Uncover the secrets of Employee Ownership

hello and welcome today we're going to uncover the secrets of employee ownership and help you decide whether it's the right fit for you my name is Donna sky and I work for project Equity I'm on our business engagement and partnership team and I'm excited to share some of the highlights for you as a business owner today as you consider employee ownership for your succession planning and as an important way that you can help build resilience for your business so what is employee ownership anyway when we talk about employee ownership we talk about businesses that are owned by the people who work there employee ownership can be a great way for business owners to sell your business and to also help attract and retain your team and in today's market I talk to business owners every day and the number one thing I hear from them is finding and attracting the best team is really top of mind I certainly do not have to tell you that Co has created significant challenges for small businesses especially in certain sectors you've lived in breed this since March of 2020 and hopefully in your community you're seeing business businesses come back from this though many business owners that I speak toec especially in specific sectors are still feeling the impact from the pandemic what many are not aware of is that covid hit when we already had millions of businesses at risk of closing as a result of baby boomers retiring over half of all privately held businesses are owned by Baby Boomers and because of this more and more businesses are coming to Market and it can create the reality that there may be more businesses on the market than there are buyers available so considering all your options for your exit strategy is more important than ever and selling a business isn't easy only about 30% of businesses will actually trans I to family members and this is decreasing year over-ear according to bis by cell the largest Online Marketplace for businesses only about 20% of businesses actually sell putting a lot of businesses at risk for closure so I will tell owners to take a piece of paper go for a walk with the loved one or by themselves and write down what are the key factors most important important things to you when you think about the next chapter for your business and know about all of the different succession options so that you can be best prepared to find the solution that's best for you employee ownership can be a solution that checks a lot of boxes for a lot of owners it can help you achieve a fair market sale price preserve your business's legy also benefit from some great tax benefits and help to preserve the company culture and jobs of the employees that have helped you build your business there are many benefits for business owners choosing employee ownership for the next chapter of their business and their life employee owned businesses are stronger businesses they enjoy higher profits year-over-year and they enjoy higher growth rate in their sales and in the growth of the number of people their company employees and this is a benefit that happens year overy year not a one-time benefit so really can have lasting and great impact on the health of the business employee ownership is also great for workers employee owners tend to have higher wages longer tenure at your business and also higher net worth having this kind of economic stability is really not only a great benefit for the workers and the employees but also for the stability of the business itself so having that kind of tenure having healthy happy workers can really be a great benefit to employee owned businesses employee ownership has a lot of great and unique benefits to the selling owner versus just selling in an Open Marketplace um as a selling owner when you sell to your employees you have the great benefit of having a very owner friendly timeline you can exit the company in a timeline that works best for you you can stay on initially after that transition if you'd like or you could exit shortly after the transition it's really about what are your goals and what's best for the business as well this is not a gift you would be as the selling owner selling your business to your employees so you would achieve a fair market rate for that business and get paid for your company and you'd also again have this opportunity to continue to work in the business in your current role or you can exit another great benefit when I talk to business owners that I hear all the time you know as an owner you've put a lot of Blood Sweat and Tears in building and growing your business so have having an opportunity to preserve the legacy of that company and to preserve the jobs for the employees that have helped you build that is something that I often hear is very important to them and is very achievable in helping you attain that goal if you were to choose employee ownership for your business you also have options when choosing which employee ownership type works best for you and your goals the three most common types of broad-based employee ownership are Employee Stock ownership plans also known as esops worker own cooperatives and employee ownership trusts Employee Stock ownership plans or esops are qualified retirement plans therefore the benefits or the financial benefit that your employee owners would receive from being an employee owner at an ESOP would go into a qualified retirement account out esops can be quite costly to set up but there can also be tremendous tax benefits that come with being an ESOP esops also tend to be better for larger companies in general we recommend 35 to 40 or more employees for businesses considering esops the next most common type of employee ownership structure is a worker own Cooperative worker own coop Co operatives are wholly owned by the employee owners who share in the profit and elect and serve on a board of directors something to consider is that worker own cooperatives also have what's called a buying amount so individual worker owners would buy in to becoming a member of the worker own Cooperative lastly there are employee ownership trust also known as eots these are newer in the United States um but they are quickly growing in popularity because eots are more a more customizable form of employee ownership and they can be adapted to incorporate Democratic principles and profit sharing so I'd like to talk a little bit about how these deals work the sale of a business or its shares of stocks are sold to a newly formed employee owned entity where the employees are now the owners then the company the newly formed employee owned company purchases the old business and there is a loan that's taken out by the new employee own entity which is paid off over time at a future profit through what's called a leveraged buyout in summary this transition to employee ownership would allow you as the selling owner to receive a payment and the new employee owned business would continue to thrive and operate ideally the management would stay in place but if you were exiting new managers would be hired or groomed to take on those leadership responsibilities so how are these deals structured typically financing can include a traditional bank and some owner financing in the form of a sell's note for example if you were to sell your business there's always a piece of it that's seller financing financed so if your business was sold for say a million dollars at least 30 to 50% of that sale price would come in the form of a sell's note the remaining amount can come from an outside lender it could be a cdfi project Equity also has a fund or some other banking instit institution and at the close of the sale the business would begin to pay off that debt at a future profit so they would begin paying off the loan that it was T that it took out from a bank or cdfi and it would also begin to pay a sell's note so for you as the selling owner you would get a payment every month for the balance of the business's sale price that is owed to you for for esops and employee ownership trust there are no buy and amounts for your employees to become employee owners if you were to choose a worker owned Cooperative however there is a buying amount um that is really determined the amount is determined on a caseby casee basis for each business in general we recommend that it's a stretch for the employees based on their wages but that it is something that is accessible and for workers who do not have the cash available to initially Buy in it can be set up that they pay their buying amount out of payroll deductions so we have found it's most beneficial and effective to work with businesses and phases on their journey to becoming employee owned this provides deeper insights for the selling owners and also tools for a smoother transition the first phase is exploring fit is employee ownership right for you and during that phase you will do things like this watch videos about educational videos about employee ownership you might attend one of our live webinars and have a consultation call with a member of our team if during that phase it is determined that you would like to work with us and we've done that initial review of your company's um financials and go goals you would move on to what's called a feasibility assessment during the feasibility assessment we determine viability and make sale price [Music] recommendations the next phase is the transition phase during the transition phase this is where the design happens we structure the sale secure financing and also determine how your new business would function as employee owned after that your existing company sells to a newly formed employee owned entity and all the eyes are dotted and the te's are crossed and then finally post sale we support your new company to grow a culture of ownership to maximize the potential benefits of being employee owned employee ownership can be a great fit for a lot of businesses but not all businesses are ready for employee ownership right now we have found the following to be important indicators of Readiness for an employee ownership transition via a leverage buy out the first factor is size how many employees do you have in general we recommend 10 or more employees for businesses that are interested in transitioning to a co-op or an employee ownership trust for esops we recommend 40 or more employees the next factor is a company's Financial Health is your business profitable in general we recommend employee ownership for businesses that have at least five years of Revenue producing Financial Health and at least three of The Last Five Years with a healthy year-over-year profit another important factor to consider uh when thinking about your Readiness for an employee ownership transition is your company's track record and management team is your business established with years of experience do you have managers or leadership team in place that can lead your business post transition and then finally another very important factor is the amount of debt would there there be free cash flow Ava available to help service the debt that would be taken out to buy the business from you so I hope you found today's video helpful as you continue to explore employee ownership for your business you can contact us to register for a complimentary onetoone consultation and we hope you'll visit us at project equity. org for more information about employee ownership and some great case stud studies of businesses who have successfully transitioned to employee ownership thank you [Music]