Across America, inequality is rising, wages are stagnating, and inflation is worsening. At the same time, workforce participation is still lower than it was before the pandemic and employers, especially small business owners, say they’re struggling to find workers. And in the background is the rising “silver tsunami,” the growing population of aging Americans approaching retirement. Baby Boomers own 2.9 million businesses, which employ more than 32 million people.
As these issues all come to a head at once, some experts say one solution could address all of them: employee ownership. The idea of workers owning a company isn’t new—there are thousands of such companies with that structure, from small businesses like The Local Butcher Shop in Berkeley with just 17 employees to Eileen Fisher with its 1,200 workers. This can take a few different forms—but experts say it’s a model that has often been overlooked.
“It’s such an underutilized strategy tool,” says Alison Lingane, cofounder of Project Equity, a Bay Area-based nonprofit that works to raise awareness about employee ownership, “primarily because people don’t know enough about it, or if they do, they may have misconceptions.” One of the most common misconceptions is that employees need all of the capital themselves or access to a bank loan. In fact, it’s actually the business itself that takes out the loan, which then gets paid back by its profit.
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Employee ownership can take a few different forms, from a worker cooperative to an Employee Stock Ownership Plan (ESOP) to employee ownership trusts, but at its core, it’s an arrangement in which employees have a stake, and a voice, in their company. How much employees own can vary: Business owners can sell just a part of their company to workers, or they can make their business 100% employee owned. Project Equity advocates for about 30%, what Lingane calls a “meaningful chunk.”
Typically, the transition to employee ownership is led by the owners themselves. “The business owner holds the keys to the kingdom in terms of employee ownership,” she says. They may want to make the transition for legacy reasons—like wanting their company to still be a pillar of the community after they retire. Maybe they’re interested in the tax benefits that come with that exchange. Or, perhaps they’re looking to improve employee retention and revenue, which multiple studies have shown employee ownership can do.
A 2022 study found that 53% of ESOPs in the food industry saw revenue increase from 2019 to 2020, compared to 35% on non-ESOP food companies. Another study in 2020 found that employee-owned companies were three to four times more likely to retain staff than other businesses. That’s no surprise, since employee-owned businesses also tend to have higher wages and better benefits; they’ve also been shown to benefit the broader community by increasing local spending.
“There are so many ‘why now’ reasons [for employee ownership],” Lingane says. But there’s no one blueprint, so for owners who are interested in transferring their company to their workers, there are a few steps to take first.
Articulate your business goals
As a business owner, you have to have the end goal in mind from the start. “We often talk to business owners about, ‘Imagine you have retired and now you’re five or ten years after having sold your business, look back at it and what do you want to see?’” Lingane says. That vision might include leaving work completely and enjoying retirement right away, or it could mean reducing one’s role in the business, but not exiting completely. With that second scenario, business owners could start with a partial sale, like 30%, which also sets them up for transferring the remaining 70% of their business to their workers later on.
This doesn’t mean business owners have to immediately decide what type of employee-ownership is a fit, though. “The form comes from the goals,” Lingane says. There are three main forms: a worker cooperative, in which employees themselves pay a small share to buy equity, and then employees are elected to make up the majority of company’s board of directors; an Employee Stock Ownership Plan, in which workers earn their shares as a retirement benefit; and Employee Ownership Trusts, in which businesses use the structure of a “perpetual purpose trust” to keep the company’s mission in place; the trust then owns the company’s shares, and employees receive a percentage of profits.
These three paths can also work in tandem, depending on the particular situation. “Forms can also be combined, so you can have an ESOP that has the democratic governance of a worker co-op,” Lingane says. “It can have a lot of flexibility in terms of how it’s designed.”
Connect with someone who knows what employee ownership is
The next step is to learn about more employee ownership; Lingane recommends talking with someone who knows about the structure. “Educate yourself, read everything, but talk to somebody who can walk through that matching of what your goals are with what the possibilities might be,” she says. “They’re going to know how to help you line the capital up to make it happen.”
Experts can come in a few forms, whether former business owners who already made the transition to employee ownership, or organizations like Project Equity that advocate for more employee ownership. Others Lingane recommends include Becoming Employee Owned, the National Center for Employee Ownership, and EO Equals. Pick a few, she says, and talk to each of them about the possibilities of employee ownership.
One thing to note: Even banks might not be well-versed in employee ownership models, so Lingane recommends talking to an expert about financing options before reaching out to lenders. There are even specific employee ownership acquisition funds to help facilitate those business purchases.
Talk to a business exit planner
Finally, business owners should also speak to an exit planning advisor. “The things that an exit planner would tell you about [how to] get your company ready to sell is very important for employee ownership as well,” Lingane says. “Get everything organized and cleaned up and ready. Do what you can to make your company even stronger and more successful.” That could mean investing in internal culture and making sure you have a solid leadership team in place.
When Project Equity talks to businesses about employee ownership, it often suggests a feasibility study to see if it’s the right time for that transition. That might reveal that there isn’t the right management team in place or perhaps that profits aren’t where they need to be. If that’s the case, the business owner might need to grow their company a bit first—but they could still do that through employee ownership, perhaps just by selling a smaller portion at the start.
Exit planning can also touch on the legacy of a business, which aligns with employee ownership, too. Small businesses are integrated into local communities, and not only in terms of what they provide economically. “Your company already has so much legacy,” she says she tells owners, “and you have the power and the opportunity to create even deeper legacy by the choices that you make when you sell your business and retire.”
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This article was written by Kristin Toussaint from Fast Company and was legally licensed through the DiveMarketplace by Industry Dive. Please direct all licensing questions to [email protected].
