which
was the seller’s wish) was also met with a cool response. All the
financier is concerned about when granting financing is how to
ensure the borrower’s ability to pay the loan; the seller’s interests
always take second place.
At the same time other buyers became active and made the seller
a counteroffer which was very close to the original asking price.
However, the seller wanted to see how the employee could organize
the financing.
When the seller was told that the buyers financing will not work
out and it is not possible to sell the partnership shares, his reaction
was surprising; he wanted to come down in price and agreed to an
asset purchase, disadvantageous to him in terms of taxation.
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After this explicit phase, the transaction proceeded quickly and

there were already several alternative sources of financing. The
banks were actually competing for the buyers. When the external
buyer heard the stage of the transaction, he made a new offer,
even a little higher than the original asking price! Nonetheless, the
seller had made up his mind and wanted to sell the business to his
employee.
For buying the business, the employee established a new limited

company with his son and the transaction was made in the
company’s name. The management consultant also assisted in
the establishment of the company and, although the owners were
related, they prepared a shareholders’ agreement with the help of
the consultant.
The buyers had contacted the local Jobs and Society Enterprise
Agency before establishing the new company and they were both
granted a start-up assistance to support the initial stage.
2. Construction company in Lieksa

-company form: limited company
A construction company based in Lieksa had four employees and in

this case the seller’s aim was clearly to sell the business to them,
because his son did not want to continue the business. However,
the son had a degree in the field of construction.
Preliminary discussions on employee ownership had already

taken place between the employees and the entrepreneur during
coffee breaks. None of the employees had previous experience of
entrepreneurship.
The first step was to organize a meeting, which was attended by,
in addition to the seller and the buyer candidates, also a business
consultant. The business consultant explained the acquisition
process to the participants. The buyer candidates chose a person
form among them to function as the head negotiator in future.
Because of their inexperience, the buyers also wished to have an
expert to support them and they were provided with one through
the REINO project. In the same meeting all buyer candidates signed
a nondisclosure agreement and therefore financial statements and
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other information on the business could be given out freely to the

buyers.
In the next step of the process the buyers became acquainted

with the financial administration and activities of the company. The
expert offered them help also in this phase, because they were
not able to interpret for instance the financial statements. It was
a slight surprise for the buyers, that although they had received
their wages regularly each month, the company’s liquidity was
rather weak and operations had high seasonal variation. However,
the company had not used temporary lay-offs.
Already before starting the process the seller had had the company’s
value determined by an external expert and it was shown to
the buyers. However, they wanted to have the company’s value
determined again, which was done with the support of the REINO
project. The person who carried out the value determination was
not the same who was offering support to the buyers.
After the new value determination, quite similar to the previous one,
was completed and it had been discussed in a meeting between
the employees and the expert, things started happen. Two of the
buyer candidates announced in the meeting that they do not want
to be involved in the transaction. They resigned from the company
soon after the meeting and started working for other companies in
the same line of business.
The negotiations were continued with the remaining two buyer

candidates, but they too started to have doubts about their ability
to cope with the loan taken to pay the purchase price. After all,
the purchase price would be divided among the two of them and
furthermore they both had a significant personal mortgage to
manage. It came out that both of their spouses started opposing
the transaction. One reason might have been that they did not
have enough background information on the subject. They should
have definitely been included in the process right from the start.
Further, the seller submitted a proposal to the buyers, that part of

the purchase price (30 %) would have been left to be paid within
three years, but nonetheless, the buyers withdrew from the sale.
The entrepreneur’s son was familiar with the developments of the
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transaction and when it finally became clear that the employees

would not buy the business, he suggested that the operations were
moved to Tampere, his place of residence. He had created a network
there through which he could use the knowledge and machinery of
his father’s company. At first the entrepreneur employed his son
to the company and part of the machinery was moved to Tampere
where operations were started.
After all, the final outcome might be a normal business transfer

within the family in a couple of year’s time.
3. Stone product company in Joensuu

A stone product company in Joensuu has been operating for more

than 50 years and has established a strong market position in its line
of business. The company owns land from where the raw material
is quarried. Previously their main product was gravestones, but
nowadays the production of decorative and landscaping stones is
increasing. Recently the product development has concentrated on
garden furniture and furniture for public spaces made of natural
stone as well as ovens.
In 2003 ownership arrangements took place in the company, as

a result of which a strong development of the operations started.
Marketing has been strengthened by recruiting new salesmen
and by developing for example the layout and functioning of the
web pages. At the same time investments were made on a new
showroom and the production facilities were modernized.
One of the new persons recruited was a young woman who had
just finished her studies in stonework. She is responsible especially
for developing and marketing new products.
During the ownership arrangements in 2003 a large part (70 %) of

the shares were passed on to a capital investor and the development
activities were started with his financial input. However, the capital
investor is willing to give up his investment and to pocket the
gains. He has offered his share to the young woman working for
the company. The principal shareholder also committed himself to
buying the minority shareholder out.
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Thus, the object of purchase would have been a portion of the

company’s shares (70%), and because also in this case the buyer
does not have any experience on corporate acquisitions, expert
help was offered to her with the support of the REINO project.
The acquisition process started in spring 2007, and at first the

value of the shares was determined from the point of view of the
buyer. However, it became clear, that it would make more sense
for the buyer to buy business operations instead of shares. The
buyer candidate has also updated the company’s business plan with
her assistant and they have started looking for financing. When
updating the business plan, it has become clear that the extent to
which the buyer is familiar with the business and its strengths and
weaknesses has a great impact on how realistic the business plan
is. This was emphasized in all pilot project companies and led to a
concrete EBO PLAN product presented later on.
This acquisition has not yet concluded, because the seller did not
accept the offer for an asset purchase, but made a counteroffer
for a share purchase. However, at the moment it looks like the
buyer is not able to obtain financing for a share purchase, because
the seller’s asking price includes a substantial amount of goodwill
value, which the buyer cannot utilize in her taxation. In the case
of an asset purchase the Finnish tax law would allow the buyer to
make depreciations on the paid goodwill value and thus optimize
the tax benefit in the new company.
As the seller only wants to sell shares, the buyer would have to
take a personal loan for the selling price and pay it back from her
salary. This case also proves that financiers in Finland are not able
to offer financing solutions customized for EBOs.
One temporary option that was considered was renting the

business to the seller. The problem was what will happen to the
public subsidies received for the construction of the buildings.
No preliminary ruling on the matter was found and because the
danger was the subsidies might have to be returned, the option
was given up.
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Despite differences of opinion, the parties have continued the

cooperation in good atmosphere and the latest event in the
case is that the buyer has been appointed as managing director
of the company. Thus she can improve her abilities to work as
an entrepreneur and develop the company according to her
wishes. Currently she is studying for a Further Qualification for
Entrepreneurs.
4. A printing factory in Joensuu

The company is a small micro company with only one employee in

addition to the entrepreneur. The entrepreneur is already aged has
not been involved in the business operations full-time for several
years. His task has been taking care of invoicing and financial
administration.
Therefore the skilled employee was even more familiar with the
company than the entrepreneur, but he had no practical experience
on entrepreneurship. However, for some time already the goal had
been that the employee will continue the business. The seller was
also ready to do what he could to reach the goal.
The buyer candidate himself has also been active; a couple of

years ago he participated in a course on starting up a business
organized by the Employment and Economic Development Centre
and familiarized himself with the line of business by visiting trade
fairs, for instance. However, the company had a problem, which
is very common in a technology-intensive small business that has
been operating for a long time. Only the necessary investments in
the means of production had been made, as a result of which the
technology was outdated. Therefore the new owner would have to
make major investments in equipment.
After discovering this and discussing it with the financier a decision

was taken that the existing equipment would have to be bought
almost at the price of scrap iron and nothing could be paid to the
seller for the goodwill value. Only this way a financing package
could be put together which would allow the investments expected
in the near future. Buying the partnership shares would not
be possible either, instead the object of purchase would be the
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business operations of the limited partnership and the buyer would

be a new company established for this purpose.
Of course this was a great disappointment for the seller, because

he had assumed to be able to strengthen his weak retirement
plan by selling the business. Many owners of small businesses in
Finland have very weak retirement plans, because they have not
ensured that the annual income selected as the basis of the self-
employed person’s pension (YEL pension) corresponds with the
reality. As recently as the last decade, everyone was able to select
themselves the annual income which was the basis of the pension
and of course entrepreneurs wanted to skimp on something that
was not relevant at the moment. Only in recent years insurance
companies have determined a line of business specific minimum
annual income as the basis of YEL contributions and adjustments
to contributions have also become possible.
The entrepreneur thought over the matter for a few months and
became well aware of the situation he was in. If the company was
put up for sale in public, it would be very unlikely that anyone
would be interested in it because of its condition. At worst the
business would have to be closed down and the machinery and
equipment sold to anyone who was willing to pay for them. Most
likely they would be sold almost at the price of scrap iron also in
this case.
Nonetheless the entrepreneur had been running the business for

decades and was very attached to it. Therefore the thought of
closing it down was very difficult to the seller and finally he agreed
with the employee on a transaction as described above. However,
he wanted to have the option to visit the company every now and
then to feel the atmosphere and to have a look on the activities.
This was agreed on, it was written even in the deed of sale of the
asset purchase, and the acquisition was realized. Also in this case,
the buyer had contacted the local Jobs and Society Enterprise
Agency before establishing the new company and was granted a
start-up assistance to support the initial stage.
It was also agreed upon that the long-term support of a Business

Mentor would be arranged for the new entrepreneur. A suitable
mentor with technical training and experience was found and
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several development projects have been launched in the company

with the mentor’s support.
5. A telecommunications company in Joensuu

The company in question operates in the same line of business

in two different towns and the personnel in Joensuu are mainly
responsible for the operations of the Joensuu office. The personnel
consist of three persons; two men and a woman.
The idea to buy the operations of the Joensuu office occurred to

the employees when they found out that they were working like
an entrepreneur without gaining from it in terms of workload and
salary. In addition, the owner of the company was more interested
in developing the other office and the employees felt that the
future of their jobs was uncertain if the operations were continued
as at present. However, they had many ideas on how to develop
the operations.
In this case the planning of the EBO started when the employees
contacted a business consultant in order to obtain the basics of
carrying out an acquisition. They were given the information,
but right from the start the problem was that they had almost
completely been kept in the dark about matters related to the
company’s finances and the profitability of the business. In practice,
all they knew was whether they had reached the budgeted target
each month, but they were not familiar with the cost structure, for
example.
Nonetheless the process was continued with the help of the

business consultant by contacting the seller and telling him what
the employees have been considering. It was a complete surprise
for the entrepreneur and his first thought was that his employees
are not able to work as entrepreneurs although they were “good
employees”.
Later on the problem was that it was extremely difficult to obtain

the necessary information from the seller to support decision-
making. Furthermore early in the process he told the buyers what
was the value of the business they were interested in and was not
willing to have a value determination made of the company.
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The company’s bookkeeper was also on the seller’s side and

made it difficult to obtain information. Finally when the financial
statements were obtained, it became clear why they had been
presented so reluctantly. The company was in a liquidity crisis and
because in the bookkeeping the movements on the accounts of
both sales offices were on the same accounts, money had been
moved from wherever there was money. Therefore it was a difficult
task to decipher the big picture.
The buyer candidates in this case did not either have any experience
on running a business and therefore a consultant was chosen to
assist them with support form the REINO project. The company’s
value was determined by an expert and once the big picture had
been deciphered the making of a business plan was started to
explore financing options. The value determination showed that the
value of the business was only approximately half of the amount
the seller had previously asked for.
It was very difficult for the seller to bring out the reality, which he
probably had been familiar with, and it looked as if the negotiations
would cease immediately. However, having thought it over he gave
the buyer candidates the permission to start exploring financing
options.
The employees knew the everyday business very well and they
were professionals in the field. Only they did not have any idea of
the big picture. While they started to write a business plan with
the help of an expert for a new company, which they might set up,
a completely new model for business plans was developed, a so-
called EBO PLAN. The model will be explained in more detail later
on.
The EBO is not yet concluded, but the process is coming along
slowly. The idea is to make an asset purchase on behalf of a
company not yet formed. Because all contracts (except for contracts
of employment) are usually cancelled in this form of purchase,
it is crucial to ensure before the final acquisition that the main
contract concerning the selling of telecommunication services will
be transferred to the new owners. In order to ensure the transfer
of the contract, a preliminary contract should be made with the
client; the financiers will probably also demand it.
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6. A transport company in Ilomantsi

The company has been providing coach transport services in the

region of North Karelia for a long time. It also has its own travel
agency with a tour operator licence. The business has been very
active earlier, but increased competition and the purchase of trips
through the Internet have resulted in a decrease in business
activities.
The company still provides customized charter trips, but only in

small scale. However, one of the two coaches is operating school
transport, because of the decline in business activities. It forms the
main business activity which is supplemented with charter trips.
The entrepreneurs of the family business are aged and no-one

from the family will continue the business. Ageing causes also
other problems to running a business; one of the coaches does not
have a driver, because the entrepreneur’s right to operate a motor
vehicle of this type has been terminated. The other coach is driven
by an external hired employee.
The entrepreneurs have offered him the chance to buy the coach
and obtain the rights to operate school transport services. In
addition he could operate prospective customized charter trips if
time permits.
This would be an asset purchase on behalf of a company not yet

formed. The sellers would keep their limited company, which
offers travel agency services. The other coach would be sold. The
employee was very interested in the plan, because it was his own
job at stake here; they did not know of any other jobs from the
same line of business in the small town. However, he did not have
any experience on running a business nor did he know anything
about the productivity of the business.
With the help of the business consultant information was started

to be gathered in order to make a business plan for the buyer.
This time the problem was not in obtaining the information but
in interpreting it. The pricing of the school transport was based
on a tender made for the town authorities, and the employee had
a clear understanding of the costs of the coach, which made it
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easy to make calculations. The surprise was, however, that the

operation was barely productive and had only been carried on to
keep the driver’s job.
Furthermore, sorting out the transport included in the charter

transport and its share from the prices of the package tours sold
turned out to be difficult. A customer paid a lump sum for the tour
which included, in addition to the transport, also accommodation,
meals, packaged activities, guiding etc. The company had never
made an actual cost calculation of the package tours sold and
therefore it was decided to choose five different tours and find out
their cost structure receipt by receipt.
The study showed that the profit margins of the tours, mainly
the transport, were very low. There were even two tours whose
transport had made a substantial loss. The information obtained
also surprised the owners; however they said they had once
suspected something like this. The company was free from debt,
so it could afford to even pay sometimes in order to get a tour
organized!
From the buyers point of view the situation was different, because
he would have had to take a substantial loan for buying the coach.
As a result of all measures, the buyer withdrew from the transaction
and the business operations continued as before. Apparently for as
long as the company has enough money or until the couch reaches
the end of the road.
7. A physical therapy business in Juuka

The company is the largest company in its line of business in the

region; it has three employees. It operates in rented premises on a
good business location in the main built-up area of the municipality.
For several years the entrepreneur has been developing a physical
therapy training package together with another entrepreneur
from the same line of business. They have already completed the
product development and penetrated the market so well that they
have established a new company, whose primary line of business
is training services. It also seems that organizing the training takes
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so much time that the entrepreneur has to give up the physical

therapy business.
In our meeting we discussed the feasibility of selling the business.

The municipality of Juuka is a relatively small municipality in North
Karelia and it would probably be very difficult to find an outside
buyer for the business. Furthermore the present employees are
highly skilled, so we also discussed the possibility of an EBO. The
possibility is also favoured by the fact that the entrepreneur was
worried about what will happen to the employees if the business is
bought by an outsider who might bring their own employees with
them.
Although the employees are trained professionals, none of them

has any experience in running a business. All operational activities
have been the responsibility of the entrepreneur. This is a fact that
might become the biggest problem in the acquisition and therefore
the seller is prepared to give support for the buyers for a long
period of time.
In the value assessment of the physical therapy business, it is

difficult to determine, what the goodwill value of the attained market
position is, for example. The net asset value is not significant,
because the company is operating in rented premises and therefore
the assets comprise treatment tables, office furniture etc. The
company also has a small gym and its equipment constitute a
substantial part of the net asset value.
The entrepreneur wants to keep the possible acquisition entirely to

himself at this stage and the employees are completely unaware
of the new plans. The seller is clearly in the so-called awakening
phase at present; he is gathering all available information on the
acquisition prior to offering the business to his employees. Along
with gathering information, an appropriate solution for carrying
out an EBO is being created.
The acquisition is not yet completed, but the seller has a clear view
on how to carry out the business transfer.
However, we do not know the truth until the employees are being
offered the business.
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8. A specialized shop in Joensuu

The company sells fish, canned fish, semi-finished products and

other sea delicacies. The customers include private persons, and
a number of restaurants and institutional kitchens. The reason
the entrepreneur is giving up the business is ageing and in this
case the company’s only employee had already for a while been
interested in continuing the operations.
In terms of the taxation of the seller, it would have been in his

interests to sell the partnership shares of the limited partnership,
but the financier did not approve. The acquisition was carried out
as an asset purchase and the seller promised to support the buyer
by working with him for a couple of months.
In this case the written contracts between the business in sale

and the restaurants and institutional kitchens played an important
role, because they made up almost half of the revenue. Legally
contracts are not transferred in an asset purchase, because the
contracting party changes.
Before carrying out the acquisition, the seller and the buyer visited
together all contractual customers and ensured the extension of
the contracts. Basically, they had with them new contracts made in
the name of the new company established by the buyer and their
aim was to obtain the customer’s signature on the contract during
the visit. It was important for the customers that the seller had
promised to support the buyer after the acquisition and they were
convinced by it that the operations will continue to be as flexible
as before.
9. A construction company in Joensuu

The company manufactures traditional log houses for residential

and holiday use. The raw material used is close-grained North
Karelian pine. The company’s products have a brand name which
is rather well-known in Finland. The products have also been
exported to Greece, for example, but only in small scale and as an
experiment.
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The method of delivery varies according to the customer’s needs.

The delivery can consist of a mere timber frame, a log home kit or
the whole turnkey project.
The company operates from two locations in North Karelia. One

contains only production and the other has a sales office in addition
to production. It has about ten employees, mainly men.
The owner of the business has aged and although his son is working
for the company, the company will not be transferred to him. The
reason is that the entrepreneur feels that his son does not have
what it takes to continue his business.
The company has an outside sales manager, who is in practice

independently responsible for product sales for both consumers
and wholesalers. In the summer 2007 the entrepreneur offered the
sales manager an opportunity to buy the brand name, the market
and the majority of the production machinery and equipment. The
offer came as a complete surprise to the sales manager and at first
he did not take it very seriously. However, his interest was gradually
aroused and after he had signed the nondisclosure agreement
and was allowed to see the company papers, his interest grew
stronger.
The seller’s goal was that one of the locations, which had one of
the main machines needed in the production, would remain in the
limited company he owned. In practice the shares of the limited
company would be transferred to his son by using the relief allowed
by the law and the son would become responsible for running the
operations on that location. However, he would no longer have any
separate product to sell, but he would operate as a subcontractor
to the sales company and would depend on its success.
The buyer candidate was a sales professional but he did not have
any experience in running a business. Furthermore, he did not
have any real securities on hand, as a matter of fact; the family
had a substantial amount of their mortgage left. Moreover, his wife
had set a condition on the acquisition that their permanent home
would not be given as collateral for a business loan. Obtaining
the financing would be quite a task because the purchase price
suggested by the seller was substantial and the collateral value of
the object was low.
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It was a very typical case: the buyer had a small amount of

money/securities, the collateral value of the assets in the object of
purchase was low.
After the initial advice given to the buyer, he was offered the services
of a management consultant with the support of the REINO project.
In this case the EBO PLAN introduced later on was followed right
from the start. As a part of the process a value determination was
carried out and it revealed that the seller’s estimate of the price of
the company had in fact been smaller than what was showed by the
value determination. The consultant who had carried out the value
determination with the support of the REINO project was working
to the buyer’s advantage so actually the value determination was
never shown to the seller!
The buyer candidate was further encouraged by the positive news

about the value of the business and by means of the EBO PLAN
a business plan, based fully on the buyer’s vision and his solid
experience of the business he was to buy, was put together.
The EBO PLAN was also used when obtaining the financing and as a
result an exceptional solution was arrived at. In this case, the total
amount of financing for the acquisition was determined neither by
the value determination nor by the purchase price suggested by
the seller, but by the amount of a loan the buyer could afford in the
long run! Therefore it was of crucial importance that the EBO PLAN
was realistic, that is, its sales and profit targets were attainable.
The buyer’s experience and vision convinced also the financiers
and the financing for the acquisition was organized as planned.
The maximum purchase price for which it was realistic to obtain
financing came quite close to the seller’s original asking price, so
in this case both the buyer and the seller were satisfied with the
outcome.
Because a substantial part of the production would be bought from

the company owned by the seller’s son, contract law became to
play an important role in this EBO. After all, the buyer had to make
sure that he could rely on the subcontractor in the future and,
on the other hand, would not have to fear that the subcontractor
would start to run a competing business.
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The seller and his son also had their own interests in the planned
operations model. They had to make sure that the buyer’s company
will actually use them as the subcontractor and will not establish
a competitive bidding procedure to select another subcontractor.
The aim was also to agree on the subcontracting fees.
Therefore contract law took plenty of time and both of the parties
had to hire a lawyer to defend their interests. In practice the
lawyers drew up the contracts in their mutual negotiations!
PROBLEMS OF EBOS IN THE PILOT PROJECT COMPANIES:
1. The buyers do not have experience on business activities and

entrepreneurship
a. The sellers willingness to support the buyer after the
purchase is often crucial e.g. in obtaining financing
2. The object of purchase is at the end if its life cycle and/or
necessary investments have not been done
a. This is a common problem in many acquisitions but in
EBOs it might not be as significant, because the buyers
are able to use the outdated technology as well and know
the weaknesses of the company (they do not come as a
surprise)
3. Difficult to obtain and interpret the information needed for
decision making
a. Basically all acquisitions have the same problem, because
few micro companies have an up-to-date business plan or
e.g. a technology strategy
b. It is important to make the nondisclosure agreement
already at the beginning, to enable openness between the
parties
c. The employees are usually not able to interpret the obtained
information independently, but they need customized advice
i.e. a contact person to help them
4. The seller doubts the buyers’ ability to go through with the
acquisition
a. Based mainly on the outdated employer-employee role
typing
b. Can cause e.g. the problem that the business is not offered
for the employees at all, but is sold to an outsider
c. It can also be a problem that the seller tries to manipulate
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the buyer’s decision making in the role of “the boss”

5. The buyers lack the perseverance and will to develop the
business
a. The reason is their inexperience in seeing the big picture,
because in paid work the operating area was narrower for
the most
b. They also lack a broader view on predicting the future of the
branch
6. In terms of taxation, the seller’s and buyer’s interests are often
different
a. The seller would like to sell shares, while the buyer would
gain more advantage by buying the business activities on
behalf of a company not yet formed
b. This problem might not be as apparent in EBOs as when
selling the business to an outsider
7. The buyers’ risk-taking ability varies
a. If there are several employees as buyers, personal loan
liability might vary greatly and as a result it might be
difficult to obtain financing
b. Finland lacks a financing instrument tailored to EBOs
8. The business is priced by feeling rather than by reason
a. The same problem in almost all acquisitions, requires a
value determination made by an outsider
b. The final purchase price can be a disappointment to the
seller, he does not have the motivation to help the new
owner
i. However, the need for the seller’s support is
emphasized in EBOs, the financiers also demand it
9. The different role of the employees after the EBO
a. Emphasized in situations where some employees become
owners and some remain employees
b. A challenge for personal management!
10. Accounting firms and the trade union movement lack knowledge
on the EBO process so it is difficult to obtain assistance from
them
a. Persons who could support the parties of the EBO are
needed
11. The business that is for sale is often strongly identified with the
entrepreneur
a. Difficult to assess the reaction of the customers, suppliers
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and stakeholders to the ownership transfer

b. Emphasizes the significance of the seller’s involvement after
the acquisition
When examining the companies involved in the JOSEK pilot project

it is quite striking to notice that none of them represent the so-
called Phoenix phenomenon, re-establishing a company in crisis,
although it is the most common way of establishing employee-
owned companies in Europe.
EBO PLAN
During the JOSEK Ltd’s pilot project a completely new model for making
a business plan for EBOs was developed. Usually it is necessary in all
acquisitions, whether carried out one way or another, to make a busi-
ness plan, primarily for the financiers, which describes the company’s
starting point and future plans.
The basic idea of the EBO PLAN is to tap into the intimate knowledge
that the employees have on the company they are buying and to depict
the future based on their experience and vision. In this regard, an EBO
differs essentially from a ’normal’ acquisition, where the buyer is not
familiar with the object of purchase, on the contrary he has to spend
much more time on acquainting himself with the object. And even then,
he will miss something essential.
The EBO PLAN aims at preparing a comprehensive action plan for the
ownership transfer, where the company’s key personnel is preparing to
continue the business operations and to take the entrepreneurial risk in
continuing to run and develop the business.
THE THREE KEY QUESTIONS
When starting the EBO PLAN process, the first and most important task
is to find out the profitability of the business. This is done by means of
a value determination and an analysis of the present state of the busi-
ness. A credit report for the company also has to be obtained and lia-
bilities and commitments have to be identified. In order to obtain a full
account of these issues, due diligence investigations, which take plenty
of time and money, often have to be conducted.
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Just as important as the financial analyses are discussions on the future

prospects of the business with the transferor and the buyer candidates.
It is also worth getting acquainted with future prospects of the industry,
changes in customer buying behaviour, changes in the industry-specific
technology etc. One of the advantages of an EBO is that usually both
parties of the purchase have intimate knowledge of the industry.
The second key question is to find out what the buyers are actually
willing to do. EBOs are often a matter of securing one’s job and many
people are willing to do a lot for it. However, it has to be born in mind
that people have different personal economic situations and different
possibilities to invest capital in an acquisition. People also have different
views on spending money. Someone is willing to invest 30,000 euros in
a new car without thinking that the sum of money will most likely al-
most disappear in a few years time, while they do not have the courage
to make the same investment in establishing a company and securing a
job (which would pay for itself even in a year).
The third key question is what are the seller’s motives and goals in the
acquisition. The answer is difficult to pin down and it might take a lot of
background work. In addition, the interests of the entrepreneur’s fami-
ly, which might not be the same as those of the entrepreneur, have to
be kept in mind. Another thing to find out is whether the entrepreneur
is truly willing to give up the business. In other words, does he actually
intend to sell the business or is he only trying to gain additional finan-
cing from the employees.
After dealing with these three key questions, a situation described in

Figure 6. is arrived at and the final decision about whether to go ahead
with the EBO PLAN or “go back to square one” is made.
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Figure 6. EBO PLAN process.
Thus the value determination is only one part of the EBO PLAN process;
planning the future according to the buyer’s goals plays the leading
role.
When planning the future, a detailed analysis of the present state of the
business is of key importance; it shows what the business has resources
for. It involves evaluating the company’s strengths, weaknesses, oppor-
tunities and threats i.e. the SWOT analysis.
The analysis is tailored for each sector, for example, the following issu-
es are examined in the analysis of the machinery and equipment of an
industrial company:
• Value determination and expected lifetime of the machinery
• Capacity and the need to increase it
• Investment requirements in the near future and their financing
options
• Production bottlenecks
• Human resources in production
• Quality assurance
• Product life cycle
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Figure 7. EBO strategy.
A complete EBO PLAN also includes a follow-up. It should be carried out

by the same person who has offered support for the buyer/buyers in the
EBO process and in making the EBO PLAN.
The suitable time for assessing the situation is about six months after
the transfer. At that time it is still possible to correct the potential mista-
kes quite easily or even change the original EBO PLAN to better corres-
pond to reality. The ’auditing’ should be a continuous, biannual activity
at least during the first three years the company is operating.
COMMUNICATION AND PUBLICATION IN EBOS
The issue of how the ownership transfer is communicated during and af-
ter the acquisition process is relevant in all acquisitions, including EBOs.
The JOSEK Ltd’s pilot project also revealed, how important it is to keep
the buyers’ family members updated of the developments. In the pilot
40
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company in question, this was not taken into account and it probably
contributed greatly to the failure of the acquisition. On the other hand,
it must be remembered to ensure that the nondisclosure agreement
also binds the buyers’ family members and thus obliges them to keep
the whole project a secret during the process.
A pending acquisition is sensitive to disturbance and fascinates the pub-

lic greatly and therefore rumours start to spread easily. The news on the
possible acquisition travels quickly to customers, competitors as well as
to suppliers. Unless confirmed or refuted, these rumours will continue
to grow and already early on they might become an obstacle to carrying
out the acquisition. The secrecy and controlled communication of the
acquisition are crucial factors in a successful acquisition. Usually these
are ensured by minimizing the number of people who know about the
acquisition, but in that sense an EBO can be challenging, because there
might be several buyers.
Usually it is a custom in acquisitions that external business communi-

cation is not conducted during the process. This custom is important in
order to preserve the readiness for operation and prevent the potential
transfer and its consequences from causing concern among the custo-
mers, suppliers and stakeholders. One exception is informing the finan-
ciers of the acquisition, which should be done already at an early stage
of the process.
After the ownership transfer has taken place it is recommended that

a communications strategy, which both the seller and the buyer agree
on, is developed. All in all, the most important thing is that information
about the acquisition is given out openly and extensively as soon as the
transfer has taken place.
The easiest way to inform the general public is to organize a press con-
ference, but even then a good press release has to be written for distri-
bution at the press conference.
Although the acquisition is carried out as an EBO, informing the emp-

loyees should not be forgotten. It is possible that only part of the emp-
loyees were involved in the acquisition and the rest will continue as
employees as before. In an ownership transfer situation, an employee
usually has only one very personal question in mind: What will happen
to me now? The preservation of jobs and the buyer’s plans should be
openly communicated.
41
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In companies where the transferor has had a strong role it is recom-

mended that meetings are organized between the most important cus-
tomers and the representatives of both the seller and the buyer. The
customers’ main concern in an ownership transfer situation is usually
the question, how will they obtain the service or product they want in
the future, and therefore one has to be able to tell this clearly to them
in the meeting.
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PUBLISHED REINO PROJECT WORKING PAPERS
4. Toni Brunello. 2008. The Bank of Cases: Manual, Tool and

Example Cases.
3. Jan Sten - Sakari Oikarinen. 2007. Process Flow Chart for

Business Transfers.
2. Johanna Salmi - Veli-Matti Koljonen. 2007. The Outcomes and

the Evaluation of the Pilot Project “Anticipation Method”.
1. Ari Peltoniemi (ed.). 2007. Baseline Analyses: Denmark, Finland,

Greece and Italy.
43

Employee-Buy-Out (EBO) Model in Business Transfers

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REINO PROJECT WORKING PAPERS NO.

EMPLOYEE-BUY-OUT (EBO) MODEL

DO NOT FORGET THE FUTURE

KOSEK, Kokkolanseudun Kehitys Ltd

Mainostoimisto Heinäkuu / Kirjapaino A. Välikangas, Kokkola

According to estimations the companies which are transferred to the emp-

Kokkola, March 2008

Antti Porko Ari Peltoniemi

BUSINESS STRUCTURE IN NORTH KARELIA.���������������������������������������������������3

BUSINESS TRANSFER IS A PROCESS!.������������������������������������������������������������6

WHAT OPPORTUNITIES EMPLOYEES HAVE TO CONTINUE BUSINESS?.���������10

PILOT PROJECT OF JOSEK LTD IN REINO PROJECT.��������������������������������������13

EXPERIENCES FROM PILOT PROJECT COMPANIES.���������������������������������������18

PROBLEMS OF EBOS IN THE PILOT PROJECT COMPANIES����������������������������35

THE THREE KEY QUESTIONS.������������������������������������������������������������������������ 37

COMMUNICATION AND PUBLICATION IN EBOS.�������������������������������������������40

Employee-run companies tend to be successful and employees moti-

BUSINESS STRUCTURE IN NORTH KARELIA

There are approximately 6 500 businesses in North Karelia and appro-

Figure 1. The distribution of companies by the line of business.

Figure 2 below illustrates the age structure of entrepreneurs in the year

Figure 2. The age structure of entrepreneurs in North Karelia.

Figure 3 shows the problems that entrepreneurs consider as main ob-

Figure 3. The anticipated problems related to generation change or ownership transfer.

A group of students at the North Karelia University of Applied Sciences

BUSINESS TRANSFER IS A PROCESS!

A business transfer is always a long-term process, regardless of the

One of the most important differences in EBO in relation to other acqui-

When a company is in crisis its operations have already ceased in a

Another case of rescuing a company in crisis is when business opera-

A business transfer usually takes place when an entrepreneur is relin-

Outsourcing usually means closing down or selling a part of a large

thing is to start the process in time, because if the negotiations to redu-

Another case of outsourcing is the need to privatize auxiliary activities

Contract law has an important role in the privatization of operations and

Privatizing enables the buyers to obtain the outsourced operations at

In the privatization of a municipal service the problem might be that

WHAT OPPORTUNITIES EMPLOYEES HAVE TO CONTINUE

The largest problem in the business transfers of micro companies is that

However, in many SMEs the employees are closer to the entrepreneur

In the light of these facts the employees of the company would be

The employees can also regard employee ownership as strange; the

Furthermore, Finnish society does not support employee ownership,

In addition, business-transfer relief in giftlike sale (payment over 50%

Usually corporate acquisitions always include mapping potential finan-

Some of the facts in support of employee ownership are as follows:

-- competitors get a look-in and start marketing actively to the

PILOT PROJECT OF JOSEK LTD IN REINO PROJECT

1. Two Workshops were organized for local business advisors,

Workshops were marketed with a direct marketing letter sent among

The EBO Workshop held in March 2007 concentrated on distributing

Psychologist Pirkko-Liisa Antikainen from Psykologian Tietotaito

Ms Hanna Koponen, chairperson of the local steering group, is

Figure 5. The distribution of different types of acquisitions financed by Finnvera.

The EBO Workshop held in November 2007 comprised mainly

Most of the time was used in workshops and therefore all

• How the trade union movement and organizations of enterpri-

This type of business transfer workshops had not been organized in

2. There is an EBO guidebook being prepared (16 pages, A5) for

During spring and summer 2008 there will be significant changes

3. Information on the employee-ownership model was distributed

and in the publication for the members of the local Chamber

4. Micro companies, women-led businesses and their employees were

BUSINESS STRUCTURE IN NORTH KARELIA.��3

BUSINESS TRANSFER IS A PROCESS!.��6

WHAT OPPORTUNITIES EMPLOYEES HAVE TO CONTINUE BUSINESS?.��10

PILOT PROJECT OF JOSEK LTD IN REINO PROJECT.��13

EXPERIENCES FROM PILOT PROJECT COMPANIES.��18

PROBLEMS OF EBOS IN THE PILOT PROJECT COMPANIES��35

THE THREE KEY QUESTIONS.�� 37

COMMUNICATION AND PUBLICATION IN EBOS.��40