Preserving Community Based Businesses through Worker Ownership

Tonya Price was our Legal Extern in her last semester before earning her J.D. from Michigan State University College of Law. Among other amazing things she did as a Blue Dot team member, she helped with the Impact Terms Project, our PBC conversion, and setting the groundwork to creating our first Impact Report, coming in 2018.

I recently had the pleasure of attending the Rocky Mountain Employee Ownership Center’s workshop on preserving main street and small businesses. The workshop prompted attendees to think about the “silver tsunami”, i.e. the retiring boomer population, and how worker ownership could be used as a tool to preserve boomer owned businesses and the place they hold in their communities. Seventy percent of businesses are boomer owned and those businesses hold about $10 trillion in assets. The panelists at RMEOC’s workshop made the case that those $10 trillion in assets should be transferred via worker ownership and not traditional sale. The panel discussed the advantages of employee ownership, building capacity in employee-owners, the city’s role in promoting worker-ownership, and converting to worker-ownership.

Blake Jones of Namaste Solar, made the case for employee ownership’s competitive advantage. When employees think and act like owners, the level of care exercised is significantly different than in a conventional command and control structure. He believes that Namaste Solar has succeeded in the incredibly competitive solar energy sector largely because of employee ownership. Namaste Solar’s customers receive better service, the quality of employees’ overall work is better, employee turnover is low, and the company culture is better. Jones also cited employee ownership as better for long term economic development because it prevents the concentration of wealth in the top few employees at a company. He was mindful that with the benefits of ownership comes the risk. The burden and worry that comes with being an owner is shared across the company, something he felt was a key component to the success of worker owned companies.

The discussion then shifted to how to make the transition to worker ownership. Building capacity in employee owners seemed to be on everyone’s mind. The panel was careful to emphasize that worker ownership does not have to mean that democracy is built into everything. For example, when companies choose an Employee Stock Ownership Plan it’s unlikely that they will implement democratic decision making. ESOPs are retirement plans that are intended to align the interests of the employees and the company they work for. ESOPs provide ownership as a fringe benefit with no up-front cost to the employee. In many cases, employees receive no voting rights and are merely beneficiaries of the ESOP trust. On the other hand, worker owned cooperatives generally have democracy built in to the company culture. Unlike in ESOPs, employee owners in a cooperative usually invest in the company. Buy in cost varies among worker owned cooperatives, but a common benchmark is the cost of a used car. This goes back to Jones’ belief that when employee owners share the risk, the cooperative structure works better. With the investment comes voting power and the full responsibility of ownership. That does not mean that every decision requires a vote by all owners. When decisions require a vote and to what degree, is unique to each cooperative. One method, employed by Namaste Solar, is a decision matrix that employees reference to determine whether the decision they are faced with can be made independently, will require peer review (4 or more owners), or must be voted on by all owners. A final essential element of building capacity in employees, whether in an ESOP or worker cooperative, is transparency. Open books, open meetings, and training on how to use and understand the information available were all cited as critical to fostering effective worker ownership, even where voting is not an issue. Namaste Solar also advocates for sharing salary information with everyone, but this element of transparency is a more contested issue in cooperatives at large.

Michael Miera (Denver Office of Economic Development) led the conversation about the role of cities in supporting worker ownership. Community wealth building is part of Denver’s strategic plan and Miera sees worker ownership as one avenue to achieving that goal. To that end, the city is exploring ways to use community development block grants to provide financial support to worker owned companies. Other suggestions for city involvement included tax incentives, succession planning education, procurement advantages for ESOPs and cooperatives, and getting to know area businesses and reaching out when the owners are close to retirement or are considering an exit. In addition to the incentives at the city level, RMEOC is lobbying for HB17-1214, which would require the Colorado office of economic development to establish, or contract with a nonprofit to establish, a revolving loan fund that provides capital to businesses transitioning to worker ownership. The loan fund will not be state funded, rather it will be capitalized by grants, gifts, and donations and loans are limited to $10,000 or 50% of transition costs, whichever is less.  The goal of the fund is to generate enough returns through interest and fees to replenish the loan fund for future allocations. RMEOC believes that this fund is critical to enabling traditionally owned businesses to convert to worker ownership.

The presentation concluded with an overview of the critical steps of converting to employee ownership. First, know your objectives; what are your goals for the transition. Second, test the feasibility. To transition successfully, owners need to understand the value of their business, what role they want to have in operations moving forward, and how to make a seamless transition from a marketing and sales perspective. Next, determine the structure of the transaction. Who is eligible for ownership, how does an employee become an owner, and will you allow non-member employees. Fourth, execute the deal. Understand the tax implications of the transfer and structure the transaction in the most efficient way. Get all your financing in order and get a firm handle on federal and state law that applies to the transaction. The final phase is operating as a democratic firm. Action here will vary, depending on whether the company has elected to become and ESOP or worker cooperative, but thinking through the culture you want to create is important to long term success.

The overall tone at the workshop was positive and hopeful. It was encouraging to see a Denver city official on the panel, but also to see planners and city officials from the Denver Metro area in attendance. In addition to Denver, New York/New Jersey, Ohio, and California have established employee ownership centers. The New York City Council allocated $1.2 million in 2015 and $2.1 million in 2016 for the Workers Cooperative Business Development Initiative. In 2014, New Jersey passed legislation incentivizing ESOPs by excluding from gross business income net gains or income from the sale or exchange of employer securities to an ESOP. California has 101 worker cooperatives and democratic workplaces. Ohio passed its first worker ownership legislation in 1988 and between 1996 and 2006 the rate of ESOP growth in Ohio was three times greater than overall U.S. growth. Like RMEOC, the Ohio Employee Ownership Center’s contemporary challenge is transitioning established businesses to worker ownership as their founders exit. With RMEOC taking the lead, Colorado is well positioned to facilitate a large scale transition to worker-ownership from traditional ownership models, but it will require continued buy in and support at the city and state level.