Employee Ownership 101

so hello everybody and welcome to succession planning through employee ownership transitions my name is Donna sky and I'm a business engagement and partnership manager here at project Equity I um work for project equity and I'm often one of the first point of contacts for business owners that are interested in exploring if employee ownership can be a fit for their business I also uh do several of these awareness raising presentations uh to help give a a general overview around what employee ownership is and how it works as well as speaking directly to hundreds of business owners a year um for them to explore fit for their unique businesses so I work with an organization called project equity and we help business owners preserve their company legacies by transitioning to employee ownership uh we also work directly with business advisors Economic Development professionals and different cities and municipalities across the country to spread the word about employee ownership we are based in the Bay Area but we work with businesses all around the country as well as cities and municipalities around the country and our staff is also located um across the us so we have a lot that we're going to cover here today um as a little bit of housekeeping I'll let you all know um you can add your questions to the Q&A tab in Zoom room um I may take a pause in in the middle of the webinar to check those questions but um if I don't get to them in the middle of the webinar there will be time for me to answer those questions at the end of the session uh as well I will be providing my email for all of you if you would like to email those questions directly to me um you can also sign up for that individual complimentary uh consultation call with myself or a member on our team and they can help guide you through further exploration of employee ownership so in terms of the agenda today um we have uh a lot that we'll be covering um we'll start off with exploring you know what is employee ownership we'll talk about the benefits and why as a busy business owner it's important or we think it's important for you to to make terms uh time to learn about it now we'll talk about the types of employee ownership a few case studies and examples of companies that have transitioned and we'll also talk about how it works and Readiness factors so again if you've just logged on I noticed a few more folks logged on uh I would like to invite you to add any of the questions you may have in the Q&A um tab in your Zoom so what is employee ownership well when we talk about employee ownership we talk about a few key things um we talk about companies that are owned by the people who are actively working in the company and those employees who were employee owners have a say in the governance of the company and also o get to share in some of the profit that they've helped to create so it can be a really powerful way for an owner to sell their business at market rate and also help employees build wealth through having an ownership stake in the company that they work in some of the other key benefits that we'll dig into a little more deeply but um you know very common are that there's less staff turnover and there's more financial stability for the business itself so it's good for the selling owner the employees and for the business itself so why now you know I don't have to tell all of all of you as as busy business owners you know that there are inherent challenges and opportunities with being a business owner um but the last few years have added some additional um challenges uh on top of that um for one you know I I do speak with hundreds of business owners and you know they all have have been impacted in some way or another from the pandemic and unfortunately as I talked to owners this continues to have sort of a a lasting impact in some way and creating those uh significant challenges especially in certain sectors in particular any type of service industry is still sort of feeling the repercussion as well as other industries from that pandemic and it's had a lot of impact around being able to attract and retain uh workers as well as some supply chain impacts um as well um we have a phenomenon right now What's called the silver tsunami so half of all privately owned businesses in the United States are owned by Baby Boomers so um with that there is this phenomenon where there may be more businesses for sale than there are buyers available so understanding all of the SU session planning options uh it can really be important for for business owners as they think about the next phase in their lives and the next chapter for their business as well selling a business isn't easy U over half of all businesses are owned by older um 50 individuals who are 55 or older so again you know there are going to be a lot of owners who are thinking about the succession plan and selling their businesses at the same time also the trend of selling or transitioning to a family member has decreased greatly uh in the last decade or so so at present there are only less than 30% of businesses will actually transition to a family member when an owner decides to uh move out from uh owning and operating their business as well only about 20% of businesses will actually sell on the open market so that was something you know that was um is surprising for a lot of owners to hear you know I live in San Francisco which is the the land of of the billion dollar unicorns um and you know we often hear about those big sales on Media or in the news but the reality is only about a fifth of the businesses that are for sale actually do sell to an outside buyer but the good news is when you start to think about succession planning you do have options um you know we often say um that selling to employees may not be a fit for all business owners but it can be one that checks a lot of boxes for many so what I do when when I speak with business owners and I invite all of you to do this now is to to take some time if you haven't done so already with a piece of paper or go for a walk and and sort of have a checklist in your mind and think about what you would like the next chapter of your life to be and the next chapter for your business to be what are the key factors that are important to you as you think about that is it preserving the company's Legacy is it you know having a market value price for selling your business where to tax benefits uh factor in to what's important to you or retaining the workforce for your company after you transition out or or have the next phase for your life and the business um you know selling to a family member can be uh valuable to preserving the company's Legacy selling to an outside buyer um some of some of the things around you know preserving Legacy market value and retaining employees may or may not U fit into that plan so if those are key things that are important to you it's important to you know consider how would a an acquisition to an outside buyer work to meeting those those goals for you but employee ownership can check a lot of those boxes um it's able to preserve the company's Legacy it is a sale owners sometimes think that selling to employees would require an owner giving the company to them that is not uh true it's an actual sale so your existing company would sell to a newly formed employee-owned company there can also be tax benefits depending on the ownership type that you choose and it can help preserve um the the jobs for your company uh for the employees that work at your company as well as the services that your company provides so it can really be a win-win across various factors so again encourage you to take that time make a list you know what are the most important factors to for you when you think about the next phase and the next chapter for your business and for yourself so employee owned companies also come with several benefits a big benefit is the impact the positive impact this can have on the company itself employee owned companies tend to be stronger businesses and have a positive impact on local economies The year-over-year Profit has been found to be higher than peers in the same industry as much as 8 and a half% and the sales and growth or hires for a company tend to be higher as well a study recently found that about 2% faster per year so in terms of the higher profit and the sales and employee employment growth those gains happen year overy year so not just one off and that can go a really long way in strengthening the company as well employee ownership can have a very positive impact on the employees at the business or the workers within the company the wages tend to be higher up to 33% higher job tenure and lower turnover are really big positive impacts for employee owned businesses on average 53% higher job tenure or longer job tenure for companies that are employee owned and then the higher household net worth is higher as much as 92% and that economic stability helps to really create um positive impact and quality of life for the worker owners or employee owners in the company which translates into um more a productivity on the job for employee owned companies as well there are unique benefits for the selling owner owners who choose to sell to their employees achieve a fair sale price these sale prices are based on um the profitability and the company's ability to pay off debt that it takes out to buy the business uh from from itself as well owners can craft their own exit and time line and this is something that I often hear from owners is very important to them owners can craft their own timeline and also craft if their you know their role is to shift in some way I've spoken to owners where you know some of them would like to after the transition retire right away some of them want to stay on for one to two years and some of them after the company transitions they'd like to continue on and don't have a set goal of when they'd like to retire they want to share the ownership with their employees and still stay on in their current role and I've also spoken to owners where they want to stay on but perhaps they'd like their role to shift to a part-time role or they're an artist or they're creative but by being a business owner they had to take on more administrative uh role but now that the company is transitioning to employee own they can go back to their first love that perhaps maybe is more creative and less at a CEO capacity and with employee ownership all of those are possible for your business as well it can be quite beneficial to owners because for many preserving a company's Legacy that you've built with your hard-earned uh Blood Sweat and Tears is something that is frequently U mentioned and very important to selling owners and being able to preserve the culture and the job and the assets of the the services that the company offers in their local community can be preserved and is frequently very important to selling owners so when we talk about employee ownership there are three um pretty common employee ownership models uh the first being and the most common is an employee stock ownership plan also known as an ESOP as well worker own cooperatives are quite popular in the United States and more recently employee ownership trust so in the last few years this ownership model has grown in popularity um though it's been around in Europe for quite some time and popular there it has become more more popular in the United States and each one of them have various benefits uh to the selling owner as well as to the business and the employees so an employee stock ownership plan or an ESOP is a retirement plan that is owned all or part of ay company on behalf of its employees so the benefits come through as a qualified retirement plan as retirement benefits for the employee owners so when an employee decides to employee owner decides to retire or move on to a different role um those benefits that have accured in the ESOP would then go with the um the employee owner that's leaving so they would roll over into another type of retirement plan or if the person is of retirement age they can um you know work with their um retirement planner to um access those funds as they would like to worker own cooperatives are wholly owned by the employee owners who share in the profits and elect and serve on the board of directors so for a work own Cooperative um the benefits the profit sharing which is called patronage for worker own cooperatives happen while they are actively employed so they're not retirement benefits they share perhaps in that year or within a year or two of the time that they are generated uh the employee owners get to elect they get a vote uh for the board of directors and they can also choose to to serve on that board themselves and then lastly an employee ownership trust is becoming more popular uh largely because it is a really customizable form of employee ownership and it can be adapted to incorporate the Democratic principles and profit sharing that would work best for that company now of of the three uh the employee ownership model where there is also a buy an amount is a worker owned Cooperative so when the company transitions anyone who would like to be an employee owner would pay um a fee that would go towards the company and it's called a buy an amount and when they leave they would get that money back so in none of the scenarios though um would the company need to negotiate to buy out uh uh to buy out the employee owners when they leave that's all decided upon um when the new entity is being formed and designed um so that it doesn't it's not disruptive to the flow of the company so we've worked with several companies dozens of companies since project Equity um began I'd like to mention Proof Bakery this is a company that's located in Los Angeles um it's a retail Bakery um that has about 25 employees and has really grown and be and has been able to really have a positive impact on the existing employee owners um one of them for example is Jen Sal aato she's currently an employee owner in front of house manager of Proof Bakery and from her for her having the opportunity to become a work or owner has really been uh an educational experience for her G providing an opportunity for her to see the big picture from a micro and macro standpoint um in a way that as she said she doesn't think she could get um from just being an employee or even just being an owner so really that intersectionality of being both has really opened her eyes to how the business runs and and honestly a very successful company uh runs so how do these transitions work so at a very high level what would happen is that an existing company sells to a newly formed employee-owned company so if you would like to sell your company to your employees you would do do so by selling your existing company to this newly formed employee owned entity and to get to that point um sell price and deal terms would be uh finalized as well the company would obtain a loan to buy the business from you and then that loan would be paid off over time through future profit so so we'll get into the Readiness factors more uh in a in a few moments but in essence the profitability of the company is is a key factor in a company's ability to be ready to do this sort of leveraged buyout because when your existing company sells to this newly formed entity they take out that debt to buy the business from and the debt is paid off over time out of the future profit and the way that their structure can vary depending on your goals as a selling owners and the company's goals as well so some owners may choose to finance the entire sale so again when the existing company sells to the newly formed entity that entity would take out debt to buy buy the business from you and sometimes the lender is the selling owner they may uh create a note and then that company takes out a note and pays that off over time and it could be 100% or sometimes it may be set up where 30% of the final sale price is in the form of a note to the selling owner and 70% of the sale price is financed from a a loan that's taken out from a cdfi or a bank and as well for worker owned Co cooperatives there can also be a buying amount but this is usually a nominal uh amount a nominal part of the sell price and is only for worker owned cooperatives so that buying amount from the employee owners could be as little as $150 or a couple thousand dollar it depends on what is attainable for the worker owners and for the employee owners or worker owners um they don't necessarily need to have the money up front it could be taken out out of payroll deduction overtime if it is an amount that is um something that maybe people don't have the cash in the bank to pay up front so in order to make thisen happen we found that working with our clients in different phases can be really helpful and it the first phase that we work with uh business owners who are considering this is by doing what's called exploration and that exploration can include you attending a webinar like this and then um scheduling to have a consultation call with a member of our team to really dig into the specifics of your business uh the financial situation for your company your current organizational structure who your managers are and what your goals are and really explore can ownership can employee ownership fit your needs if after doing those consultations it's discovered that you know you'd like to move forward and we recommend that you move forward the next phase would be what's called a feasibility assessment is employee ownership a solution for you and your business and during that feasibility assessment the key things that are um come from this are a sale price or sale price recommendations as well as really examining your current organizational structure for the managers who help support operation after the transition and a strong model is built um and as well we do what's called an employee engagement meeting where we can help you present this concept to your team and Survey them on their level of interest if at the end of the feasibility assessment you'd like to continue to move on the next phase is the transition and during the transition this is where the finance ing is secured and the new employee owned entity that is designed how will decisions be made what would the board look like if you chose the worker own Cooperative model and you know how would this new employee-owned business function then there is an actual sale that happens so again your existing company sells to a newly formed entity and all of the eyes are dotted and the t's are crossed and there is a s now that happens and you are paid um for your business and the company the new employee owned company begins to pay off that debt over time at a future profit and then lastly we can stick around to help support the company um to help build that culture of ownership through our services called thrive so now that we've run through how it works and U more about the details of the different employee ownership models and and why it's important to learn about them now I'd like to dig a little bit into the Readiness factors so we've worked with um dozens of businesses to date and we've had calls with hundreds and hundreds of companies um to explore um you know if employee ownership can work for their business and what we found is that there's a few key Readiness factors that help sort of indicate the likelihood of success for a transition like this number one how big is your team ideally we recommend 10 or more employees so really we say 10 to 15 or more employees for worker owned cooperatives but there have also been uh examples of of co-ops and eots with hundreds and even thousands of employees so those models can work for smaller businesses as well as larger businesses and then for esops we recommend 40 or more employees um esops are there's a little more compliance that's required for an ESOP so and they are more costly so in general we recommend 40 or more employees um for an ESOP transition as well because of the way that these deals are structured and financed um having a company that is profitable and has good Financial Health over the past five years is very important um you know so in general we recommend that a company is revenue producing for the last five years and has solid profit for at least three of The Last 5 Years as well having aen track record and being in an industry that's poised to continue to be in demand and successful is very important and to have minimal debt to support the financing and the transaction so with that we do offer free consult ation and advisory CS calls and um my email is Donna pro- equity. org you're welcome to email me directly with any questions that you may have and you can also go directly to our website project- equity. org and you can sign up for a consultation call at a time that works best for your schedule there as well our website is chalk full of videos and case studies and examples of other businesses that have chosen this path um and I highly recommend if you have time to to peruse the website uh there's really a a a treasure Trove of information for you as you continue to explore employee ownership and fit for your business