Gobonobo [Public domain]

February 5, 2020; Bloomberg Businessweek

Worker co-ops are “an idea with growing appeal for small-business owners,” observes Karen Angel in Bloomberg Businessweek. Angel adds that according to data from the US Federation of Worker Cooperatives, the US now has about 800 worker-owned co-ops—still a small number, but more than double the 350 that existed a decade ago. These worker co-ops now employ more than 8,000 people and generate nearly $500 million in annual revenue, the worker co-op trade association estimates.

Most worker co-ops are small; if 800 worker co-ops employ a little over 8,000 people, that’s an average of about 10 worker-owners per co-op. That said, some are much larger. Cooperative Home Care Associates in the Bronx, as NPQ has noted previously, is the nation’s largest worker co-op, with more than 1,000 worker-owners providing care for elderly, ill, and disabled clients.

While many worker co-ops have been co-ops since their founding, increasingly family-owned businesses are choosing to adopt the structure. As owners retire, they’re looking to ensure the enterprises they founded continue to serve their communities after they’re gone. And if their workers are willing to buy them out to preserve the business and keep themselves employed, why not?

Nationally, it is estimated baby boomers own 2.34 million businesses, which employ a total of 24.7 million people. This pending wave of business-owner retirement has been called a “silver tsunami,” one characteristic of which is that there are likely to be more sellers of businesses than buyers. New laws like 2018’s federal Main Street Employee Ownership Act, which makes it easier for employees to buy, help even those scales.

Often, worker ownership takes the form of an employee stock ownership plan, or ESOP. But ESOPs, which enable workers to own businesses through pension-owned shares, also require compliance with federal regulations (such as conducting annual third-party assessments of business value to ensure workers don’t get ripped off).

The cost of ESOP compliance with federal laws is manageable if the business has 50 or 100 employees, but for businesses with only five or 10 employees, not so much. By contrast, worker co-ops do not face the same regulatory hurdles because workers own shares directly rather than through a pension plan.

Rob Brown, a director at the nonprofit Cooperative Development Institute (CDI), has supported some of these conversions. Brown works primarily in Maine. Making retiring business owners aware that they can sell to their employees can be a challenge. “The typical succession strategy in a lot of rural Maine is liquidation and closure,” Brown tells Angel. The lack of knowledge can hurt both the business owner, who “isn’t realizing the wealth they should be,” and also can cost employees their jobs.

As Angel points out, “Businesses with a long history in their market tend to transition best.” A conversion to employee ownership can only rarely save a failing business, but it can often be a very good strategy for keeping a successful business model going.

Angel notes that conversion to worker co-ops can sometimes help business founders expand their businesses too. Angel profiles Aja Hudson, who founded a landscaping company in New York’s Catskill mountains 19 years ago but found she was unable to keep up with business growth. As Hudson tells Angel, “It was too much for me to manage by myself.” Four years ago, she converted the company, now called Earth Designs, into a cooperative she co-owns with nine employees.

Hudson says the transition “required a tremendous amount of patience and many more meetings than any of us expected.” Even so, “the rewards have been great.” Since becoming a worker co-op, staff has grown from nine people to 25, and annual sales have nearly quadrupled from roughly $500,000 in 2015 to almost $2 million last year.

The bottom line, as Angel writes, is that “conversions of small companies to co-ops are likely to become more common as baby boomer business owners retire. Many have no succession plan, and it can be tough to find a buyer, especially in rural areas.”—Steve Dubb