Would a True Capitalist Consider a Worker Co-op?

[Music] Hello everyone. Welcome to the 21 Hacks podcast. I'm your host, Lauren Feldman. A few months ago, John Abrams, author of From Founder to Future, joined us to talk about succession strategies and the different ways business owners can share ownership with employees. For his own business, John chose one of the more radical options. He turned his construction firm into a worker cooperative. Perhaps surprisingly, the more he described the co-op model, the more intrigued Jay Goltz became. Although predictably, Jay did retain a degree of skepticism. So, we asked John to come back on the podcast to help Jay dig a little deeper. Are co-ops really all about democracy? Does someone on the loading dock get the same vote as the CEO? How do profits get split in the co-op model? How do losses get absorbed? How are loans secured without burdening frontline workers with personal guarantees? And perhaps most important, what can go wrong? In the end, I think surprising even himself, Jay failed to identify any real deal breakers. Even in good times, owning and running a business can be a lonely pursuit. Our hope is that these weekly conversations will let owners know they are not alone in facing challenges. In fact, that's the whole idea behind the 21 Hats community, engaging with other owners to get the kinds of insights only another owner can offer. If you're interested in learning more, you can sign up for our free trial of the Morning Report newsletter, which highlights the most important news of the day for business owners and shows how other owners are confronting challenges and seizing opportunities. Just search the 21 Hats morning report to subscribe. You might also try our monthly Zoom mastermind where owners from around the country gather to compare notes. It's a lot like this podcast except you get to be part of the conversation. Shoot me an email at lauren21s.com to get more information. Joining me this week on the podcast are John Abrams, who founded South Mountain Company, a design and build construction business in Massachusetts, and Jay Goldz, who is CEO of the Golds Group, whose companies in Chicago include a picture frame business, artist frame service, and a home furnishing store, Jason Home. The episode is titled, "Would a true capitalist consider a worker co-op? Welcome Jay and our special guest John Abrams who is back here again after joining us a few months ago to talk about the various flavors of employee ownership. As I think you know John Jay has been on quite a journey to try to figure out what to do with his business. The last time you were here somewhat to my surprise you clearly piqued his interest with what you had to say about worker cooperatives. We had to get past the Birkenstock jokes, but once we did, Jay clearly was intrigued enough to at least want to know more, which is why we're here today. So, maybe we could start. John, could you just explain to us quickly what exactly is a worker cooperative? So, Lauren, work co-ops are businesses that are owned and democratically controlled by their employees. And the structure creates an economic alternative to the traditional corporate model. It's a way to assure continuity and legacy in small businesses. And what distinguishes the worker co-op is that they have workplace democracy built into the DNA of the structure. Other than that, they're generally um Ccorporations and um there are lots of parts that we will get into in this conversation, but it's really a democratically owned and controlled business. Okay. So now Jay, I know your skin started to crawl every time John used the word democratic. >> You know me too well. You know me too well. Yes. >> Uh we're going to get to democracy and how that plays into this. But first, could just tell us based on that first conversation, what caught your intention? Why why are you at all interested in this idea? >> Well, I'm 69, owned the business for 47 years, have 120 employees who I like. every one of them. And I've recognized that I can't do this forever. And even though I have no plans on retiring, I'm going to die one day. I got that. And I've gone through the family business thing. I have three kids, three sons. I made it clear to all of them. I don't want to hang this on anybody. If you're not interested, blah blah blah. And >> they're not interested. >> They're not interested. Right. And and now I'm I call this I'm in the suck part of succession planning. So now I have to figure out the next plan and I can tell you what's not on the agenda. I'm not selling to private equity and watch them screw up what I built all these years. I don't need the cash so bad because I own the real estate and the fact is and is in a retail environment. My inventory is probably worth almost as much as the business. So my options are have it going out of business sale not appealing. Uh sell to private equity totally not appealing. kids aren't interested. Sell it to a competitor. My framing business is way bigger than anyone else. I don't know who would actually buy it. My home store is nationally known. I don't know how easy it would be to get someone to buy it. And more importantly, I say to myself, cuz you know, I looked into ESOPS for 2 years. Why wouldn't I try to do something with my employees? Why not? If I can come out, okay, I don't need the last dollar out of it, even if I don't get as much. Why wouldn't I want to try to do something that my employees can run it? So, I'm totally into that. The problem is I looked into the ESOPs and there were some things about it that were completely non-negotiable bad. Whereas, in our short conversation with the co-op thing, it sounds like those aren't an issue with this, which is why I'm interested. >> I want to go back to John real quick before Jay jumps out of his chair. We we talked a little bit about democracy the last time you were here and you made it clear that it's it's not a matter of the the employees voting on every decision throughout the day. Give us your definition of what role democracy does play in a worker co-op. >> Oh my god, it certainly is not that. So, one of the great misconceptions about worker co-ops is that they are these leaderless entities and everybody figures out everything. And um nothing could be further from the truth. Uh worker co-ops need great leadership just as much as any other company. And the kind of leadership that Jay's company has had for many years, 47 I think I heard you say, is the kind of leadership that would need to continue. >> In your situation, Jay, because you don't have any intention of retiring, which is the best situation. So, I advocate for early ownership conversions that leave a long runway for the second generation leadership development. In your situation, you would be selling the business to a group of employees who who meet the criteria that you set and to yourself. And you would become an owner rather than the owner. And the owners would be responsible for those things that are set out in a decision-making matrix that are the province of the owners. And they are they're policy issues. Whereas management would continue as it is. It may or may not be more collaborative than it is, but that's a choice to make. And my sense is that if you did this, you would go on as CEO and um a lot wouldn't change and a lot would the me the mentality, the ownership culture that you would develop. And again, I don't know a lot about your business, but it sounds like you have elements of that already, and those are the ones that make the the most successful worker co-op conversions are ones that are already acting like that in certain ways. >> Jay, I bet you have some questions. >> Well, I I left off the part. My average employees been here 12 years. I have many I probably got 20 employees here more than 20 years. So, yes, it does fit that. I I just Well, I'll just cut to the chase. Yeah. >> Let me tell you one other thing, Jake, cuz you mentioned it about that you don't need every dollar. So, the way most of these conversions work is a professional valuation is done. That is not necessarily the number that's agreed on in the purchase and sale because you're trying to satisfy the financial desires of the owner and repay that investment that the owner has made. But you're also trying the best situation is if you finance it yourself over say 10 years. So there's a note to you from the co-op. They make annual payments to you and you want those payments to be structured in a way that they are not going to um hamstring the business. So you want to find a price that satisfies you and that satisfies the ability of the business to pay. Many of these things happen when the founder is ready to retire and goes, "Oh my god, now what the hell am I going to do?" And then they come up with this and that company has to deal with the leadership and the ownership at once. Whereas when you disentangle those two, you have a much greater chance of success. So you would be there. Um, in a way what it does to make an earlier ownership conversion is it reduces risk. You are there. You're the person that built this and made this happen and you're still there helping um you're now your fellow owners who have been your fellow employees. You're helping them to succeed. >> Is there a limit to how much you can still retain? >> You mean what share? Yes, there is. Because because the the fundamental part of a co-op is that each owner has one share. >> Nobody has more shares. That doesn't mean nobody has more power because you know there is a hierarchy and it's a hierarchy of expertise. And so you're the CEO. You're going to be making a lot of the decisions as you always have. But you know there is that element. So when I converted to a worker co-op, it was scary because I was relinquishing a certain amount of power. And what my fear was, my fear was that this thing that I had created and built that I loved would become something that I didn't love anymore. It turned out to not be that way at all. I loved it even more. But to me, you got the right attitude. the whole right attitude, no private equity, because that's going to make your business something that you don't love anymore. Whereas in a worker co-op, you'll still have every bit as much respect as you always had from these people. You'll still be charting the course, but they will have a say in decisions that affect everybody. Jay, is that a big issue for you? I >> I'm struggling with I'll just throw it out there because I read your book. There are three things that each one of them instead of inspiring me put me off tremendously to where I think the first one is this democracy thing. I I think running a business is not a democracy. Someone has to make a decision and if everybody gets one share so the guy that works um on the loading dock is going to have a a vote as to whether we open another store really I and has no risk in it. I believe in capitalism and capitalism is being rewarded for risk you take and sleepless nights and stress and I just don't know how you mix those. I I just don't know how you mix those two things together. So the democracy, >> what were the other two? >> Okay, the other two is the comment in the book about the whole thing with income inequality in the country. Like that's not my fault. That's not my problem. I I'm not going to own that. That's a bigger picture thing. And then lastly, that CEOs now are making hundreds of times more. Again, that's a Fortune 100 company thing. My argument is, correct me if I'm wrong. Well, no, I'll ask you this question. Doing what you're doing, do you believe that you're an activist or do you believe you're an advocate? Which one of those two? >> I'm an advocate. >> Very good. That's what I thought. And on my argument is those three words sounds like they're coming from activists of people that have never owned a business, have never signed a note, have never put their house up, have never maxed out credit cards. So it's very easy for those people to sit on the side. Oh, you should be sharing your really do you want to share the losses I had when I when I come up short for cash? Do you want to give me $50,000 and borrow against your house? >> That is so true. But I have done all those things in spa. Yes, >> I'm sure you have. I'm just suggesting that the messaging is >> and I have found I have found something Jade that is not you know it's it's counterintuitive in a way but that when you engage the employees in that way in that that deeply what you get is you get all the wood behind a single arrow going in the direction on the course that you've charted. >> I buy that. >> Now you're familiar with Jack Stack. You're familiar with Jack Stack. Sure. Absolutely. I talked to him about that's where I got the first idea about ESOPS from Jack Sick. >> So, so open book management is a form of democracy. You're sharing it all. You're sharing it with everybody. But the reason you're sharing all that stuff is to give them a way to understand what they need to do and how they can help to make the business successful. And I would argue substituting the word democratize with participative would solve the problem that yeah they should be participating. Absolutely no problem. I just think there's baggage with that word. >> Let's do that. Let's do that. >> Just just to be clear, Jay, I think created a formulation where he suggested that if the business was deciding whether or not to open a store, somebody on the loading dock would have an equal say to Jay. And I don't think that's what you're envisioning, John. That's a great illustration. So you have 130 employees. If if this becomes a worker co-op, you will probably decide I mean the the way you do this is you create a small steering committee that you choose who are trusted employees and leaders in the company to figure out the nuts and bolts of this transaction. And that group of people is going to figure out, well, how large should our board of directors be? And maybe that's going to be seven people. Maybe it's going to be 10 people. Yes, those seven to 10 people would all have an important voice in whether you opened up that next door. But those people are going to be the people that you would want to be involved in that decision. They're not going to be just anybody. >> Okay. No, I I like I said, I haven't given up on the concept. I'm just telling you, reading stuff and being a business owner, when I start hearing some of those words, I think, here we go again. >> Wait a minute, Jay. In the very beginning of this conversation, you attacked big business. You said, "I would never I would never sell to private equity." >> I don't want to. I But I'm not attacking I just don't want to do it. I'm not attacking it. If somebody wants to do that, go knock yourself out and do it. I couldn't care less. I'm not I'm not attacking it. >> I have a different view, but it doesn't matter. >> Jay, I don't think you're arguing in favor of pay inequality. I think you're arguing that small businesses are not responsible for creating that problem and shouldn't be responsible for solving it. >> What's the difference between the lowest paid person in your company and the highest paid person? >> Uh, five times. You are a worker co-op. I'm sorry. >> No, I No, believe me, I got that. That's what I'm saying. Those those numbers >> that is the lowest ratio I've ever heard. >> No, I'm sure I fit the mold. >> I mean, I've heard, you know, 4:1, 5:1, 7:1. So, you're already doing this stuff. >> Yes, that's why I'm talking to you. But you you could now create a group of owners that could take the company into the future with a structure that will not be violated because it's going to be a legal structure. >> And I'll feel great about it cuz I have to tell you one of the greatest things that makes me that gives me joy. I've helped 10 people buy houses to work for me and I feel great about that. And um so no, I do think I fit this model. And the reason part of the reason why I was tow turned off of the ESOP thing is there were so many problems with it, including the one that is my biggest one. And Jack Stack is the one that does speeches on this. So he says he tells the story of a guy working on the production line making whatever 20 bucks an hour and he's got millions of dollars in his retirement fund. And I say to myself, that's great for his kids, but not good for him. I just went to my high school reunion at 68. 20% of people aren't going to live to to retirement. So, how about letting the guy take some of that money, woman or man, and go buy a new car? Go put braces on their kids teeth. All that. So, that was that's enough reason not to do an ESOP for me. Like >> Jay, in a in a worker co-op, there are there are dividends, and those dividends that are taxdeductible are limited by the IRS. And there's a whole complicated formula about that. >> Sure. But you have to pay at least 20% of those dividends in cash. And the reason for that is that income is passing through to the employee and they have to pay taxes on it. So you have to give them enough cash to cover the taxes, but you can give them 100% if you want. You can give them 70%. But but curiously, why? No. Why do they Why do you have not not I I think that's great, but why why is the government telling you you have to give some of it in cash? >> Yes. Yeah. The IRS >> really the IRS wants to make sure that those taxes get paid and so they make that regulation that if you're going to issue taxdeductible dividends, you have to give the employees enough cash to pay the taxes. >> Ah, >> but you don't have to limit it to that. >> Okay, great. No, >> at South Mountain, the philosophy is we want as much money to go to the employees as possible. And if the company is in a cash position to give more of that in cash and less of it in a set aside, then they do that. If you're a very cashy business, you might give out 100% of those dividends in cash. >> Okay? Whether it's >> so they can pay their college bills. This isn't a new whether it's small giants with conscious capitalism. I've been involved with lots of these things and and they always start to boil down into like somehow oh it's the right thing to do which I take tremendous no it's a good thing to do not the right thing to do >> like if someone needs the money and they've got a guy that offered them a zillion dollar I don't criticize that do what you ought to do is a personal choice I would rather do this I just think the small business person has taken all the risk the sleepless nights the that their family have paid the price for it. And like in my case, between real estate taxes, payroll tax, and sales taxes, I pay millions of dollars of taxes every year. So my point is, I've got no apologies being a small business owner. I'm not screwing anybody. I'm not >> I'm with you. I'm with you, >> right? So I just want to be respectful to small business owners. More more teachy, less preachy. No preachy. That's kind of the point. I don't want to preach to people they should be doing this. So I'm very interested in it. But I wouldn't argue with someone who wasn't interested. Here's another thing you should know and you can't necessarily take advantage of this, but you know how ESOPs you can defer the taxes and that's a big selling point for ESOPs. Well, it's a little known fact that you can do that with the worker co-op that the same 1042 rollover that applies to ESOPS applies specifically to worker co-ops too. In certain conditions, you have to invest the money that you gain in certain ways. So, you can even take advantage of some tax advantages potentially. >> Okay, great. >> I want to talk a little bit more about some of the nuts and bolts of how a a worker co-op works. For example, I know one thing that you were wondering about, Jay, is the relationship the company has going forward with a bank. How does that work? >> This is a great question, Lauren. So, you know, the the problem personal guarantees. Do you have personal guarantees? >> Yeah. Yeah. Let's make that clear for the rest of the world. I've always had a personal guarantee. And most business owners, most I don't know, not many, most that's that's frequently, whatever word you want to. Yes. I've always personally had to guarantee it. >> To make it even clearer, that means you have used your own home as collateral. >> Absolutely. >> Yep. So, this is a real problem with worker co-ops. South Mountain Company has a large line of credit and no personal guarantees because we worked with our bank for 40 years and it's a local community bank and they understood what a good business it is and they they went along with it. But this does not happen very often. And so there are loan funds that are set up just for co-ops. A a big one is the cooperative fund of the northeast. There are about eight or nine of them in the country and they respond to this problem. They loan two co-ops without personal guarantees. I can tell you knowing I was doing this today. I called my bank that I love that is that is a very entrepreneurial bank and asked her about loans to co-ops. She'd have a clue what I was talking about and she said, "Call me back when you figure this out because I'm interested." So, no, they're not used to it. So, that is an issue. It's a big issue and it's an important one and that's why solutions have come. So when we converted 40 years ago in 1987 um is that 40 years ago maybe it's more. >> Yeah almost >> um there was no infrastructure for co-ops. There was one organization the industrial cooperives association that helped people become co-ops. There were all kinds of worker co-ops in other countries in the world, but there were only a dozen in the US and there was no infrastructure. So over that time, it was super exciting for me to see as I researched this book how many resources and how much infrastructure now exists because now there are 1300 of these worker co-ops in the US and they are happening and that's the purpose of this book is just to inspire people to do that. No, I think with the silver tsunami thing, it's perfect timing. >> But you know what? It It's great timing, but in the second edition, I'm gonna have to change that word. >> All right, here's another question. >> So far so good. Yes. >> Jay, you've helped several other businesses go through a transition, uh, a succession by having the founders, longtime owners, sell to key employees. And you've come up with an interesting structure to do that. You actually call it a WSOP. Um, why I'm My question is why would a co-op be better for you than a WISOP? That's an excellent question. I have helped a couple and it's worked out beautifully. One is a guy I've been mentoring for years. He built a very successful frame business to like a million and a half dollars. Two employees work there. He's ready to retire. And I said, "Can they buy it from me?" He goes, "They have no money." And this was a breakthrough for me. He goes, "Well, they could get an SBA loan." And that's when the light bulb went on. I said, "Wait." I said, "Wait, wait, wait. You're trying to turn a civilian into an entrepreneur taking risk. Let's take the civilian and turn them into a business person and take the risk part out. Forget about getting an SBA loan. They're not going to do it." >> Yeah. So I figured out and part of this was simply because I had just come off of two years of looking into ESOPs and I realized three and a half times Ebida or four whatever the number is. If you could just hold on to the company for a few more years you'd get all your money out. >> Exactly. Yep. >> He made a deal with them. Here's the deal. You work for another 3 years and after after three years you can buy the business but at least you got your money out then. And since they took no risk, they don't get anything if they decide to get out of it in a year or two. They didn't put anything into it. And you know what? It worked beautifully. He's already done it. Everybody's happy. One of the the the women that he sold it to the husband said, "Wow, this is like a gift." Yes, it is a gift. >> Great. Why would you do that instead of a co-op? Okay, that's a good question because after talking to John and after reading his book and after thinking about it, I can't argue with the idea that people they're clearly going to be more invested and more dedicated and put a little bit more into it. Sure, I can't argue with that. >> Yeah. There's another thing though, Jade. I mean, one of your goals, you have built something of beauty and one of your goals is that it will endure. And if you sell it to two key employees, >> who knows what they're going to do with it. Yeah. Whereas this keeps the mission intact. >> I'm planning on that that little bit extra energy is going to absolutely be a tangible ROI that there's going to be more profit there and that extra profit will basically be what I'm going to get paid back with. I'm assuming there is going to be some synergy to this whole thing and that we're going to get more profitable and then that extra profit is going to help oil the whole big machine. That's why I'm interested in this. On top of the fact if you pick out several employees exactly where's the line I mean and then oh why did I knock? It could cause could cause I'm sure it causes problems. >> Cause resentments. This this is broad-based. >> Yes. Absolutely. No, I got it. This is why I'm talking to you. So far so good. No, you tell my story better than I do. >> I speak entrepreneur. I know what inspires me and I know what turns me off. >> All right, here's another question. You know, we're going through really interesting uncertain times. No business is guaranteed to survive. Uh I'm curious, John, what are the advantages and disadvantages of being a co-op during tough times? How do you think about that? >> I think about it by telling you a story. The second best thing that ever happened to South Mountain Company was the crash of 2008. We got beaten so badly, a cascade of cancellations and we were suddenly facing, we were used to prosperity. We did well for so many years and all of a sudden we were facing the unthinkable that there would not be enough productive work for every person in the company. And that was the moment when I realized that my job was not to protect people from stress. My job was to engage them in solutions. And we came up with together as a group six different strategies that we would engage in. voluntary temporary furlows, involuntary temporary furlows, reduction in work hours, uh reduction in wages across the board. Six of them, and none of them involved layoffs, it was accepted and assumed that just because somebody hadn't been there as long, they shouldn't have as much of a right to their job. So, I will never forget the day that I stood in front of the company and announced that we were going to reduce wages by 20% across the board. And we had no idea when we would be able to restore that. And after that meeting, people came up to me and thanked me. And I said, "Wait a minute. Wait a minute. Do you know what just happened there?" And they said, "Yes, but it happened to you, too. And you're losing more than I am. and we're all in it together. So that's the thing that you have this workforce that doesn't go home and forget about it. You have this workforce that is engaged in the business and keeping the business intact. Let me tell you the rest of that story. It happened last week here. Business is off and I decided we need to do some furlows. Just not a lot. Only 10%. I've been through this before. >> Wait, furlow 10% of employees or 10% of pay? No, for 10% of their pay, take a day off, take leave half an hour, leave four hours early on Friday, whatever. And I've been through this, been through four recessions. I've been through September 11th, I've been through the pandemic, the whole 20078. Been through the whole thing. And the reaction I got was startling compared to the old days. The young people that work here that have never seen this are looking at me like, "What?" Like I And it was the opposite of what you just described. And I realized we're in a new world now that they just I have been funding this business with hundreds of thousands of dollars to get through it. And like no one knows about it. No one cares. All they know is I'm driving a BMW, you know. I So I understand what you're saying more than most cuz I just live through that whole thing. And um so I totally buy that. I do. >> And you know what we learned from 2008? We decided that we were never going to be in that situation again and we were going to build a very strong reserve fund, at least a million dollars. And the next time something like that happened, we could coast through it. We didn't know that it was going to be a pandemic, but the pandemic came and we kept everybody working and paid even though they weren't working. >> Wait, did you take PPP money? >> We did take PPP money, too. >> Well, that helps. That helped a lot. >> Yes. Let's not leave that off. >> No, no, that that helped a lot. But that PPP money didn't come right away and we had eight or 10 weeks of being effectively closed. Our job sites were shut down and people were getting paid and they were all saying, "Well, what can we do? What can we do to help? Put us to work doing something." >> So, that is the answer to Lauren's question. Why am I thinking about this instead of doing a WISHOP? Nothing would make me happier than um knowing my employees are why would I want to go make some guy from a private equity company rich when I've got these people been with me for why wouldn't I want them to be getting the benefit of everything that that and that's just my personal thing. I'm not criticising someone that doesn't, but why wouldn't I want my my employees to have that benefit >> and they also get to so if they want this company to be more profitable, great. They can they can do that. They can affect it. >> Okay. Now, here's the question though. Walk me through the profitability. Everyone's got a vote. Okay. How does it work with you've got a $300,000 profit? How do you split it up? >> All right. So, first of all, you set your wages and salaries in in the usual hierarchical way. I mean, just the way you do with your 5:1 ratio basically. And so, that's how people really get rewarded um for their level of responsibility, their talent. Then the dividends get distributed on the basis of hours worked. You're basically saying everybody here is of value. everybody is contributing. So those dividends when you're highly profitable, they can be very substantial. I'm thinking of a of a company called Ward Lumber in uh uh Jay New York that converted to a worker co-op about 2 years ago, 60 employees. Um a very good lumber yard. It was a fourth generation family business. and the fourth generation guy, his two daughters did not want to come into the business. And so he got enamored of the idea of a worker co-op. And I was up there talking to um people and the operations director said to me, "Firstyear dividend, it allowed me to buy a house that I thought wouldn't happen to me for years. It changed my life." So it's life-changing. And so so companies that actually have some money to distribute it is meaningful to people. >> But you're telling me the person who makes $175,000 is getting the same bonus as someone that makes $40,000. >> Yes. Now now you can do you can do your own profit sharing before the dividends if you want to, but I think it's a really good system. I have never had people complain about that because they're getting paid well. That surprises me. >> And they like it that everybody's sharing it. >> I know. But that surprises me that the person making $175,000 that got a $2,000 share is happy with that when they know that the guy who's making $40,000 got the same thing. So I guess what you're saying is it's Yeah. If >> if if they're unhappy, give them a $2,000 raise, >> right? That you you bury that in the in the money. Okay. Okay. So there's workarounds to that whole thing. Okay, I I got that. >> John, I I've spoken to a lot of owners who've gone through some sort of transition to employee ownership and in many cases it takes the employees by surprise and they kind of have to be sold on the idea. Sometimes they're skeptical. They think, you know, more work is being dumped on them or more risk and they're wary of it. Did you when you converted uh have to sell your former employees? I mean, I I didn't because it was a very tight-knit small group, but but what you're saying, Lauren, happens all the time. At Ward Lumber, there was tremendous skepticism at first. They thought it was a way for Jay to get out and leave them hanging, but you have to be very open about it. What it is, you have to communicate really well. You know, they're choosing to become owners if they want to. So you got to sell it. You have to make the case that this is good and it's good for them. >> You're choosing as a group or individually. Could some employees opt out or is it an >> Absolutely. You don't have to buy in. Uh you know, we had a we had a guy for 20 years who um would never buy in. And he was a good friend of mine. And I would say, Bob, you are leaving on the table an annual dividend and you are not getting the voice that you ought to have. And he would say, "Hey, I get it, John. I'm just not an owner type. Not for me." Okay, that's fine. You don't have to do it. >> Love that. I I gotta tell you that is a great actually that that's a that's a great thing with this because I know there are people who you don't want to cram this down anybody's throat. I think that's a >> no that's a lovely piece of this that people are opting in and don't have to be in it because that's the way the world works. >> You know what else Jay? It's it's very rare because there there are a lot of people that don't um first of all they they just can't put the money together or whatever or they they it it just doesn't appeal to them. But when they see their friends and colleagues um benefiting from this and enjoying it and getting a lot out of it, after a time they come around everybody except Bob. >> Okay. So let's just summarize what's going on in my little brain. One, don't get hung up on they're all getting the same thing. You can go have a different profit plan if you want to do. Okay, great. That solves a huge problem. Two, can't argue with the fact everybody's going to be even more, you know, invested. I I can't I'm not naive. I'm sure they'll they'll work a little harder. Great. Three, the government's not crawling down your throat for anything. >> No. >> Right. But the other thing is that you can so the board has the has the obligation to hire and fire the CEO. So you could get fired. But who's going to ever be stupid enough to fire you? >> My kids after they take my car keys away. >> It's your job to set the salaries so you can reward people as you feel like you need to. >> Okay. >> It's not very democratic, Jay, but hey. No, I'm telling you, if you do nothing more, if you've accepted that, I thank you for that. If you do nothing more but get rid of that word, you've done yourself a tremendous service because that's the one that I immediately go, "Oh, here we go again." >> Well, here's the thing, Jay. I really do want to get this out of the echo chamber. I want to spread it widely. And that means meeting people where they are. >> Yes. >> So, um, I appreciate that criticism. I appreciate whatever feedback I get that makes it more appealing to people. >> Yes. All right. So, here's my last question that I wake up one day and I think, "Oh my god, this isn't working or and I'm not kidding when I say this. I have a 13-year-old grandson. Maybe in 20 years I'm still here and my grandson wants to take it over or something. I don't know." And I think, "God, I wish I would." Can you get out of this? >> No, you're in trouble then. >> Okay. >> Yeah, you can't. >> Okay. >> Yeah. Okay, >> you can hire him. >> Not a deal breaker. No, no, not a deal breaker, but Okay, >> how about selling the company at some point? >> So, Lauren, that's exactly the follow- on question. That's why it's good that you can't get out of it because the other thing is that you set up now, you can do this however you want. You set up in the bylaws what it takes to sell the company. And the most common thing is that 85% or 90% of the owners have to agree to sell. So when are you going to get, you know, you've got people in their 30s and their 40s and their 50s and 60s. When is everybody going to agree I want to sell the company and get rid of my livelihood? So there's a protection there. and some worker co-ops and especially this is true in a network of co-ops in Italy and some here there's a company called Equal Exchange which has been around for 40 years if the company is sold half of what's left over goes to the employee owners and half of it goes to a nonprofit thereby disincentivizing selling the company. So you can do whatever you want around that, but the normal thing is just to you don't want to make it 100% of the owners because you might have a situation where it really makes sense to sell this company and everybody knows it and everybody agrees and you've got one person that says Bob. No. Yeah, Bob. Yeah. Yeah. So, so you got to count on there being a Bob and um so that's why you don't make it 100%. >> Okay. I again not that's not a deal breakaker because in my situation my other choices aren't even close to working. So this one even it might not be perfect. It's close whereas my other ones are aren't even on the table. I'm not doing it. John, do you know of a situation where somebody chose to convert to a worker co-op and it just was a disaster? For whatever reason, it didn't work. >> Yep, I do. It was actually a really good friend of mine. >> What went wrong? >> So, first of all, you only had to work there for a year to become an owner, and you didn't have to pay hardly anything. I think it was a,000 bucks or something like that. And there was no um kind of education. There was just a tremendous amount of diversity in that company in terms of people's points of view. And there was strife going in. I mean, if you take a crappy company and you make it into a worker co-op, you are going to have a crappy worker co-op, right? And this was not a crappy company. It was a good company, but it had some real problems that they didn't address. I got to tell you, just you telling me one, that's not a good idea. You want people vested. Like if someone's been with you five years, they're probably good employees. They want to be there. You want them to be there. One year, I mean, that's just a can of worms. >> It's interesting that you that you say 5 years. So most worker co-ops, it's either two or 3 years. At South Mountain, it's 5 years. And there have been times when I thought that was too much because people coming in in mid-career, it's a long time to wait for ownership. But I actually tried to tr to change that once and make it four years. And I got so much push back. People said this is a great system. We have 5 years of evaluations. We can usher them out the door if they're not the right material for ownership. It's a good system. So, yeah, I think having a long period is not a bad idea. >> Okay. So, Jay, where are you? >> I'm I'm uh >> he's going to call me on Monday and we'll get to work. >> Yeah, we're going to get to work. No, I like I said, I I need to do something cuz uh this isn't going to fix itself and it's not going to kicking the can down the road is not necessarily going to be helpful. And I've had to go through this process of first cycling through my kids to realize this would not be a good idea. My my my kids are not suited to do this. They don't want to do this. And that was a tough pill to swallow, frankly. Uh but I swallowed it. Um so I'm ready to move on to phase two, which is figuring this whole thing out. So, and I I like I said, I I accept the fact that having a participative workforce and what a lovely thing for me to go to employees been with you for years. The one that's awkward are the people that have been with me for 30 years that are retiring. >> They're going to love it. They're going to love it. >> I know, but they're leaving. They're going to think, "Great. I'm glad you doing it now. I'm about to retire." I mean, oops. I mean, it is what it is. But, I mean, I do have a couple people that are going to be ret three people are going to be retiring next year, so they're going to be out of it. But you also could pay them a really nice severance. >> Yeah. >> Yeah. Right. >> A gift. >> Yeah. A gift. >> Not really. Severance. Yeah. Okay. Uh John's book is from founder to future. Uh it's got a there are a lot of sources of information out there about employee ownership. Uh many of them try to sell you on one particular flavor. As you heard here, John discusses them all and tries not to oversell any of them. The most important part is he owned a business. That's the most important part to this because a lot of these people are out there have never been in the arena as Teddy Roosevelt said. Thank you both. One thing before you go, everything we do at 21 Hats is created by entrepreneurs for entrepreneurs to help us all learn together. If you get something out of listening to these podcast episodes, consider joining the conversation. You can do that by joining the 21 Hats sounding board, a Slack channel where you can tap the wisdom of a very smart crowd or by becoming a founding member and joining our monthly Zoom forum where you can be part of conversations much like the ones we have on the podcast. You can sign up for both by subscribing to the Morning Report. If you have any questions, you can email me at lauren21hats.com. And if you get something out of this podcast or out of the morning report, please tell a friend, tell an enemy, tell every business owner you know. Your word of mouth owner to owner will always be the most effective way to build this community for all of us. Thank you. It means a lot. This episode was produced by another entrepreneur, Jess Stubberon, founder of Blank Word Productions. Thanks for listening, everyone. [Music]