Financial feasibility of employee ownership under the Danish succession model
Thomas PoulsenPurpose
We examine the feasibility of employee-financed succession under Denmark's new framework, which lets owners transfer ownership to employees through a cooperative holding structure with deferred capital gains tax.
Design/methodology/approach
We develop a cash-flow model yielding closed-form feasibility conditions that incorporate the statutory dividend threshold and tax deferral, with simulations and a stochastic extension quantifying liquidity risk.
Findings
Feasibility turns on short-run liquidity rather than profitability. Because dividends are pro rata, funding a stake of any size requires the operating company to distribute its entire equity value; this “dividend leakage” to non-participating owners is the root of the constraint. The maximum sustainable multiple rises with payout and falls with leverage, leaving high-valuation firms unreachable; a smaller stake does not help, as feasibility is independent of the ownership share. Feasibility therefore hinges on concessions outside the dividend channel: tax-exempt seller gifts or employee contributions.
Research limitations/implications
The baseline abstracts from bargaining and from heterogeneity beyond payout and leverage; an appendix shows earnings risk tightens the feasible set.
Practical implications
The results clarify why employee buyouts are viable in some firm contexts but not others and inform the statutory review due after three years. They indicate that using differentiated cash-flow rights, so the employee entity captures more of a given distribution, would widen reach at no cost to either party.
Social implications
The selection mechanism favors mature, stable firms. Reaching high-growth sectors requires instruments beyond the current framework.
Originality/value
To the best of our knowledge. This is the first formal feasibility analysis of the Danish model, connecting institutional tax design to economic viability.