What is Employee Ownership?
Small businesses that are employee-owned tend to be organized as worker cooperatives. A worker cooperative is owned and controlled by its employees. It is a value-driven business that puts worker and community benefit at the core of its purpose. The two central characteristics of worker cooperatives are:
- Workers own the business and participate in its financial success on the basis of their labor.
- Workers vote for their representation on the board of directors, with the principle of one worker, one vote.
In addition to their economic and governance participation, worker-owners engage in day-to-day operations through participatory management structures.
Researchers and practitioners estimate that there are 300-400 democratic workplaces in the United States, employing around 7,000 people and generating over $400 million in annual revenues. The number of worker cooperatives has grown steadily over the past 20 years and increasingly includes longstanding businesses that have been sold to their employees by their owners. Any business can be a worker-owned and -controlled business. In the U.S., worker cooperatives tend to be concentrated in the service and retail sectors.
Why Employee Ownership?
Transitioning your small business to employee ownership can have positive impacts on employee engagement, productivity, and retention; anchor a lasting legacy for your efforts building the business; and offer a financially rewarding exit path that can be supported by experienced professional assistance. Small business owners throughout the United States are increasingly seeing employees as highly desirable buyers because their expertise operating business offers continuity, which buoys company value, and because of their commitment to the main street social fabric that could be jeopardized by outside buyers.
How Does it Work?
An employee-owned business is owned and controlled by its employees.
While there are a number of legal entity options – corporations, LLCs, trusts – they all share equity ownership that gives employees real risk and reward, and a path for employee participation to voice their desires, and to improve their work life.
Checklist: Is it right for my business?
If you agree with one or more of the following statements, employee ownership is worth exploring for your company.
- I want the positive impacts I’ve built into my business – good jobs, connection to our community, best practices in our sector – to last beyond my time as the owner.
- I believe the risks and rewards of ownership can reinforce a culture of high quality work and shared responsibility that improves productivity and the bottom line.
- I want to receive a fair value from the sale of the business I have built and feel the employees might value the company as much, or more, than an outside buyer.
Examples of Large Worker Cooperatives
Examples of Medium Worker Cooperatives
Examples of Small Worker Cooperatives
What are the Stages of the Transition?
Converting a small business to employee ownership can be a practical solution for ownership succession, job stabilization, and employee retention. The process takes an investment of resources and professional assistance to ensure success and long-term benefits. While unique for each business, the process generally has five stages. Below is a an outline of the stages, with approximate durations and costs, though these can vary widely depending on the complexity of the business and the readiness of employees to become owners.
This quick assessment can help guide an early conversation with an experienced professional assistance provider. The structure of employee ownership transitions can be flexible, and can be designed to meet desires and address concerns.
What are Your Desires?
- I want to exit the business while ensuring it carries on its positive community impacts.
- I want to stay in the business and strengthen our work with a culture of shared ownership.
- I want to receive the best value for the sale of the business, and a lasting revenue stream.
- I want to reward employees for helping to build the company.
- I want the benefits and lessons of business ownership to be accessible to all.
What are Your Concerns?
- I worry that an outside buyer could lower the quality of the company’s goods or services.
- I worry that a sale could be complicated and take a long time.
- I worry that there could be few or no buyers, or that offers will not meet my financial needs.
- I worry that my absence would leave gaps in key business activities that no one is ready to fill.
- I worry that a change in ownership could lead to a loss of customer confidence.
- WHAT: Key stakeholders, generally the owners, study the idea and decide that it is worth pursuing
- WHO: The selling owner; a local advisor who can offer confidential guidance; sometimes key employees
In the Explore stage, the owner learns the benefits and options of employee ownership and decides whether to invest further time and resources. During this stage it is helpful to have a knowledgeable local champion of the idea to speak to in confidence, and an opportunity to see how other businesses have made the transition. The essential question is whether employee ownership will meet the outcomes desired by the seller. Outcomes may be financial security, community benefit, or maintaining the legacy of the business.
- I have learned the stories of other businesses that have become employee-owned.
- I understand the potential benefits of employee ownership for me and for my business.
- I have a good sense of my own financial needs and timing in selling the business.
- I am willing to frankly assess employee’s leadership gaps and work to address them.
- I have considered how the employees compare to potential outside buyers of the business.
- Becoming Employee Owned – Company Stories
- DAWI, UWCC – Successful Cooperative Ownership Transitions
- Project Equity – Case Studies: Business Conversions to Worker Cooperatives
- ICA Group – Ensuring Your Legacy: Succession Planning & Democratic Employee Ownership
- OEOC – An Owners Guide to Business Succession Planning
- WHAT: Experienced professionals affirm that a financial, legal, and organizational transition is feasible
- WHO: The selling owner; trusted outside professional advisors
In the Assess stage, experienced professionals are invited to look at whether the value of the business will be enough to meet the seller’s needs. The advisors will propose the best legal structure for the sale to preserve value and maintain continuity. They will also examine the organizational capacity to take on new leadership and managerial responsibilities if the owner exits. A recommendation will either be made to move forward or to make changes that will increase company value and employee readiness.
- My business has had a recent valuation by a qualified outside professional.
- A legal path to employee ownership is outlined that would help seller and buyers retain value.
- My hands-on work role is documented, and employees are being trained for the time I may exit.
- The employees are surveyed to measure attitudes that support ownership culture.
- I have a realistic willingness to invest the time and resources to transition to employee ownership.
- ICA Group – Business Valuation Basics
- DAWI – A Brief Guide to Understanding Employee Ownership Structures
- SELC – Legal Guide to Cooperative Conversions
- Ownership Associates – Ownership Culture Report
- W2O – Ownership Culture Self-Assessment
- WHAT: A transition team establishes the sale terms and any organizational or leadership changes
- WHO: The selling owner; a representative team of the employees; professional advisors
In the Structure stage, employees will become engaged in preparing for the transition. General information will be offered to all employees to gauge interest, and a smaller group will regularly meet to understand the details of the sale and give input on the terms. The group usually focuses on gaining financial literacy and understanding how governance and management will operate under employee ownership. At the same time, advisors are at work structuring bylaws, securing capital, and addressing any special needs.
- A meaningful percentage of employees have signed commitment of interest letters.
- A representative team employees forms to regularly meet, learn, and advance the transition.
- Governing documents are written or amended to reflect employee ownership.
- A business plan is communicated to employees to show their investment, debt, and risk.
- Financing for the sale is secured from capital providers.
- ICA Group – Democratic Governance
- CFNE, Project Equity, DAWI – The Lending Opportunity Of A Generation
- ICA Group – Intro to Bylaws
- DAWI – Decisions in the Process of Business Transition
- SELC – Think Outside the Boss
- WHAT: Loans are drawn, the company legally changes hands or entity, and a founding board is elected
- WHO: The selling owner; the employees; professional advisors; lenders
In the Complete stage, all activities – legal, financial, and organizational – intersect to finalize the transaction. Purchase agreements are signed by employees. New legal entities are ratified and founding boards chosen. Loans are drawn on for the initial cash payment to the seller. If any leadership or management structures are planned for the execution of the sale, they begin. This stage requires committed attention from either an advisor or an internal champion to move slow external processes forward and keep employee morale high.
- New legal entities or amendments are ratified.
- The initial (or full) cash payment is made to the seller.
- Purchase agreements are signed by the employees with a schedule for any future payments.
- A founding board of directors begins fiduciary responsibility and management oversight.
- A path to ownership is established for future employees who are not part of the sale.
- DAWI – Investing in Worker Ownership
- UWCC – Cooperative Equity and Ownership
- ICA – Internal Capital Accounts
- Britton and Stewart – Selling Stock to Employees… and Sheltering Capital Gain
- NCEO – A Conceptual Guide to Employee Ownership for Very Small Businesses
- WHAT: Ongoing training addresses leadership and operational gaps, and builds ownership culture
- WHO: The employees; professional advisors
In the Support stage, the development of ownership practices and attitudes is guided through the inevitable bumps and growing pains. Employees gain business literacy to see how their everyday effort can reward them financially. They set personnel practices that foster engagement. Roles for the board, management, and members are established. Training from professional associations, business schools, and cooperative experts assures that educational needs are not deferred by operational ups and downs.
- A management and employee training program is defined and has an annual budget.
- The company is a member of an association that can offer ongoing education to employees.
- A calendar of activities and trainings for the board, management, and employees is defined.
- The company has open book practices that engage employees in financial operations.
- The company has personnel practices that support employees to improve their work life.