Retaining Rural Businesses through Conversion to Employee Ownership

all right good morning everybody this is michael darger i'm an extension specialist in community economics from the university of minnesota extension i am on campus today in what i call lonely hall i have explicit permission to be here but otherwise the university of minnesota we're all supposed to be working at home until at least december 31st so welcome to you wherever you are home offices on the road or your real office i am joined here by my teammates on this project which is sponsored by a grant from michigan state university the north central center for rural development and courtney burner sorry and esther west from the university of wisconsin center for cooperatives and i don't know if kevin's here yet but kevin edberg from the community cooperative development services out of st paul minnesota we were teammates uh on a grant that's winding down which is all about introducing the concept of employee ownership especially employee cooperatives as a viable option for business succession and transition um you know for people who look like me i'm a baby boomer or other folks who want to transition out of their business uh in the next several years so that's what we'll present on today glad you could join us uh we are winding down this grant and we're recording this presentation today so you can use this for future reference we'll post it on our various websites and this will be uh available um you know to support those of you who want to bring this concept to business owners or employees of businesses who aspire to be in the employee ownership uh you know a method of having a business and um and we'll report our findings out but we have 115 people's registered for the event and uh looks like about half of half of you are here so far and get this poll anyone wants to take the poll uh looks like just over half of you are economic or community developers but we have some business owners we have some people in the business support professional space and we have uh at least one person who's potentially interested in taking over business as an employee and several others if those of you who are in the other category want to just kind of say what hat you're wearing today in the chat go ahead uh but welcome to everybody so uh we'll save questions for the end and uh courtney will spend about uh 35 40 minutes introducing and presenting a comprehensive presentation of the retaining businesses through employee ownership um concept and let's see i think i covered everything all good if uh if you're ready courtney i'll uh courtney is again the director of the university of wisconsin center for cooperatives and she will make the presentation today and we'll take questions you can send your check your questions in the chat at any time but we'll queue them up and we'll have about 20 minutes at the end for for q a take away courtney great uh thank you so much michael it's really a pleasure to be here and like michael said this presentation this webinar um is the sort of one of the final steps in a project that before our project team has been working on we delivered a road show in rural minnesota and wisconsin in early march really snuck it in right before the world changed um it's actually i was just um looking back at one of the recording of one of the sessions that we did and it felt like a different world i was like wow that was before everything changed so um it's in in many ways the the topic for today um is just as relevant um there are certainly some more things to think about certainly a lot of business owners um horizons have shifted but i think um this question of how do we retain businesses how do we retain jobs in rural communities is as critical if not more critical so i'm going to go ahead and share my screen here so for our time today i'll hit three main um topics the first is really the nuts and bolts of employee ownership what are we talking about um when we're talking about employee ownership the second is the steps in the conversion process and the third as resources and how to get involved so those are the three three places we will um go today and michael i would love it if you would turn off that poll because it keeps popping up in the middle of my screen i don't know why i'm keep closing it's gone now uh i closed it so it went away but it keeps popping back up right in the middle um it's fine if it keeps going but i might have to pause occasionally and get rid of it so all right let's jump in so um more than half of you are in the field of economic development this information is not going to be a surprise to you in any way um as you know uh there is a lot of business the need for a lot of business succession on the horizon um based on some of the research we've done there are more businesses that were founded by those born between 1946 and 1964 than any other generation over half of u.s companies with employees are owned by baby boomers and um a lot of different entities have done research on succession planning and how many business owners have actual written plans in place or a sort of a formalized exit strategy and it's estimated between those different studies that 60 to 80 85 percent of business owners have no extras exit strategy so if you're someone that's in the bre the business retention and expansion field you might be really familiar with this if you're out having conversations with business owners um so um you know we've in our world you know we've been trying to promote the idea of employee ownership as a business succession strategy for quite some time now and when we first started talking about this it was really future focused you know this wave of baby boomer retirements is coming it's coming we need to start talking to business owners and start getting this um this idea out there in case it's right for someone and um the days of talking about this as though it's going to happen in the future are over this is um this wave of baby boomer retirements um and their business accessions is here now um we're in it i think um the oldest baby boomers turned 73 in 2019 so this is happening now and um as many of you know particularly if you're doing business development in rural communities um you know most jobs come from existing businesses that are growing and so you know your best one of your best economic development strategies is to hold on to the businesses you have um and that is really what we're talking about here today um and one of the strategies for doing that okay oops so what are the small business succession options i'm not going to spend a lot of time here um this isn't really about you know all the ways to do succession planning but we do want to just talk through some of the strategies so um on the right-hand side you have the business closes so maybe that's a liquidation you're losing jobs services and a tax base potentially there's a sale to an outside interest which looks promising from the outset but that new owner has the option to consolidate operations and really eliminate jobs or or locations which in many ways for a community feels the same as a business closure so then on the business continuity side if it's a family business that might that that business might stay in the family um the likelihood of businesses getting passed down from generation to generation goes down as it keeps moving down um but that certainly is an option again there might be a sale to an outside interest and direct sale um in which case you know where the the jobs are retained the business the retail locations whatever whatever that makes up that business um those things are retained in sort of their original format and that might actually be great for the community too there might be a management buyout so some people are familiar with employee ownership in the context of the management team or some subset of the management team purchasing the business and that can be a direct sale that might be combined with an esop and i'll talk about what an esop is later in the presentation and then lastly is this a sale to the employees and so this most often takes place in the form of an esop or a worker cooperative there are a couple of other structures but they are fairly new and not commonly used in the united states so um interestingly you know interest and investment in employee ownership is on the rise i think there are a handful of reasons for this um one uh it was a reaction to the great recession and it's sort of interesting talking about the great recession now as we're entering a sort of period of uncertainty around um our economic future in the in the coming years but um certainly coming out of 2008 2009 a lot of interest in employee ownership and ways of sort of democratizing the economy how do we make it more fair um for more people so um secondly there are a lot of people that are looking at employee ownership as a tool for achieving some other social or economic goals whether it's uh related to the you know the wealth gap wage gaps creating higher quality living wage jobs um but increasingly this model is getting attention um from places that it didn't get attention as much so the um you know this is just a sort of smattering of fairly recent news articles or news stories they were fairly recent at least in march um of different folks getting involved so there's foundations that are putting more money into employee ownership there are municipalities that are supporting this as an economic development strategy the city of madison for example made a very significant investment in worker ownership both in terms of startups and conversions as an economic development strategy as part of the city's economic development strategy so and then the reason that i think we're really seeing a rise in interest um both from sort of traditional parties and some newer players like foundations and municipalities um is around this idea of business succession and job retention um and that uh it's it's you know there's sort of a fever pitch you know in terms of it being a really important issue and needing to um be proactive and find new tools for holding on to some of these jobs so um interest in this topic is uh certainly on the rise so what are some of the benefits of employee ownership um one is that this is a financially rewarding exit path and there's some potential tax benefits for selling owners we'll talk about those uh in a minute um one of the things i hear a lot is that it can be a lasting legacy for the selling owner if you know there were a handful of business owners i saw in that poll i'm seven or eight and um most people who spent their life's work building a business um you know i hear a lot of people refer to their business as their baby um it's not something they just want to cast off when they're done to the highest bidder to do what they want with the business um you know that a big component of developing their succession plan or success succession strategy is um building a legacy it's it's taking care of the business it's taking care of their employees to help them build the business it's doing right by their community um so that as that that piece can't i think be underestimated uh it also you know rewards employees for their role in building the business most business owners know that their employees are a huge piece of their success and they want to reward those employees they don't want to leave them out of a job there's been quite a bit of research done on the impact of employee ownership on business performance and productivity most of that research comes out of the esop world not the the worker co-op world but it's uh it's been shown that particularly when there's a true feeling of ownership and a little bit more control by employees that employee ownership really has the potential to both improve employee engagement and productivity and retention and business performance overall and then lastly you know i've talked about this already you know it retains um converting a business to employee ownership retains those services jobs wealth tax base in the local community and a business that's owned by people who live in that community is much less likely to get up and leave those people are embedded in that community and so in terms of retaining those services jobs wealth and tax base into the long into the future i'd argue that there's a higher likely likelihood that that will take place when the employees own that business so in to briefly mention um the tax benefit because that's something um that often sparks people's attention um it sparks people's interest so there's something called 1042 rollover uh it was established in the 80s as a tax break for selling owners um it's available to both in the case of a conversion conversion to a worker co-op and to an esop though they're used much more frequently by esops and so the gist of the 1042 rollover and i want to say i'm not an accountant i'm not an attorney um uh this is like i can't go much deeper here um i can certainly point you in the direction of people who can help you better understand the 1042 rollover and whether or not it might apply in a given situation or be appropriate um but i can do a fairly surface level treatment um of it uh but again i'm happy to refer you out to others who can walk you through the the nitty-gritty details but essentially the idea is that the selling business owner gets to defer tax on the capital gains from the sale if they do the following so they have to sell at least 30 percent of the business to their employees via an esop or a worker co-op in a worker co-op they're always selling 100 of the business to the employees so that 30 threshold is really in the case of an esop and then second secondly they need to reinvest the proceeds into qualified replacement properties within 12 months of the sale and that's often where that big question comes what do you mean by qualified replacement properties well that's a conversation to have someone who's better qualified to have it um it's complex it's not always the right fit for folks but it is a you know it is a tax benefit um that exists if the selling owner is interested and able to take advantage of it so i want to quickly talk about esops before diving into worker cooperatives which is the main model that we will talk about today so um but esops are actually the most common form of employee ownership in the united states you've probably seen some of the logos that are up on the screen right now you might have even wondered what does it mean that their employee owned i teach a client i'm about to start teaching my class next week on cooperatives here at uw-madison and when i ask students you know what co-ops do you know or like what you know what employee-owned businesses do you know um they often say woodman's or um pdq or you know if they might be from somewhere else in the country they might share another um brand that is actually nissan when i say well actually it's not a co-op but here you know it is this it is a form of employee ownership but it's different from a cooperative in several key ways so essentially when an asop is created the business owner sells some or all of their shares to an esop trust that owns those shares on behalf of the employees um and then that trust is sort of the intermediary between the employees and the business and really it's it's a benefit plan that can be used to share ownership with employees but it is highly regulated um they're fairly expensive to set up and maintain um and again the esop that esop trust can own anywhere from one percent to a hundred percent of the company so you notice that pdq food stores said you know 100 employee owned when they had an esop um that come the esop owned a hundred percent of the company in the case of woodman's the esop does not own 100 of the company so um and what comes with esops is really financial ownership but generally there's no control over the business um associated with those ownership shares um and so many esops have sort of ownership cultures that encourage employees to think and act like owners but it's not necessarily built into the model the esop itself is really just this federally governed benefit plan um and so i just wanted to make sure that folks and they tend to be uh so when folks come to us interested in selling their business to their employees potentially um you know we talk through you know does it make sense for you to pursue an esop or to pursue potentially a worker cooperative and some of the factors that might um determine that or the size of the business the number of employees sort of the payroll um and what the selling owner is thinking in terms of staging that sale generally larger businesses with a higher number of employees are more appropriate for esops because they are fairly expensive to set up and maintain so now let's uh move on to cooperative so a cooperative is a business that is owned and democratically controlled by the people who use its services so those members so there are members in a cooperative they elect the board they approve changes to the bylaws um they in the case of a worker cooperative they met would be the owners also of the business um and in a worker cooperative i think it's important to point out that you may still have a fairly traditional management structure what we're really talking about here is the governance structure so you have the members they elect the board of directors the board of directors governs and leads that business on behalf of the members it's really focused on high level questions strategy the financial well-being health of that business and then the board of directors hires management the management hires and supervises employees um and in a worker cooperative so this graphic is one we use to describe all types of cooperatives and i'll mention the different types of cooperatives in a minute um but in a worker cooperative that this one two three four might actually be a closed loop where um the group of employees can apply to become members and then it um and there'd be members on the board and in the management structure as well so um but the key things here are that really a cooperative is a tool it's a tool um to create a business that is member owned member controlled and the members benefit based on their use of the cooperative so there are several different types of cooperatives we tend to at the center for co-ops here in wisconsin sort of divide them up based on who the members are consumer cooperatives are cooperatives that are owned by the people who um you know are trying to band together to get better pricing access on goods services so we're electric cooperatives grocery cooperatives tend to be consumer owned rei is the largest consumer co-op consumer-owned co-op in the country we also have producer cooperatives generally we think of farmers owning producer cooperatives but an artist artists could be owners of a producer cooperative they're essentially the cooperative is aggregating potentially adding value marketing goods on behalf of those members so here's ocean spray a very large national cooperative farmer-owned cooperative um in the u.s uh purchasing cooperatives are um i kind of love them because they're these behind the scenes and um purchasing cooperatives make it possible for many of our sort of main street businesses to remain viable particularly when they're in industries where there's quite a lot of consolidation so ace hardware um is a cooperative and it's owned by all of the independent ace hardware location owners and by banding together they're able to get better pricing on their inputs they have shared marketing shared store design layout other administrative support that helps them remain competitive so that they can stay in business despite the fact that you know there's home depot lows those sorts of businesses so um you often find purchasing cooperatives in industries where there's been quite a bit of consolidation um and uh there's a lot of competition so multi-stakeholder and then worker cooperatives which we'll talk about more in a moment are cooperatives that are owned by the people who work there um multi-stakeholder cooperatives are much less common they are owned by one or more sort of membership class so an example is a grocery cooperative in north carolina that actually has consumers and workers as owners in that business and there's two separate membership classes so let's focus though on what a worker cooperative is so again workers own the business they democratically control the business and profits are distributed to workers in proportion to their labor contribution labor contribution is often um measured by the hours worked but different worker cooperatives have different ways of doing that um like i said earlier there are a lot of different ways to actually structure a worker cooperative and you know they're there's a broad continuum of um management structures governance structures um you've got everything from the you know five person collective that makes all their decisions together and everyone is paid the same rate the wage i think that's sometimes the like um um the idea that people have in their mind um and then you have you know mondragon spain the largest worker cooperative i are you in the world that is a huge and competitive international manufacturing and they have many many branches of their cooperative so um that has a much more traditional management structure and it's quite sophisticated um the largest worker-owned cooperative in the united states is a home care cooperative in the bronx and it has around 2000 worker owners so this is a model that can be really small and flat it's a model that can scale and be quite large and sophisticated but regardless of where the business where the cooperative falls along the continuum these three things remain true that the workers own it they invest equity in the business they control the business democratically by electing the board of directors um and in the in worker cooperatives there's often other ways in which both information and decision-making is sort of pushed down into the front lines to try to really engage those workers in the business in many levels of the business and again profits are distributed in proportion to their labor contribution so now i'm going to talk about a few examples because i think stories are more powerful than sort of concepts and so i want to walk you through three different examples of businesses that have converted to employee ownership and there they're different sizes they're different industries um and they're in different parts of the country and um that was intentional i think there are this is a phenomenon that's not just happening in one part of the country it's not just happening in one industry worker cooperatives are really in some way like any other business it's a you know but it's a group of people that comes together to identify a product or service that they then sell it just so happens that um you know and with the goal of generating enough revenue to support themselves and the business owners um and the business and um it just so happens that these businesses you know ownership is shared across the employee base um and i just want to mention this is a question i get often is you know not all employees have to be members of a worker co-op there are different many different ways to set it up in some worker cooperatives all of the employees are members and in others they're not structured that way for a variety of reasons so so let's start with northwind solar a great local story here in central wisconsin so north wind was established in 2007 by josh stolzenberg and fairly soon after establishing the business he added three part business partners who became co-owners in the business josh came to a seminar that we put on i want to say in 2012 or 20 i think it was 2013. um no it was later than that i think it was 2013 2014. um and was interested in potentially selling the business to his employees and um we began working with them um i worked with them on some education and structuring the deal and sort of working with his employees on on what this could look like and in 2017 he converted they converted the business to a worker co-op and they launched with six worker owners and have since grown to 12 they might be up to 13 now um this is an instance where the selling owners actually stayed with the business so i know we opened up the presentation talking a lot about business succession and baby boomers um but in many cases business owners you know are thinking they either are interested in sharing the um the advantages and the disadvantages of ownership with a broader group of people um they see employee ownership as a way to improve their management governance and decision making structures they see as a method by which to get more engagement from employees and and so in in many cases business owners are staying with the business um you know josh is about my age and was not looking and all four of the business owners actually stayed so um so yeah so this is again an example of business owners staying with the business and they have had a really the the conversion has been really successful for them they have continued to grow and have had some of their best years coming out of that conversion and one of the things that was really important for them to think about the selling owners to think about as they were approaching this was sort of the the growth trajectory of their business and they chose to do uh evaluation fairly early on um and stuck with that valuation because they were really trying to balance sort of you know what they would get out of the business as selling owners um with their desire for the deal to be feasible um for the employees to actually buy the business from them and so they probably took a slightly lower um pay price for the business because they wanted they had this long-term goal and vision of including employees in the business and they thought that was the best strategy um so after each introduction i will talk a little bit about the financing for that deal so this one is fairly straightforward it was 100 seller financing and um in most of these deals actually there's a pretty significant portion of seller financing um and in this case they didn't want to engage the banks they they took um basically they had i think five year notes that each selling owner got um and it was fairly clean and it was also not a huge deal so it was 350 000 dollars so fairly simple the next example is real pickles it's a worker-owned food manufacturing cooperative in massachusetts they produce fermented foods like kimchi kraut pickles um dan rosenberg founded it in 2001 his wife joined the business a year or so later um they also were looking to stay with the business so they are older and i think will probably exit the business um in the next decade or so but wanted to stay with the business again wanted to engage their employees more deeply in the business and so in 2013 converted um they provide were provided technical assistance by a cooperative development institute which is out on the east coast as well so this is a slightly bigger deal around 750 000 and two reasons i like to highlight this deal in on this presentation one it's food manufacturing which is an industry um that is you know uh really important here in wisconsin and also in minnesota so um and secondly um they used an interesting financing mechanism to finance his business so um you will notice that that blue 67 is actually equity from community investors so real pickles has a really strong following of consumers who love their products so businesses that are actually have consumer facing products this could be a viable strategy for raising equity capital to finance the deal so real pickles did a direct public offering they raised whatever that is 67 of 750 000 um around 500 000 from 77 community investors and um they were able to then leverage that equity from community investors to get a line of credit and secure some senior debt from cfme which is the cooperative fund of new england it's a cdfi that supports cooperatives in new england and then the worker owners also put in some equity so what's interesting about this direct public offering is that you know typically when um an investor is interested in investing in a business they want some sort of control for um in exchange for their investment which is makes sense but when you have a cooperative structure where control resides with the members it can be difficult to attract investors um because those members have set up a cooperative because they want control of the business and are hesitant to relinquish um relinquish some control so in this case those 77 community investors have no control rights in the cooperative the goal is to pay a four percent dividend on those um on those equity shares so essentially the members were able to raise equity from the community really not only financial investment but emotional investment from their consumers who really want to see them succeed both because they love their products and because they've literally invested in the business and they didn't have to exchange any voting rights um for that equity investment so interesting model um particularly i think for businesses that have um consumer-facing brands the last co-op we'll talk about is the island employee cooperative it is on deer isle in maine and um uh it's literally on an island and um the cooperative is an umbrella of three other businesses so there's a grocery store um there's a gas station and then there's a sort of hardware variety goods store and so the selling owners of these businesses operated them for 43 years and um these businesses are crucial to this island in several ways they're the largest employer on an island that doesn't have a lot of employee employment prospects and they also provide critical goods and services on an island one of the few some of the few places to actually procure goods and services so it was really critical to the selling owners um that this business these this set of businesses stay intact and they were worried if they sold to an outside um buyer that they would actually you know consolidate operations and lay off employees that was a really a real concern to them and some of these employees one of the employees had been with them you know since the first business opened in the 70s so this is really had really become a family so the um the business converted in 2014 uh 60 employees over 45 of those were worker owners the selling owners did exit the business they were ready to retire they wanted out this was a fairly complex deal against the provided support by cooperative development institute so this is the largest of the three deals um the sale price i think was around 4.5 million um but the full deal was 5.6 million dollars and it was a mix of senior debt from national cooperative bank some senior debt from another local lender and then from cfne the one i mentioned earlier cooperative fund of new england and then some seller financing that nine percent the piece i want to call out here that's unique to this deal is that there was a significant portion also of vendor debt so one of their suppliers had a you know strong interest in this set of businesses not going away i imagine it was an important customer of theirs and so they actually um provided you know 27 of the financing uh via debt for the for in exchange for a first position on inventory um to move this project forward and so i think um again an example of the unique ways that these deals can be financed with everything from seller financing to vendor debt um different combinations of um debt and credit from different banks and um cdfis so and then um of course member equity is usually a piece of the equation as well so now i just want to spend a little bit of time walking through the steps in the transition process and there are a lot of different ways to talk about these steps um but we're going to do sort of a high level treatment here and this is how we divvy them up so explore assess structure complete support and um in the the accompanying boxes sort of an estimate of how long it takes um and how much money might be involved in that step again these are estimates it really really depends on the specific deal and circumstances i've had you know i've been in conversations with a business owner going on five years i was yeah i was not pregnant when we started talking and my son's now will be four in december so um sometimes you know it's that explore phase um can vary and it can be a few years while someone really thinks through the things through the process the business might be going through you know up times down times um so but we've also had deals we just supported a deal in northern wisconsin earlier this year um that you know from start to finish i think was about four to five months which is is fast um not necessarily recommended so this first step explore this is where the key stakeholders decide if the idea is worth pursuing for those of you on the phone who are business owners that you not you might just be starting this phase today on this webinar um the questions that we asked during this phase are you know is the business a good fit for the worker co-op model what are the basic legal and financial realities um so as a business owner you're thinking trying to learn about the model trying to learn about um you know if your business might be a good fit you're thinking about i often ask business owners when i have conversations during this phase with them you know what are your goals what what are you you know what are your financial goals what timeline do you have in mind in terms of exiting the business um have you spoken with your employees have you had evaluation i'm just really trying to understand um what their desires are their concerns the realities of the business owner so moving out of this phase is when a decision is made about whether to invest resources in moving forward with this process and i would say that most of the time i'm having these initial conversations with business owners although we have supported deals where the employees have been the ones to step forward and say you know we think our business owner is x you know is nearing retirement we don't think they have a plan um we don't want to lose our jobs we care a lot about this business so there definitely are instances when the employees are leading leading the charge and really initiating this explorer process next is assess and um during this stage as the name would suggest we're trying to understand and assess if uh if a conversion to a worker cooperative is feasible and so feasibility is you know the feasibility question is about financial feasibility it's about sort of the culture and terms of that business is it feasible um based on you know how the employees that we have in place right now to actually sell the business to the employees what questions do we need to answer around financing is the selling owner willing to invest and can they can they provide some financing so often an outside professional is brought in to help assess this feasibility we strongly recommend that a third-party valuation is done of the business um you know sometimes business owners have an inflated sense of what their business is worth and it's nice to have a third party who at least can provide a starting point for negotiations around the sale price um because ultimately you want the employees the selling owners to come out of this transaction feeling like it was transparent and fair and like everyone you know the win-win everyone really had their needs met so um one of those like i said non-financial feasibility assessments is sort of what's the ownership readiness of the employees and then are there gaps so if the selling owner is exiting what relationships knowledge skills do they have that are essential to the business that need to be replaced in some way and so i've um one of the companies that i worked with they actually hired an operations manager um before you know to prepare for um the exit of the selling owner and that was one of their steps um after assessing sort of the the management structure and the operation structure and what would happen when that that selling owner left next is structure and that's when the transition team really determines the sale terms and what organizational changes might take place so um this first question of you know who will make conversion related decisions and how i actually like to do that a little earlier in the process you know it's this interesting space where you have a business owner who has real control over decision making who's exploring selling the business to a larger group of people um who will then own the business and sort of like who there's a lot of muddiness in between you know start and end and so how do we make decisions who gets to make which decisions about the structure of the deal about the structure of the new cooperative so really like to sit down early with the some key employees and the selling owner to um better understand sort of who how how they're all going to be involved in the decision making along the path so um the you know this during this part you really structure the documents structure the new cooperative structure the deal um the next step if you've done all the other steps um fairly well are you know complete so the loans are drawn the company legally changes hands um and poof you have a cooperative a founding board of directors is established to govern it's often made up of some of the members of that transition team that work closely on structuring the deal and have been involved and then lastly is support so um we don't want to just be creating these worker cooperatives and sending them out into the ether to fend for themselves so part of this um this process is really making sure that there's a long-term plan in place for supporting that ownership culture for building that ownership culture for supporting this new business in their new democratic ownership structure so in the cases when the selling owners haven't left um oftentimes you know you're you may not change the management structure right away you're changing the governance structure and that you now have this board of directors but the cooperative um you know the the reporting relationships might remain the same but when you have someone who's left uh has taken a lot of knowledge and skills and relationships with them um we want to make sure that you know there's a support team in place um whether it's helping them review financials um doing training on governance um you know supporting their board as they um sort of get established in their new role um uh connecting them with peer peer co-ops in other parts of the country as well all right so um lastly i just you know want to make sure that you're aware that there are resources out there so if you are a business owner who's exploring this if you are an economic development professional who's talking to business owners or employees a lot um that you don't have to have all the answers for the you know for this that there are co-op development professionals um at the national level regionally there are accountants and attorneys and financing entities that are familiar with cooperatives and part of this work is really building an ecosystem of support for these businesses from that explore phase all the way through to the support and so if you know if you're interested in having a longer conversation about a specific project or how you can support businesses in your community um you know there's me there's michael there's kevin and esther um our project team but there's also these other um resources out in the community so i think i will stop there and try any questions if there are any yeah there's been several questions in the chat and it's uh good we've been uh just kind of a conversation on the side so you were staying focused and that's a good thing i'll so the first question i think is the most pertinent on the business uh conversion to a worker co-ops is the one from analyse with respect to business valuation can any qualified valuation service do this or are there special questions considerations for co-op conversions i i so generally the valuations are done just for people who do any kind of business valuation so i don't think in terms of setting the sale price um or setting the you know all standard rules apply um even if you're converting and times a business owner that is exploring their options has done evaluation before they've even or had a third party valuation done before they've even gone down the path of exploring employee ownership and that that valuation still holds great and that's what i thought um nancy had a couple questions one was about ace hardware's creation story but i think that's uh really about you know a big purchasing cooperative but a more specific question to this topic today and i'm sure there's plenty of information out there about ace and if if you or esther can track it down we can i can put that in the follow-up email to the participants but she had a question about do you know of any conversion sales of one site of a chain i'm assuming like a chain store you know a chain location to a group representing a worker co-op or basically an employee cooperative conversion i think is what she's getting at mm-hmm yeah so actually it's um it was just i'm on this we're part of this national network of organizations focused on trying to increase um knowledge about this option and i'm on this list and just this morning before as i was getting ready for this um there was a flurry of emails about ace hardwares actually um and someone was asking if they'd ever supported a conversion of an ace hardware and rob who actually supported the main employee exam co-op example chimed in and said he's helped support two ace hardwares to become worker cooperatives so in the context of ace hardware yes um in the context of one location in a um in like a chain um it would be possible i don't know of something like that where like because they would actually be owning it so if it was like you know i will say that in a in the case of a um franchise that it would be possible for a group of workers to purchase a franchise and run it as a worker cooperative and there's actually a couple people that have been doing a lot of thinking about how to actually get that to happen um i don't know if it has but um yeah okay um there was another question from joseph a while back which was basically talking about um about what economists would call market failures so for instance a co-op uh is it is it a situation where co-ops can go in there and not be so concerned about the profit motive but try to address critical community needs such as food deserts and lack of locally available foods nutritious foods in you know what we call food deserts and nancy responded by saying well the sewage co-op in south minneapolis is a good example because they have their main store in franklin avenue and they opened up like a sister branch not far from actually where the george floyd killing happened unfortunately this earlier this summer they opened a store in that neighborhood so that's one example she threw up but any any kind of comments that you and we also have been joined by kevin edberg who's one of our partners so kevin if you have a mic where you are in your remote location feel free to join in but let's let courtney uh go first on that one sure so i think um what i like to say is that um when you have a market failure that's so vast i like to talk about child care sometimes people ask me well can child care co-ops could it if you just made it a co-op could the like child care center could we use co-ops to fix the child care crisis and i say sure there are a lot of ways in which co-ops can be used to sort of nibble around the edges of that problem um but when there's clearly a sort of a such a big failure and mismatch and a lack of public investment um you know the co-op model is not a panacea that said co-ops exist to meet member needs so in worker cooperatives it's really the it's providing employment gainful employment but in the case of a grocery cooperative um a producer cooperative the co-op does not exist to maximize profit and so um whereas it might not make sense for an investor-owned firm to um to do what the cooperative is doing because they wouldn't be able to generate enough profit so a co-op might come in because they're not profit oriented but they're still it's still a business and it needs to be able to generate enough revenue to support its costs like any business so co-ops can't make magic um but because of their very different orientation towards meeting member needs um they can their their priorities are different it shifts decision making it shifts strategy um and so they are able to do things that profit maximizing investor-owned firms won't do um it's a that's a short as so it's as simple of an answer as i can give to that um great well let's see if kevin has a microphone kevin did chime in yeah yeah go ahead kevin so i think of cooperatives as one part of the spectrum of mission-driven businesses um and certainly there are other forms of mission-driven enterprises that we find scattered across the economy in multiple ways but it's that focus on the mission that connects people to the hey why are we here are we getting what are we getting our needs met um at least reasonably and perhaps better than other alternatives and i think the the critical component of that is you know is it at least a reasonable alternative to other um to other alternatives that are available to the to the owners um the international cooperative association says that a cooperative exists to meet both economic social and cultural needs so for those of us who think predominantly from an economic lens sometimes we need to step back from that and say what are the social and cultural needs that might also be part of that value equation that is not met by other alternatives so you know it's it's it's more it it's as courtney said there is a business it has to over time have uh enough resources to keep uh the infrastructure and everything uh working but there are a number of ways of meeting that and so perhaps kind of like the church sometimes there's community fundraisers to to fill in gaps or to find other ways of meeting needs because the mission is really important great thanks kevin and uh are you are you at home or are you in montana i'm leaving this is the last activity before i hop in a car and start driving to uh western montana all right great well thanks for joining us oh there's a hot question here that brett just submitted what kind of compensation do the professionals you mentioned charge to work on these types of transactions flat fee percentage of sale etc courtney you want to take the whack at that yeah it depends so um if the business falls in a rural community we so the uw center for cooperatives as uh we receive extension funding and some grant funding so we can generally offer our services at a low low to no cost especially if you're in a rural community um you know attorneys charge what attorneys charge um i will say no more on that um so it depends on the attorney but um some of the groups so the ica group um cd cooperative development services kevin's organization and project equity are three groups that engage in sort of that feasibility analysis deal structure um and it's usually a flat fee it's not usually a percentage um and it rain i mean it really it depends on the complexity of the deal it depends on how good of shape the financials are in um so how much time does the group have to spend untangling things um depends on how long the deal takes but i've generally seen it structured as flat fees or sort of hourly rate not a percentage i will say that sometimes the cost of supporting the deal structure and then ongoing support has been wrapped up into the financing and it's paid for that way and oftentimes lenders feel pretty feel better about that having some money built in um to pay for ongoing technical assistance to the business that reminds me not as expensive as esops but they're i like to tell people that there are going to be some costs along the way um just to be up front and and that reminds me uh courtney that along the way on this project together some of us have had some you know basic uh you know ballpark figures for how much an employee would would typically put into buying becoming one of these employee owner co-ops so i know at one point kevin had kind of a used car uh rule of thumb like you know it could be ten twenty thousand dollars which is a lot of money but it's not like taking over the whole setting any kind of comments now of course it depends on the type of business but yeah i've seen it range from you know 25 in an industry that's low wage um and they didn't really didn't want to make becoming a member a barrier um but making the the financial piece of barrier to um like you mentioned you know pegged to the cost of a good used car so i think isthmus engineering here in madison um which is a worker-owned cooperative manufacturing and engineering cooperative is around 20 now um but anywhere you know a thousand two thousand five thousand ten thousand again depends on the size of the business depends on um the industry um you often there's a payment plan built in so that um someone could have payroll deduction over time to help them work towards that and then they might have some time after becoming a member to complete their equity buy-in so the point is this is a very doable thing for almost all employees if they choose to be an employee owner which is a big decision i think that's a great segue to i think this can be our last question i just want to remind people that we are recording this session we will post we will post this to the website we also will share with you the slides and there's an evaluation for this session but we'll have an evaluation for that recorded session but miles alexander has a really pertinent question please say more about employee readiness and education and support needed from the change from you know just being an employee with no responsibilities that owner to also being an owner comments on that it's really important and some of the deals that i see the conversions that i see that are really successful the selling owners have actually been laying the groundwork for this for quite some time even before they've talked to employees about um about their idea of selling to them they've been you know pulling more people into the management team um having you know quarterly meetings with all the employees where they're talking about the financial performance um really opening up the books in ways that they might not have before so i always encourage business owners if they're thinking of of going in this direction to start the process of pulling more employees in and trying to build that ownership culture as early as possible that said even if you haven't done that if a business owner hasn't done that there have been plenty of successful conversions where the business owner has really just exited and has done no favors on the the cultural side um uh so yeah there are groups like ours um other national groups that can come in and provide some of that support um it's really it's a really important piece and you can build it over time um and i don't know kevin if you have anything else you want to say to that and no um spot on okay okay well thank you um there was a bunch of other discussion in the chat and i will try to download the chat log and send it to you all with the evaluation link because there's some really good stuff in the chat and i saw i know some people kind of pay attention to chat some don't but since there are some nice side conversations we'll send that along i'll also get the link from esther uh esther i think i'll call you after this call and find the latest link and so we'll try to send you folks all the information we have we thanks for thank you all for joining us today um hey michael yeah when you send out the email can you also be sure you might be directing people to the website that has this but maybe the like the two or four pager that we put together for the project is a nice summary of some of the points in the slides um and it's a really the handout it's a really nice tool if you're an economic development professional and are talking to business owners um that you can just give them that has sort of the quick and dirty on this um as a takeaway so all right we've got hard copies at our our uh road show but since we're right i'll try to do that as a as an attachment um it's also a link on the site but uh you know uh thanks everybody um this is this again was a part of the business retention expansion community a practice webinar series that we've been hosting here for three years at um extension but i've really enjoyed being part of this cooperative uh kind of awareness raising because you know there's as courtney said there are many many businesses that will be transitioning in in the near future especially because of the pandemic there's a lot of people who are going to get out now and they like to salvage that business for their community so keep co-ops in mind everybody because they're part of the continuum of possible solutions it's not for everybody but to reach out if you want more information let's try to keep as many businesses in american communities as we can during this this terrible time and uh we're all together so thanks again for being in and we'll see you down the road bye thanks thanks esther and eric for helping on the sidelines there