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Our latest series on the role of private equity in employee ownership provides a deep and nuanced view of this development. Join the conversation, by emailing your thoughts to info@fiftybyfifty.org. We’d love to hear from you.

Thank you for your ongoing support.

Karen Kahn, Editor

Employee Ownership News Ceases Publication at Medium was originally published in Employee Ownership News on Medium, where people are continuing the conversation by highlighting and responding to this story.

At Employee Ownership News, we approached this new initiative with some skepticism. Private equity is not known for its sympathy for workers. So we reached out to a dozen people in the employee ownership field to hear their reactions. We’ve now put together multiple voices in a series of posts that will begin today, May 19. Today, we set out to frame the issues with several posts, including:

• Our introduction: Is Private Equity about to Co-opt Employee Ownership?
• Are the Barbarians at the Gate, a three-part commentary by Marjorie Kelly and Karen Kahn that challenges the notion that Ownership Works is granting employees ownership
• Enter the Dragon? A commentary from Jim Bonham, president of the ESOP Association, raising concerns regarding protections for workers
• Can We Call This Employee Ownership?, by Ian MacFarlane, president of EA Engineering, a 100 percent employee-owned consulting firm

To see these posts — and those that follow the week of May 22 — you will need to visit Employee Ownership News at www.employeeownership.news. We will be winding down our Medium presence, and hope you will continue to follow us by subscribing at our website to our newsletter.

Thank you for your continued interest in all things employee ownership!

Is private equity co-opting employee ownership? was originally published in Employee Ownership News on Medium, where people are continuing the conversation by highlighting and responding to this story.

Several state-led efforts are advancing employee ownership legislation. Among them:

California: A bill ( SB 1407) has been introduced in the California Senate to create an employee ownership program within the Governor’s Office of Business and Economic Development (Go-Biz). The dedicated hub would educate stakeholders about worker ownership, assist business owners and workers in navigating available resources, provide funding for technical assistance, and streamline and reduce barriers to the existing business transition process. The bill establishes two grant programs: one focuses on outreach and technical assistance to expand awareness of employee ownership among business owners and business service providers while the other would provide partial support for feasibility studies for business transitions to employee ownership. The bill is being supported by the Worker-Owned Recovery California (WORC) and Ownership America.

Massachusetts: An “ Act Enabling the Massachusetts Center for Employee Ownership “ (H.511) has been reported out of the state legislature’s Economic Development and Emerging Technologies Committee and is currently being heard by Ways and Means. The legislation would make the Center for Employee Ownership a permanent part of the Massachusetts Office of Business Development. Its mandate would be to create an environment in which employee ownership can expand and thrive across the state. Specifically it would be responsible for education and outreach to key stakeholders, for research and evaluation that could assess the impact on businesses and workers in the Commonwealth, and for providing grants to facilitate employee ownership transitions.

The Massachusetts legislation would make the Center for Employee Ownership a permanent part of the Massachusetts Office of Business Development.

Minnesota: A bill (HF 3733) to help build community wealth in Minnesota would create a low-interest loan program to support employee ownership, community land trusts, or cooperatives focused on providing wealth-building opportunities for historically disadvantaged groups, including people of color, women, disabled veterans, and low-income workers. The bill calls for the state to appropriate $15 million in 2023 to provide grants to partner organizations to make the loans, which would be priced at not more than the prime rate. State support for the loan could be for up to $2.5 million. Up to 10 percent of the funds could be used for technical assistance. Half the principal payments would go to a community wealth-building account the state would create to provide ongoing funding.

Pennsylvania: The Pennsylvania Center for Employee Ownership (PaCEO) has been working on several fronts to strengthen the state’s support for employee ownership. Among its legislative priorities for 2022 is creation of a state Office of Employee Ownership. A floor vote to fund the office is expected to go the floor sometime in April.

Additionally, the PA State House passed a bill to amend the state’s tax code to incentivize employee ownership transitions. Pennsylvania is one of only a small number of states that do not currently mirror the federal Section 1042 rules. By making an election under Section 1042, sellers of C corporations can defer 100 percent of capital gains tax when selling to their employees in an ESOP. The bill (PA HB-285), which has a good chance of passage this session, would adopt the same rules under state law.

Finally, the city of Pittsburgh has allocated $120,000 to the Pittsburgh Citywide Task Force on Employee Ownership, which launched right before the COVID-19 pandemic. The taskforce is awaiting word on matching funding from Allegheny County.

To follow Employee Ownership News, subscribe to the Fifty by Fifty newsletter or follow us on Medium.

Originally published at https://www.fiftybyfifty.org on April 1, 2022.

States Advance Employee Ownership Legislation was originally published in Employee Ownership News on Medium, where people are continuing the conversation by highlighting and responding to this story.

How the Vermont Employee Ownership Center is engaging the state’s economic development agencies

By Matt Cropp

Since the enactment of the State Small Business Credit Initiative (SSBCI) as part of the American Rescue Plan Act (ARPA), the Vermont Employee Ownership Center (VEOC) has been strategizing to ensure that the program includes an opportunity to accelerate employee ownership conversions in our state. Vermont will be receiving about $57 million in capital (not including additional funds for technical assistance activities), half of which will go to an equity fund and half to enhancing the availability of credit for small businesses.

On average, Vermont sees two to four transitions to employee ownership annually. The pandemic has increased interest in this succession strategy. We believe that, with equity investments and more accessible credit, the number of deals could potentially more than double, and their average size could also increase as additional funds expand the “loan ceiling” beyond what has been available through existing capital players.

The key to the state getting its allocation of funds out the door effectively will be increasing deal flow. That creates an opening for VEOC.

A Seat at the Table
Vermont is a small state, and over the years our center has built strong relationships with the state’s economic development agencies. As a result, the Vermont Agency of Commerce and Community Development (ACCD) invited VEOC to the state’s first meetings on SSBCI, along with local Community Development Finance Institutions (CDFIs) and the Vermont Economic Development Authority (VEDA), the public financing agency tasked with managing the program.

The theme that emerged during those first conversations was that local lenders were already well-capitalized — the key to the state getting its allocation of funds out the door effectively would be increasing deal flow. That creates an opening for VEOC: as a state employee ownership center with strong ties to business leaders and business service providers, co-op developers, and underserved communities, we are well positioned to take on the role of identifying businesses that would make good candidates for employee ownership transitions. Our hope is that we will be able to access some of the technical assistance funds associated with the SSBCI program to increase our capacity to reach out to business leaders, develop the pipeline, and provide support to under-resourced employee groups to access legal, valuation, and business advising services.

Key Role: Educating Decision Makers on Employee Ownership Conversions
Since that first meeting, we have met with VEDA several times to ensure that its team is familiar with the employee ownership conversion process and the unique considerations in lending (such as the obstacle created by the personal guarantee requirement). We’ve highlighted that the only M&A deals allowed by the program are ones that convert businesses to employee ownership, and we’ve also introduced VEDA loan officers to a potential partner — the Cooperative Fund of New England, a regional co-op-focused CDFI loan fund.

We have met with the Vermont Economic Development Authority several times to ensure that its team is familiar with the employee ownership conversion process and the unique considerations in lending.

To help VEDA and its partners become more familiar with employee ownership conversions, we used one meeting to talk through a possible case-study deal that was in our pipeline that would most likely be seeking financing in the second quarter of 2022. Getting into the specifics of the possible deal provided excellent context for unpacking some of the nuances of how the agency intended to go about deploying the funds, with topics of discussion including how the organization would work with participating lenders and the potential impact of the new capital on underwriting standards and requirements.

Equity Financing Opportunity
In addition to discussing how the loan fund portion of the state’s allocation can best be deployed to benefit employee ownership, we’ve also had our eye on opportunities for the equity side. A successful equity program requires experience, and VEDA has issued a Request for Proposal for an institution to manage the $28 million pool of equity capital. When that fund manager is announced, we intend to engage with both VEDA and the fund manager to encourage allocating some of the equity financing to employee ownership. In particular, Vermont is lucky to have a co-op equity fund, which is managed by the Vermont State Employees Credit Union; it could provide a ready-made vehicle for investing capital. Its current assets of $3 million, however, are tiny compared to the $28 million in equity financing from the SSBCI program.

Relationships Are Key
While we are still waiting for final details on the SSBCI TA program, and time will tell how the “pilot” deal we’re exploring will turn out, we feel optimistic that the work that we’ve been doing over the past year has positioned SSBCI in Vermont to provide support to expanding employee ownership. Essential to achieving that, in our opinion, has been the work we’ve done over the years building relationships with key economic development players in our state.

While we were initially brought into the conversation more as a possible TA provider than for input on the lender side, we have been able to leverage our inclusion in the discussions along with our organizational relationships and credibility to ensure that the employee ownership opportunity inherent to SSBCI has remained on the radar of the relevant decisionmakers in Vermont.

Matt Cropp is the executive director of the Vermont Employee Ownership Center.

To follow Employee Ownership News, subscribe to the Fifty by Fifty newsletter or follow us on Medium.

Originally published at https://www.fiftybyfifty.org on March 10, 2022.

Vermont: Positioning SSBCI to Benefit Employee Ownership was originally published in Employee Ownership News on Medium, where people are continuing the conversation by highlighting and responding to this story.

by Adria Scharf

For low- to moderate-income workers, Employee Stock Ownership Plans (ESOPs) can provide an important path to wealth accumulation. But most often that wealth is not available until retirement. Central States Manufacturing, located in Lowell, Arkansas, is addressing that limitation by allowing workers to access their wealth while they are still working.

ESOP Benefits and Limitations
ESOPs have several design features that make them beneficial to lower income workers.

Because ESOPs are designed as retirement plans, employees typically cannot access their share until they retire or leave the company.

First, ESOPs are statutorily inclusive. They’re required by law to cover all or most employees on payroll, from the frontline to the C-suite.

Second, eligible employees are automatically enrolled without having to opt in. This makes the benefit accessible to employees regardless of their level of information or savvy.

Third, and importantly, ESOPs are normally funded entirely by the employer. It is a free benefit paid for by the company. For workers with limited disposable income, this is key.

In the 2019 report Building the Assets of Low and Moderate Income Workers and Their Families, Rutgers University researchers found that low- to moderate-income employee owners in 21 firms with ESOPs had median retirement savings of $215,000. That’s notable, when nearly half of U.S. families have no retirement savings at all.

For all its benefits, however, the ESOP model has a real limitation from the perspective of workers experiencing economic precarity. Because ESOPs are designed as retirement plans, employees typically cannot access their share until they retire or leave the company.

On the one hand, this preserves ESOP balances as a source of retirement wealth and facilitates asset growth through compound interest. On the other hand, for low-wage workers navigating housing, school and medical costs, and emergencies, with limited disposable income, the ability to tap into their wealth, to access liquidity, is vitally important.

It turns out that some ESOP companies have overcome this limitation by permitting workers to access a portion of their ownership wealth while they are still working. Central States Manufacturing is one such company. A recent case study in the Journal of Employee Ownership and Participation examined how the firm’s ESOP simultaneously shares significant wealth with employees and makes some of that “wealth benefit” accessible to workers during their years of employment.

Central States Manufacturing and the ESOP Miracle
Central States Manufacturing, Inc., makes metal building components and building packages. It employs more than 1,000 people nationally across 11 sites. About half of the company’s employees work in production and another 130 are truck drivers. The remaining employees are office personnel. Starting wages for the company’s lowest-wage employees range from approximately $16 to $18.

Central States was once featured in Forbes in an article entitled “The Millionaire Truck Driver and Other ESOP Miracles,” and indeed, workers who stay at the company for a period of years — including truck drivers and production workers — can build seemingly miraculous sums of wealth.

The average ESOP account balance for an individual who has worked for over ten years at the company is just shy of $500,000. For an individual employed for over 15 years, the average ESOP account balance is over $1,000,000, according to Chief Financial Officer Chad Ware. “One employee owner with the company just retired [after 25 years] with over $5 million in their ESOP account,” says Ware.

Pre-Retirement Liquidity
At most ESOP companies, employees must wait until they retire or separate from the firm before they can tap into their ESOP wealth. At Central States, however, employees have access to liquidity while they are still employed through two programs: hardship withdrawals and in-service withdrawals.

At Central States, employees have access to liquidity while they are still employed through hardship withdrawals and in-service withdrawals.

Hardship distributions: The Central States ESOP plan document allows participants to receive hardship distributions, which are permitted but not required by the IRS. Such distributions are defined by the IRS as for “immediate and heavy financial need,” including medical care expenses, the purchase of a principal residence, tuition and other educational expenses for post-secondary education, eviction prevention, and other safe harbor situations of financial hardship.

Central States not only permits employees to access withdrawals for these purposes, it proactively educates employees about this opportunity. In 2020, the ESOP paid out about 26 hardship withdrawals totaling just under $2.5 million. The average amount employees withdrew from their accounts was $90,000. (Employees must pay an extra 10 percent tax penalty; the company instructs them about that.)

For example, a production worker took out around $100,000 when a close family member needed to go to a special hospital for care. A truck driver, who had been with the company about 14 years, took out over $200,000 to buy a home. He and other employees who withdraw funds for this purpose often say, “Without the ESOP hardship withdrawal, I’d never have owned a home.”

In-service distributions: More unusually, Central States also gives workers access to in-service withdrawals, meaning current employees may access a portion of their account balance each year.

In 2021, an employee who had worked at Central States for six years could make an annual withdrawal of up to $5,000. Someone employed for at least 10 years was allowed up to $10,000. An employee of 15 years could withdraw up to $15,000. The in-service withdrawal is popular: approximately 100 active employees requested and received in-service withdrawals in 2019 and 2020.

The company streamlines the process to reduce the administrative complexity: During a window of time each year in the fall, letters are mailed to people who are eligible. Employees fill out the form and the company remits the funds to them. “There’s no stipulation, it’s just ‘do you want $5, 10k or $15k?’” says Ware. New changes approved this year will allow employees to take in-service withdrawals after just two years of service starting in 2022 and will increase the amount that employees can withdraw.

Balancing Short- and Long-term Needs
Some observers may argue that such withdrawal opportunities undercut the value of the ESOP as a deferred benefit. Clear communication is key at Central States. While on the one hand, the company informs employees of their right to hardship and in-service withdrawals, on the other hand, it also reminds employees that if they leave the shares in their ESOP accounts for 20 or more years without withdrawing any shares, their accounts will likely be worth exponentially more through the power of compounding.

Central States is unusual in the sheer amount of wealth that longtime employees, including production and trucking employees, accumulate through the ESOP. Given the unusual size of participants’ ESOP account balances, its design choices make sense. The same is not likely going to be true for every ESOP. Still, its choices are worth considering in light of the growing interest in ESOPs as a tool to benefit lower wage workers and address the wealth gap.

Adria Scharf, PhD, is a Beyster Fellow and director of the Curriculum Library for Employee Ownership at the Institute for the Study of Employee Ownership and Profit Sharing at Rutgers University’s School of Management and Labor Relations.

To follow Employee Ownership News, subscribe to the Fifty by Fifty newsletter or follow us on Medium.

Originally published at https://www.fiftybyfifty.org on March 2, 2022.

Central States Manufacturing Gives Workers Early Access to ESOP Wealth was originally published in Employee Ownership News on Medium, where people are continuing the conversation by highlighting and responding to this story.

by Karen Kahn

While most ESOPs are stand-alone businesses, a model that is growing in popularity is the ESOP holding company. This structure can enable firms to enjoy shared services and can make it easier for the founder to exit, at the same time that it enables employees to take their place as owners. The holding company permits firms to thrive together, and allows employees to spread the risk of ownership across multiple companies; thus the structure can increase resilience for both businesses and worker-owners over time. Here we profile Folience, an ESOP holding company in Iowa.

Daniel Goldstein, CEO of Folience, an ESOP holding company based in Cedar Rapids, IA, is helping more family-owned businesses exit to ESOPs through the platform he has created at Folience. This ESOP holding company has its roots in local media and continues to own and operate Gazette Communications, the publisher of the Cedar Rapids Gazette and several other news and information resources. Since 2016, the company has been expanding its holdings, acquiring additional local newspapers as well as two manufacturers, Life Line Emergency Vehicles and Cimarron Trailers. The 500 employees of these companies own Folience shares (as opposed to shares of only their individual employers), which are distributed through the ESOP trust. Folience is one example of how the ESOP holding company could aid the field in reaching scale.

“When the company is sold to its employees through an ESOP, it creates a second legacy. The owner has now secured the future of the business for the employees and the local community.”

— Daniel Goldstein, CEO of Folience

Goldstein believes deeply in the power of the ESOP model to benefit sellers, employees, and communities. “When a business is sold to private equity or a strategic buyer,” says Goldstein, “it will be sold again in three to five years. The future is uncertain.” However, he goes on, “when the company is sold to its employees through an ESOP, it creates a second legacy. The owner has now secured the future of the business for the employees and the local community.”

Making It Easy
Probably the biggest barrier to ESOP formation is the complexity of the process. Owners of small- and medium-sized businesses sometimes shy away from selling to an ESOP because of concerns that the ESOP will be an administrative burden on company management. Folience has found an elegant solution to that problem.

In addition to its varied holdings, Folience owns and operates a Shared Services business, which supports its holdings by managing the ESOP administration and providing leadership development, strategic advice, and business services such as accounting and benefits management.

To Goldstein, the Shared Services business is what makes Folience an attractive buyer. ESOPs, he says, can be costly — and distract managers from their core responsibility of running the business. When a business sells to Folience, the transaction comes with all the benefits for employees, the business and local community, but without the hassle that comes with forming an individual company ESOP.

Latest Acquisition Saves Local Manufacturing Plant
Folience’s latest business acquisition demonstrates the mutual benefit that a sale to the holding company can provide.

On March 31, Folience announced the opening of Cimarron Kansas, a trailer manufacturer. The holding company bought the assets of TravAlum, a 30-year-old family-owned trailer manufacturer in Manhattan, KS. The small manufacturer could no longer compete in the increasingly competitive trailer market, so the family was looking for an exit. Folience, which needed more manufacturing capacity for its Oklahoma-based Cimarron Trailer business, offered the perfect exit — fair market value for the business assets and a chance to preserve and grow manufacturing jobs in the local community. The state of Kansas also saw the benefits of that outcome and provided some incentives to seal the deal.

While consolidations like this one often lead to lost jobs, in the case of the sale to Folience, all 26 employees were offered the opportunity to keep their jobs at the local factory, which is being retooled to produce Cimarron Trailers. Under the Cimarron brand, the manufacturing plant is paying higher wages and, of course, giving employees the opportunity to grow their assets as Folience shareholders. Moreover, Cimarron Kansas is immediately looking to bring on additional employees to produce orders that are already in the backlog.

TravAlum’s former COO Jeff Grieshaber, whose family owned the business, will become the new plant manager. In a press statement, he explained why the family was pleased with the outcome: “The trailer business has changed since our family started TravAlum by Liberty 31 years ago. With the changes in technology, distribution, and supply chain, we looked for a partner we knew well, who matched our values, and with whom we would be stronger together. We want to build on what we have already created, keep our employees’ jobs local, and build a financially secure future for them.”

“When a family-owned business goes up for sale, the seller wants to cement their legacy,” says Goldstein. “They want their employees, who built the business, to be taken care of. Selling the company to its employees through an Employee Stock Ownership Plan (ESOP) can be a good solution.”

Holding Company Structure Benefits Businesses and Employees
Goldstein points out that Folience’s portfolio businesses are stronger because a) its management teams can focus all their attention on building their businesses and brands, and b) they can access high-level expertise and strategic advice from the Shared Services team. Additionally, Shared Services provides the leadership development that is core to building strong ownership cultures across the portfolio.

As shareholders in the holding company, employees of each portfolio company benefit from the success of the whole — and they experience less risk in their retirement accounts.

The most successful ESOPs are those that value participation and engagement across the organization. “An ESOP’s benefits are realized most effectively within the framework of an ownership culture,” says Goldstein. At Folience that has meant increasing business literacy for all employees, inculcating an attitude of “servant leadership,” and decentralizing decision making so those with the most knowledge and experience on the ground are empowered to solve problems.

These practices are helping Folience’s portfolio businesses to grow their profits, which has a direct impact on the financial security of employees. As shareholders in the holding company, employees of each portfolio company benefit from the success of the whole — and they experience less risk in their retirement accounts. ESOPs are often criticized for putting workers retirement savings into one stock-the company-but the holding company is more like a mutual fund, in which one business might have a bad year but others will continue to grow, off-setting downturns.

Keeping Local Economies Alive
Winner of this year’s “Employee-Owned Company of the Year” award from the Iowa/Nebraska ESOP Association, Folience has a lot to be proud of. It’s transactions across the Midwest are helping family-owned businesses secure a future in their often-small town and -rural locations. A perfect example is Folience’s acquisition of Life Line Emergency Vehicles in 2017. The custom ambulance manufacturer is located in Sumner, Iowa, a town of 2,100 inhabitants. With 180 employees, the loss of the custom manufacturer would have had an outsized impact on the community. But with the sale to Folience, not one job was eliminated. As Goldstein wrote in a recent article, “This transaction illustrates how transitioning a privately held company to 100 percent employee ownership can provide sustainable economic opportunity for an entire community that would otherwise face dire risks were that company to be moved to another community or closed.”

Karen Kahn is a communications consultant and the editor of Employee Ownership News. To follow Employee Ownership News, subscribe to the Fifty by Fifty newsletter or follow us on Medium.

Originally published at https://www.fiftybyfifty.org on April 7, 2022.

Folience, a 100% ESOP-owned Holding Company, Eases Path to Exit was originally published in Employee Ownership News on Medium, where people are continuing the conversation by highlighting and responding to this story.

Typical progressive approaches to addressing the growing income and wealth gap — minimum wage, unions, taxation, or guaranteed income — have failed to move the needle, argue Marjorie Kelly and Karen Kahn-in a post at Stanford Social Innovation Review. In their commentary, the authors make the case for impact investors, including U.S. philanthropic leaders, to invest in transitioning business ownership to employees as a way to address the persistent wealth gap in the United States.

The authors identify a nascent movement among philanthropic investors to catalyze employee ownership and argue for commensurate policy supports that could bring more private capital to the field.

The authors identify a nascent movement among philanthropic investors to catalyze employee ownership and argue for commensurate policy supports that could bring more private capital to the field. Recent guidance from the U.S. Treasury Department on the State Small Business Credit Initiative opens up a real opportunity for states to address inequality by using their investment capital to transition businesses to employee ownership. Additionally, states could use revolving loan funds and other credit enhancement programs to provide patient, low-cost financing for sales to employees willing to rebuild local businesses in the wake of the pandemic.

“The Case for Investing in Employee Ownership” builds on the Fifty by Fifty report, Opportunity Knocking. Since that report was published in January 2021, new investment funds focused on employee ownership transitions have formed, with catalytic capital provided by philanthropic investors. These include the Employee Ownership Catalyst Fund, sponsored by Mission Driven Finance and Project Equity. Living Cities, a consortium of major U.S. foundations and financial institutions, is a lead investor. Mission Driven Finance also manages the Apis & Heritage Legacy Fund, which announced its first close at $30 million last summer, with investments from Rockefeller, Ford, and Skoll.

Read the full article on the SSIR website.

To follow Employee Ownership News, subscribe to the Fifty by Fifty newsletter or follow us on Medium.

Originally published at https://www.fiftybyfifty.org on January 3, 2022.

The Case for Investing in Employee Ownership was originally published in Employee Ownership News on Medium, where people are continuing the conversation by highlighting and responding to this story.

by Karen Kahn

A promising model for how states can support more employee ownership conversions has just been put in place in Colorado, where Governor Jared Polis has long been a strong advocate for employee ownership. On January 1, the Employee Ownership Office at the Colorado Office of Economic Development and International Trade (OEDIT) announced it is now prepared to accept applications for the Colorado Employee Ownership Tax Credit. Businesses in the state that convert to employee ownership are eligible for a state tax credit covering up to 50 percent of the cost of the conversion.

Businesses in the state that convert to employee ownership are eligible for a state tax credit covering up to 50 percent of the cost of the conversion.

The Colorado Tax Credit
According to the OEDIT press release, businesses converting to employee stock ownership plans (ESOPs), employee ownership trusts (EOTs), or worker cooperatives are eligible. The current program runs through 2027. A business must apply for the tax credit prior to completing its conversion.

In announcing the program, Governor Polis said, “Employee ownership is a business model with limitless potential to boost employee morale, engagement, and retention. We are hopeful that by covering up to 50 percent of the costs of converting, we will see more Colorado small businesses take advantage of this forward-looking business opportunity.”

Using tax incentives to cover the costs of feasibility studies and conversions is one of several state policies recommended by the National Center for Employee Ownership (NCEO) to encourage more businesses to choose employee ownership. In a series of new state policy blog posts, Corey Rosen, founder of NCEO, identifies three additional actions that states can take to create a more policy-friendly environment for employee ownership conversions.

State Employee Ownership Centers
In addition to tax incentives, Rosen recommends launching state employee ownership centers within state governments, like the Colorado Employee Ownership Office. Other states are following suit. Massachusetts has legislation pending (S.261) to make its Office of Employee Ownership a permanent part of the Massachusetts Office of Business Development. Texas is also considering legislation to support a state-level office.

Eighteen states now have employee ownership centers, though most are nonprofits as opposed to state offices.

Eighteen states now have employee ownership centers, according to the Employee Ownership Expansion Network, which works to expand these. A center also launched in Washington, DC, in 2021. The vast majority of these centers are nonprofits supported by private funding rather than through state policy.

Contracting Preferences
An additional approach recommended by Rosen is allowing ESOPs to qualify as minority-, women- , or veteran-owned businesses, where applicable. Currently in most states, a business that converts to an ESOP — even if the majority of employees meet the designated criteria for a particular preference — cannot continue to qualify for preferred status.

Easing Restrictions on Professional Corporations
Finally, numerous states restrict professional corporations from being owned by ESOP trusts. These rules impact accounting, medical, law, and veterinary services, as well as engineering, architecture, and other professions. Rosen recommends allowing professional firms to be structured as ESOPs as long as the trustee(s) are members of the profession.

Editor’s note: NCEO’s state policy pages also include a compilation of relevant state legislation and proposed language for model state policies.

To follow Employee Ownership News, subscribe to the Fifty by Fifty newsletter or follow us on Medium. Karen Kahn is a communications consultant and the editor of Employee Ownership News.

Originally published at https://www.fiftybyfifty.org on January 10, 2022.

State Policies to Incentivize Employee Ownership was originally published in Employee Ownership News on Medium, where people are continuing the conversation by highlighting and responding to this story.

by Karen Kahn

The Main Street Phoenix Project (MSPP) — an effort to transform the food service industry through cooperative ownership — has made its first acquisition, Griffin Coffee, located in Edgewater, CO, just outside Denver. Griffin Coffee is more than a coffee shop; it is a community center, showcasing local artists and performers. MSPP, which is a cooperative holding company, acquired the business at the end of November. Its four employees will become members of the MSPP cooperative, owning a share of all the businesses under the MSPP umbrella.

The Right Fit
“In making our first acquisition, we were very conscious of choosing a business that was the right fit,” says Marisol Lazo-Flores, managing director of MSPP. “We wanted the owner and/or general manager to be invested in our mission and to be willing to stay during the transition and support the employees.”

In making our first acquisition, we were very conscious of choosing a business that was the right fit.”

-Marisol Lazo-Flores, managing director of the Main Street Phoenix Project

That was particularly important in the present moment because of the severe staffing shortage that is affecting restaurants as they try to reopen. Lazo-Flores noted that restaurant owners and workers are traumatized from the pandemic. “It’s not surprising,” says Lazo-Flores, “that restaurant workers are not returning. The industry has not treated them well — wages have always been low, hours erratic, and sexual harassment common. As a result, turnover has always been high.”

In its first acquisition, MSPP wanted to make sure the workers would not fear the worst and leave, but instead would understand that the change in ownership would benefit them. It was important to have the current owner communicate to the workers that they would be crucial partners in envisioning what would come next for Griffin Coffee.

Proof of Concept
Lazo-Flores is excited now that MSPP has made this first acquisition. It hasn’t been easy, with the pandemic still taking a toll on the industry. The group has submitted a dozen Letters of Intent, and this is the first deal that made it to completion. The group went from signed LOI to closing in under 30 days, which is less than 1/3 of industry standard of 6–18 months.

It’s tough for an owner to realize that after putting their blood, sweat, and tears into the business for years or even decades, the business may not have much monetary value today, explains Lazo-Flores. What MSPP tries to communicate is that, if the cooperative buys the business, it will retain the owner’s legacy, remain invested in the local community, and save the jobs of employees. That can mean more to an owner than a quick sale to a competitor, who might shut the business down or move it to a different location.

What MSPP tries to communicate is that, if the cooperative buys the business, it will retain the owner’s legacy, remain invested in the local community, and save the jobs of employees.

After nearly two years of developing their model, MSPP finally has with Griffin Coffee a chance to demonstrate proof of concept. Lazo-Flores says that Griffin will showcase the MSPP brand — how it supports workers with better jobs as it also creates value for customers and the community. With Griffin in the portfolio, MSPP will be able to test its vision against the practicalities of implementing open-book management policies, educating workers on cooperative principles and mechanics such as patronage and voting rights, and codifying HR policies in an employee handbook. Working out the kinks in a small venue will make the next acquisitions that much easier.

WeFunder Campaign
The new acquisition also lends momentum to MSPP’s WeFunder campaign. Launched this fall, the campaign has already met its first goal of $100,000. Eventually, the team hopes to raise $500,000 through the crowd-funding platform.

Crowd-funding sites like WeFunder, says Lazo-Flores, give everyday people who want to use their money to make change opportunities to invest small dollar amounts in businesses that represent their values. She notes, “I can talk to family and friends and tell them about MSPP and its exciting vision to change the restaurant industry; it’s easy for them to go online and make a small investment to show their support.”

On crowd-funding platforms, investors do not need to be accredited. Anyone — community members, restaurant customers, coop supporters — can invest. In the case of MSPP, investors will earn returns based on a revenue-sharing formula. The investor earns annual dividends capped at 2 times the original investment.

The MSPP Vision
MSPP is ambitious in its vision. By creating a cooperatively owned restaurant group, it hopes to build economies of scale that will benefit workers through better wages and benefits, stable hours, and the opportunity to grow their careers. As Lazo-Flores explains, with multiple restaurants in the portfolio, workers will be able to try different venues or join the back office staff, giving them a variety of career paths.

Says Lazo-Flores, “We know the way the restaurant industry operated before the pandemic is not sustainable. It is up to us — people who have been in the industry — to envision a new path. For so long, the workers have been overlooked and ignored. It’s time to support local restaurants and impact the lives of the workers by acknowledging their value and showing them the respect they deserve.”

Karen Kahn is a communications consultant and the editor of Employee Ownership News.

To follow Employee Ownership News, subscribe to the Fifty by Fifty newsletter or follow us at Medium.

Originally published at https://www.fiftybyfifty.org on December 14, 2021.

Main Street Phoenix Acquires Griffin Coffee House was originally published in Employee Ownership News on Medium, where people are continuing the conversation by highlighting and responding to this story.

by Kim Blaugher

This article continues the conversation on teaching employee ownership at the nation’s business schools. Kim Blaugher is executive director of the Beyster Institute at the UC San Diego Rady School of Management. The Beyster Institute is one of the few business graduate school programs with specialized training in employee ownership.

To support business graduate students in deepening their understanding of employee ownership, the Beyster Institute offers paid internships in which students work with our consulting team on ESOP transactions. It’s a terrific learning experience. We thought there would be a lot of interest. Turns out, not so much. At a recent job fair, a total of seven expressed interest in participating in our program.

Our interns work with leading attorneys, CPAs, valuation experts, and others on complex financial, tax, legal, and accounting analysis and consulting. After completing their internships, the students are hired by leading ESOP consulting firms because, during their time at the Beyster Institute, they have gained valuable experience. The Beyster Institute should be inundated with resumes from graduate students. What is going on?

The Beyster Institute should be inundated with resumes from graduate students. What is going on?

Employee Ownership Should Appeal to Socially Conscious Students

Rady School of Management graduate students tend to be socially conscious, concerned with addressing problems of racial injustice, wealth inequality, and our deeply divided democracy. More widespread use of ESOPs offers a solution to many of these societal challenges. ESOP companies are inclusive communities, embracing diverse groups of individuals. When a company is being sold, an ESOP allows the company to remain in the local community instead of being bought by an outside strategic buyer or private equity firm. Local ownership ensures the company’s culture, heritage, and community involvement can continue and prosper. Increased prosperity and financial security among employees bolster democratic and participatory decision-making, allowing a diversity of beliefs and backgrounds to flourish.

So why aren’t these students flocking to employee ownership? For business students, the lure of working with an investment banking firm is very attractive both intellectually and financially. One of our recent intern hires reluctantly accepted the position. This individual is brilliant and had prior experience working with a leading CPA firm on mergers and acquisitions. They made it clear after joining the Beyster Institute, that following their internship, they would be seeking employment with an investment banking firm. They accepted the internship because it would provide them the opportunity to do some financial modeling. ESOPs may be good for society, but the lure of doing the real intellectual consulting would lead them down a different path.

A less confident (maybe less naive) executive director might have been deterred by the dismissal of ESOP consulting by the intern. My faith played out well. A year later, the Beyster Institute hired the intern as a full-time consultant. They will be a leader in the ESOP community, consulting on complex transactions that will reward them financially, intellectually and, most important, spiritually.

Crafting the Right Message

Consulting firms are desperate for experts in all aspects of employee ownership: transaction modeling, accounting, legal structures, valuation and, maybe most importantly, organizational behavior. The challenge is getting the right message to our graduate schools and students: The ESOP community offers both values-aligned work and the opportunity to engage in dynamic advising on very complex intellectual issues. With this message, we can attract the best minds from our academic institutions.

The ESOP community offers both values-aligned work and the opportunity to engage in dynamic advising on very complex intellectual issues.

Employee ownership will not prosper if our business schools do not teach employee ownership as a viable ownership alternative (and a better one!). That’s why the Beyster Institute is committed to expanding employee ownership in our academic institutions. When I graduated from college, I also wanted to do mergers and acquisition work. Despite knowing that the acquirer would likely seek to reduce costs by reducing wages, I thought it would be exciting to help business owners sell to private equity firms, go public, or sell to a strategic buyer.

I took a different path and have had a 30-year career supporting employee ownership. We need to enlighten our students about the thrill I and others have had working with so many wonderful owners and companies who became ESOP owned. In doing so, these firms improved their financial strength, expanded operations, improved their culture, became more involved in their communities, and increased wealth for their employees. The message for our graduate students should be: “Come work with employee ownership companies to help improve employees’ lives, our economy, and local communities. Do not live with regret after you help a company sell to a third-party buyer who then closes the plant and destroys a small town’s economy.”

Originally published at https://www.fiftybyfifty.org on November 30, 2021.

For Business Graduate Students, Employee Ownership Is a Fabulous Career was originally published in Employee Ownership News on Medium, where people are continuing the conversation by highlighting and responding to this story.