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How to Build an Inclusive Economy Through Employee Ownership

By 3p Conferences

By Adam Wiskind

More than 5 million U.S. businesses owned by baby boomers are likely to change hands over the next 10 to 15 years. As baby boomer business owners retire and want to sell, there is a unique opportunity for a massive transition of privately-held companies to employee ownership, said Marjorie Kelly, senior fellow and executive vice president of the Democracy Collaborative.

This could be a win-win-win situation for workers, local economies and the retiring owners of these companies. Through the Fifty by Fifty project, Kelly and her colleagues set the valiant goal of enabling 50 million employee owners in the U.S. by 2050.

What is an employee-owned business?

An employee-owned business is one where the employees, rather than external shareholders, hold the majority of the shares -- either directly or through an employee benefits trust that owns the business on behalf of the employees.  They are typically structured either as a worker cooperative or as an employee stock ownership plan (ESOP).

What’s the difference between a cooperative and an ESOP?

A worker cooperative is an employee-owned business where each member (worker) has one equal share of the business. This means every worker-member has one equal vote in the co-op -- no matter their pay or how long they’ve been a part of the business. Cooperative members also receive a share of the distribution of the cooperative's profits at the end of each year.  Worker cooperatives are, by their nature, democratic businesses.

An ESOP has a completely different ownership structure. In this case a separate entity, a trust, acquires some portion, or sometimes all, of a company’s stock and holds it for the benefit of its employees. The company generally appoints trustees who administer the plan. The value of the shares at any given time depends on an annual independent valuation of the company. Typically employees receive the cash value of the shares in their account upon retirement or leaving the company. They never directly own the shares and only under rare circumstances can they direct how those shares get voted.

ESOPs are not cooperatives. There is no direct ownership by workers of company stock, and there is no requirement to maintain a democratic structure. Employees do not generally get the right to “vote” the shares in their account.

What are the benefits of employee-owned businesses?

Employee ownership allows workers to benefit from the wealth they create.  According to the National Center on Employee Ownership:

  • Employee-owners have 2.5 times greater retirement accounts.

  • They receive 5 to 12 percent more in compensation.

  • And they are four times less likely to be laid off.

Companies that adopt an employee ownership plan fare better as well.  ESOP companies:

  • Are 25 percent more likely to stay in business and increase sales and productivity 2 to 5 percent per year after the ESOP is adopted.

  • Have 25 percent higher job growth over a 10-year period.

In addition to benefits that go to employees and local economies, an ESOP buy-out of a privately held company can be an advantageous exit strategy for business owners. An ESOP allows the owner to cash out of the business all at once or little by little, within a favorable tax environment. In some circumstances, capital-gains taxes on the proceeds from the sale of the company’s stock to the ESOP can be deferred or eliminated. By selling the business over time, the retiring owner can transition control to the management team and help to preserve the mission of the company and the legacy of the previous owner.

There are reasons that creation of employee-owned businesses has not happened faster. They are somewhat more complex to set up and operate than a conventional business structure.  However, if the Democracy Collaborative is able to come close to achieving their project goal, the transition to employee ownership promises to produce a more inclusive economy and benefits for workers and retiring business owners alike.

Image credit: Pixabay

Adam Wiskind, based in the San Francisco Bay Area, is an M&A advisor to lower middle market companies with revenues between $1-$50 million.  Please contact him at awiskind@exitstrategiesgroup.com or LinkedIn.

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