February 21, 2018; Entrepreneur
“If you’re a boomer business owner planning for succession, you can’t afford to overlook the employee ownership option,” writes Lori Shepherd in Entrepreneur.
At NPQ, we have written about the growing prominence of employee ownership, but mostly from the perspective of the value of preserving businesses and jobs in the community. Still, these community benefits will only be realized if business owners agree to sell to their employees. So, what would drive a business owner to do so?
While the ability to defer capital gains tax is a factor, it turns out there are also powerful market incentives. A wave of retirements (2.4 million, Shepherd estimates) has long been expected in the decade or so to come, and as Shepherd points out, “In a crowded marketplace, transferring full ownership to the workers may represent [retiring owners’] best chance to sell their businesses at fair market value.”
This phenomenon isn’t unique to the US, either. A 2011 study in Europe found that, “450,000 enterprises, providing 2 million jobs, are being transferred in the EU every year. The EU may lose approximately 150,000 of these enterprises each year, representing 600,000 jobs, because their owners retire, set up a new business or seek other opportunities, but cannot find anybody to take over their firms.”
Shepherd notes that, “Ideally, Gen Xers and millennials would be lining up to purchase these companies, or legions of sons, daughters, nieces or nephews…but that isn’t the reality.” Only about 15 percent of privately-held companies are passed on to family heirs, Shepherd observes, meaning that the owners of the other 85 percent of businesses need to figure out something else.
Perhaps your “something else” would be to put your business on the market. Your chances are not good there, either. Citing a study by Project Equity, a California-based nonprofit, Shepherd reports that, “Only 20 percent of businesses listed for sale ever sell, and that percentage is likely to decline in coming years as boomer-owned enterprises flood the market at a record pace.”
The bottom line, as Shepherd puts it, is that, “If you don’t already have a solid succession plan in place and intend to put your business on the market and hope for the best, you’re setting yourself up for disappointment.”
As NPQ has noted, employee ownership in the US is not rare. The nonprofit National Center on Employee Ownership tracks these numbers. As of 2014 (most recent data available), there were 6,717 companies owned in whole or part by their employees through an employee stock ownership plan, or ESOP. Employee shares are worth $1.31 trillion and are held by 14.1 million people (about 10.6 million current employees and 3.5 million former employees who haven’t full cashed out). That works out to an average value of $92,900 per person.
In Europe, the most common form of employee ownership is a worker cooperative. With a few prominent exceptions like the Mondragón network in Spain—which employs 73,000—most worker cooperatives employ fewer people than ESOPs. The European worker co-op federation estimates that there are 50,000 worker co-ops in European Union countries, with an estimated 1.4 million worker-owners. (US worker cooperatives exist too, although in far smaller numbers.)
Still, even though employee ownership is fairly common, Shepherd observes that misconceptions persist, such as the mistaken notion that employee ownership means no management (unheard of except at very small businesses where workers might co-manage) or that workers will need to buy the business in cash (in fact, nearly all buyouts leverage existing business assets).
Shepherd notes that a number of nonprofits have emerged to conduct feasibility studies for sales of businesses to employees, including The Industrial Commons in North Carolina; Nexus Community Partners in Minneapolis-St. Paul; the Center for Community-Based Enterprise in Detroit; ASSETS in Lancaster, Pennsylvania; and Project Equity in the San Francisco Bay Area. The ESOP Association also maintains an online directory of industry consultants.
In addition to helping family business owners cash out, employee ownership has other benefits as well. Rutgers economist Douglas Kruse notes that US employee-owned firms enjoy greater employment stability and greater firm survival rates than comparable conventionally-owned firms.—Steve Dubb