Employee Buyouts: What They Are and How To Assess Their Value

Buyouts are a common method for reducing the number and cost of employees. In an employee buyout, the employer offers some or all of their employees the opportunity to receive a large

How Employees Can Buy Out a Business

How to review a buyout package

When a buyout is being offered to an employee, there is an element of shared benefit in the design of the buyout. The employee is going to want to receive as generous of a buyout as possible, while the company is offering packages with the goal of having the offers being accepted by the employees This means that both the employer and the employee have reason to assess the offer to determine if it is providing good value to the employee. Key elements when assessing the value of a buyout offer include:

1. Time until retirement

One of the most important factors in a buyout package is how near or far the employee is from retirement. Younger employees often have a greater concern placed on how the buyout will position them professionally moving forward as they have more time ahead of them in their career.

Individuals who are closer to retirement age may be able to use a lucrative buyout as an opportunity to retire early. When assessing the value of a proposed buyout, the ability to carry over until retirement benefits begin is a valuable consideration that can significantly improve the appeal of a proposed buyout.

2. Living expenses

When assessing a buyout proposal as an employee, its important to consider how the proposal will affect your quality of life until your next job. A substantial buyout that allows for you to continue to live your life as you are accustomed to for several months allows for a large window to find new work, for example, whereas a smaller buyout may require you to make changes to your habits to reduce spending while you seek out your next opportunity. Its important to understand how the size of your offered buyout would change your life in the short term.

As an employer, if you know your staff well this can help when planning out the size of buyouts required. An employee who is currently living more extravagantly may require a more lucrative buyout offer compared to one who is more frugal with their earnings.

3. Future plans

Because a buyout often amounts to the equivalent of one or more months of payments for the employee being bought out, it provides an excellent opportunity for future planning. Knowing what your professional goals are moving forward can help you to determine whether or not an offered buyout makes sense in your plans and is the best option.

This requires not only examining the financial implications of accepting the buyout, but also any effect that you think being bought out would have on any future job search. If you think the buyout will reduce your options, a more substantial payment may be required to justify accepting it.

As an employer planning buyouts, how it will affect your employees future is a key factor to bear in mind. Consider speaking with individuals who are hesitant to accept their buyouts and offering options such as providing positive recommendations on any future job search, if requested, as this can help to reduce the negative effects of accepting a buyout.

4. Additional compensation

As with salary negotiations when beginning a new job or seeking a raise, the top-line information of how much money is being offered is important, but its not the only compensation to consider. In addition to cash payments, buyouts may include other forms of compensation and benefits. There are no limits to what a company can offer as part of a buyout if they think it will make the package more enticing and will increase the chances of successfully coming to an agreement.

Many of the most popular options for increasing the value of a buyout package are similar to bonuses offered to employees, including extending the length of benefits like insurance or pension payments beyond the period of employment.

5. Lump-sum vs. installment payments

When assessing a buyout its important to examine not just the total amount of money being offered, but also how it pays out. With a lump sum, the entire buyout is paid out upfront. This often means the buyout offers a significant payout that far exceeds normal income which can make for an extremely appealing opportunity.

With installment payouts, the buyout is instead paid out over the course of several months or years. Choosing an installment plan often results in a higher overall payout than a lump sum., and provides an element of financial consistency by ensuring there are regularly scheduled payments in the weeks and months following the buyout. When receiving an installment plan it is important to assess the financial solvency of the company, as well, to ensure that the payments will remain viable for the duration of the agreement.

6. The consequence of turning down the buyout

Although a company offering buyouts is trying to incentivize staff to take the buyouts, it is still a voluntary agreement that both parties need to enter into, and the employee may turn down the opportunity. When weighing the pros and cons of accepting a buyout, the results of choosing to remain with the company are a significant factor that should be compared to the results of taking the buyout.

The primary appeal of declining a buyout is keeping your current job, however, there are important considerations to keep in mind. The first is the potential that employees who do not accept the buyout may be laid off instead. If too many employees opt to decline the buyouts, layoffs may be turned to as a second option, and that opens up the potential for a less-generous severance package.

Its also important to consider the long-term viability of the company. This is particularly important if buyouts are occurring due to financial struggles, as employees remaining on may be subject to further downsizing or even the closing of the company in the future.

7. Regulations and requirements

When offering a buyout, a company may be obligated to meet certain rules and regulations that mandate providing certain levels or forms of compensation to the employee being bought out. The first area to check for compliance is with any federal, state or local regulations that mandate protections for employees, which may include minimum payment rates or access to insurance protection such as COBRA. Its also important to check the employment contract for any mandated benefits.

As an employer, its important to ensure that any buyouts you offer are in compliance with the employees contract, while employees should always check their offer and note any areas where the company is required to be more generous with its offering.

8. Liability release

A common practice when offering a buyout to employees is to include a liability release within the buyout agreement. This usually means that if the employee accepts the buyout they waive their right to sue or otherwise bring an action against the company in regards to their exit from the company.

For most employees this will not be a concern, however, if you feel that your buyout is coming under unfair and actionable terms, this liability release may be a reason to avoid agreeing to the buyout. If you are unsure of whether or not you should accept a buyout with a release in it, consult with a lawyer about your options and what you would be passing up by agreeing.

As an employer, liability releases in a buyout can be a critical element. Including a release provides additional protection and allows for a clean separation with all employees who accept the buyout.

9. Non-compete clauses

Occasionally. an employer will opt to include a non-compete clause in a buyout which stipulates that the employee can not begin a new job with a competitor or within the same industry for a set period of time. Because this reduces the future working options of the employee being bought out, an employer should expect to have to raise the buyout offer to account for the added difficulties. If a buyout offered to you includes non-compete language, be sure to factor in the impact the clause will have on your future earnings when assessing the value of the buyout package.

10. Unemployment insurance eligibility

In many states, accepting a buyout means that an employee becomes ineligible for unemployment insurance which would otherwise provide up to six months of income protection. When planning or considering a buyout package, it is important to check with your states laws on unemployment to determine if employees who accept buyouts will be eligible or not.

In states where accepting the buyout will void any unemployment eligibility, its important to assess how this loss of one potential revenue stream changes the value. As an employer, it may be necessary to offer a more lucrative package to an employee who will be foregoing unemployment protection by accepting a deal.

What is an employee buyout?

An employee buyout occurs when a company is looking to reduce payroll, cut positions or remove an employee from a position. To accomplish this goal, the company offers one or more staff members a buyout package.

When accepting a buyout to leave a position, an employee commonly receives compensation in the form of several weeks of pay as well as potentially additional benefits such as continued insurance, pension contributions or other perks. The company offering the buyout in-turn can lower payroll or free up positions in the organization to restructure.

A standard buyout package consists of the equivalent of four weeks of payments, plus an additional week for each year of employment with the company. Additional benefits are also often offered, either as a means of enhancing the value to encourage more employees to accept the buyout or as a show of gratitude to the employee for their time with the company.

Buyouts vs. layoffs

When a company is forced to reduce or alter its staffing in large numbers, layoffs and buyouts are the two primary methods available. From the perspective of the staff, buyouts are usually the preferable option, as they are likely to offer more lucrative payments for the employees being let go. From the perspective of the employer, buyouts are also better for maintaining morale, both in the form of the employees let go speaking more highly of the company and in the happiness of staff who remain, who will take solace in knowing they are more likely to receive a similar opportunity should further changes arrive.

One important consideration to keep in mind when dealing with buyouts is that they can often predate a round of layoffs. While a company may prefer to offer buyouts to employees, either as a sign of gratitude for their service or for the benefits noted above, if too few employees accept the buyouts it is common for layoffs to follow if the company is making the staffing changes under financial duress that has not yet been alleviated.

FAQ

What is a employee buyout?

An employee buyout (EBO) is when an employer offers select employees a voluntary severance package. The package usually includes benefits and pay for a specified period of time. An EBO is often used to reduce costs or avoid or delay layoffs.

What is difference between severance and buyout?

A buyout offer is a proposal made by one party to another to end a business contract or relationship, often early, in exchange for something of value. Some buyouts give the person making the offer a valuable asset. Other buyouts attempt to remove competition or a financial burden.

How do you get a buyout from your employer?

The terms are often used interchangeably, but severance can go to anyone who loses a job, while a buyout is an offer designed to get people to leave.

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