by Kateri Gutierrez
Non-Profit Quarterly – April 27, 2022
Last February, 22 percent of small businesses were forced to shut their doors due to financial strain caused by the COVID-19 pandemic. Brick-and-mortar businesses that lacked the ability to transition to remote work or online operations were forced to shut down. The pandemic also sped up something called the “silver tsunami,” or the mass retirement of baby boomers, many of whom have no succession plans for the businesses they own. Such businesses often don’t have the resources to upskill their workforce or adopt new operating practices to keep up with larger competitors. How does this affect the economy? As small businesses close, profits are pooled more and more in larger corporations, making it more challenging to start businesses and compete in an increasingly uneven marketplace.
Of the 2.34 million businesses owned by people ages 58 to 76, which employ 24.7 million people nationwide, a whopping 83 percent do not have written succession plans or view such plans as a topic too complex to approach. Some existing options for succession planning include selling the business to another company or a private equity firm, but in such instances, the financial well-being of the retiree is up for discussion, as are issues such as the maintenance of family ownership. Furthermore, employees may not be considered in the transaction and could be forced into difficult working conditions or lose their job. The high number of businesses without a succession plan reveals an opportunity for small business owners to connect with networks championing conversions to worker-cooperatives as a succession planning route.
Why Worker Cooperatives Work
Just as small businesses are closing at higher rates than ever, so are workers leaving their jobs in unprecedented numbers. Remote opportunities, safety measures, and shifting personal values have influenced the behavior of workers who, in the past, waited for longer periods to find the right opportunity before leaving their jobs. Additionally, workers are starting to organize, demanding better pay and conditions and communicating what businesses need to do to support the well-being of their workforce.
In a recent article for NPQ, Ophelia Akanjo writes that this shift is less of resignation than a “reckoning.” As workers speak up to advocate for their needs, companies accuse employees of being lazy while continuing to profit off their employees’ hard work. “The word “laziness” seems to be a buzzword vis-a-vis the phenomenon of people leaving bad work situations in search of better ones,” Akanjo writes about corporations’ attempts to deflect attention away from bad working conditions.
Such deflection is less convincing today, as the workforce is finding its voice and speaking up. Employee ownership models, such as cooperatives, allow workers’ voices to be heard and their requests acted upon. As small business owners find ways to keep their legacies alive, honor employees’ contributions to growing their companies, and develop accessible succession plans, converting to worker cooperatives is an increasingly promising option.
In fact, the worker cooperative sector is on the rise in the United States. The critical difference between a traditional business and a worker cooperative is the latter’s governance model. Both strive for profits, but worker cooperatives prioritize the financial and general welfare of their worker-members. One of the main features of a worker-owned cooperative is a set of core democratic values that define practice on at least three levels: where funding comes from, how to spend it, and how to run operations. In most worker cooperatives, democratic governance is institutionalized through core principles, by-laws, and statutes.
Worker cooperatives aren’t just good for individual companies. They’re good for the economy as a whole. As the National Center for Employee Ownership reported, workers at cooperatives have a smaller chance of being laid off than employees of other types of businesses. This is particularly the case during recessions thanks to the intentional implementation by coops of cost-reduction practices, such as minimizing training and recruitment costs.
Marc Bendick Jr. and Mary Lou Egan explain that stable employment gives cooperative worker-owners more economic power in the local community, empowering the local economy through the retention of locally generated capital. They write that in economies where cooperatives are prevalent, “local earnings are often spent locally,” prioritizing community concerns such as “the environment, human resource development, and the quality of life.”
One popular pathway to worker-owned businesses is when employees purchase a business from its retiring owners. A study by Gregory et al. outlines the three-step process by which businesses convert to cooperatives. These are:
- Converting the existing business or forming a new cooperative entity.
- A sales transaction executed between the current owner(s) and the new worker cooperative to sell the existing business (or its shares or assets) to the worker coop (i.e., the execution of a purchase and sale agreement). Each worker-owner “buys in” to the coop and receives a single voting equity share.
- A transition of roles and culture among the new worker-owners to assume ownership responsibility of the new entity and run it under democratic governance.
Understanding the Conversion Readiness Framework
One way we can understand the opportunities for creating conditions conducive to business conversion is through my Conversion Readiness Framework, which outlines the three main requisites for a business to convert to a worker cooperative. These are general business success, a supportive ecosystem, and internal change preparedness.
- General Business Success: A company considering co-op conversion should be a successful business. Factors by which to evaluate success include positive cash flow, years in operation, industry strength, skills type, and economic climate. Some “popular” cooperative industries, according to BecomingEmployeeOwned.org, are food and beverage, tech, farming, childcare, construction, manufacturing, health, cleaning, and landscaping. Choosing to convert a business in one of these industries to a cooperative has proven successful.
- Supportive Ecosystem: While the success of conversion depends on internal factors, it is also highly influenced by the institutional and political ecosystems available to train, support, and sustain cooperatives. As dozens of conversion cases show, all successful conversions involve some level of institutional or professional support or external resources and policies that enable conversions. Businesses should ensure they have the right support in place, including experts in designing worker-owned business structures, legal counsel, financial and tax advising, and accounting support to transition the books to new financial structures. Effectively structuring the financing to not over-burden the new worker coop is critical. In addition, it is important to invest in education and training for the selling owner and future worker-owners and in ongoing support for key individuals who will help lead the governance and cultural transition. As the authors of The Lending Opportunity of a Generation recommend, it is important to build the cost of ongoing training and support into sales financing to ensure adequate investment for a period of 2-3 years after the sale. Local and state institutions should support knowledge about and creation of cooperatives through independent efforts or cooperative development centers.
- Access to Capital: The ecosystem is becoming more supportive for slightly larger businesses converting to cooperatives. As stated in The Lending Opportunity of a Generation, “Financing lenders can work with these organizations to access a market of vetted businesses, with business values ranging from under $300,000 to over $10 million that have support organizations vested in their continued success.” Some examples of such growing capital resources include community capital funds and community investment funds.
In the last couple of years, federal-level initiatives have further enabled access to capital. One of the most recent examples is the State Small Business Credit Initiative (SSBCI), part of the American Rescue Plan Act (ARPA). According to Fifty by Fifty, “The SSBCI program was created to increase access to capital for small businesses, to benefit state economies. Congress directed Treasury to include employee ownership transitions in the program.” The funding would go through banks, credit unions, CDFIs, and eligible venture capital funds. “SSBCI funding offers states the opportunity to seed these investment funds, which CDFIs or other financing organizations can run. Municipalities could work with their state development finance agency to obtain allocations for their area. The result could be that the tidal wave of business closures known as the “silver tsunami” could be stemmed, and local economies could emerge more vibrant and just—with shared ownership at the heart of Main Street.”
A supportive ecosystem consists of local development centers, local and state institutions, policies, laws, and professional services. But in what order should this ecosystem develop? In 2020, the Democracy Collaborative published a report on the steps needed to create a supportive investment ecosystem and take employee ownership to scale:
- Foundations provide philanthropic dollars to seed new employee ownership funds.
- Family offices, foundations, and high-net-worth individuals enter the space with catalytic capital.
- Larger institutional investors choose employee ownership.
- State and local governments invest in marketing and technical assistance.
- Economic development financial authorities create financing mechanisms.
- The federal government provides credit enhancements.
- Employee ownership becomes a normal part of the investment landscape.
Such changes made in this order would enable businesses to flourish in an ecosystem that encourages conversion to worker cooperatives as an expected outcome rather than a rare event.
Be the Change: How to Organize for A Supportive Ecosystem
Activists and organizers can play a role in achieving a meeting point between slowing the silver tsunami and creating value-aligned, employee-minded job opportunities through conversions to worker cooperatives. Here are some strategies to make the supportive ecosystem we need a reality:
- Connect with your local small businesses. Support them by purchasing goods and services, but also get to know the owners and ask them about their plans for maintaining their legacies. Additionally, reach out to local small business development centers (SBDCs), and inquire about their resources around employee ownership and conversions.
- Build awareness of the conversion process, the cooperative model, and government support for both. According to Blasi, some recommendations for government action include:
- Creating state tax incentives to “encourage every retiring business to think of conversion to employee ownership.”
- “Encouraging the development of a state center, which is a low-cost nonprofit way to educate the people at the grassroots that are likely to start these companies.”
- “Make having a broad-based employee ownership plan a condition of any company receiving local or state tax abatements.”
- Follow organizations like ICA Group and Project Equity, which are leading some of the country’s conversions. One example of a successful project is Proof Bakery, a Los Angeles business recently converted to a worker cooperative.
- Stay informed about retiring local business owners but also pay attention to more innovative industries that are exploring new ways of practicing collective ownership. For instance, the E2C Collective is a team of people involved in advancing the framework, “exit to the community,” with the goal of enabling eventual community ownership and governance of local startups. This will allow proactive planning for growing industries that can incorporate employee ownership structures.
Together, COVID, the silver tsunami, and the workforce’s increasing demands have brought us to a point where employee ownership and conversions are viable options. Following guides like the Conversion Readiness Framework allows for business owners to prepare for and prioritize the next steps to sell their businesses to employees, keeping their legacy alive and empowering a new generation of workers.