September 26, 2018
By Dominic J Bartolone
Contributing Editor, C-Suite Wednesday
C-Suite Wednesday– A Succession Strategy — Expanding Employee Co-op Conversions
Each day, over 10,000 Baby Boomers turn 65, with a majority of America’s small businesses being owned by this generation, many are choosing to close the company rather than sell it when they retire. Some of these businesses provide core services to underserved and economically vulnerable areas, and their closure could significantly impact the lives of not only the workers but also the community as a whole.
One strategy to save these community businesses is to convert ownership to their employees. The approach of cooperative conversions builds equity for employees, helps save jobs, and encourages employees to invest in their future by excelling at their jobs.
Cooperative conversions can help address both these issues by providing an outlet for aging owners to sell their companies while offering a retention strategy that helps anchor much-needed services to local communities.
Another obstacle is the conversion of smaller businesses. Most conversions occur within companies that employ 100 or more employees using an ESOP. However, smaller businesses, those with 20 to 100 employees make up a whopping 17 percent of all workers in the U.S.
The challenge is to structure a conversion strategy that is acceptable to both the small business owner, the lender and employees.
Five industries are identified with workforce demographics most acceptable to employee ownership conversions — grocery stores, home care agencies, food manufacturing, residential care facilities, and child care centers.
The Small Business Conversion Market Opportunity
The median estimated “enterprise” value for a target company sold since 2000 is $777,760. Given these values, lenders with a target loan value of less than $500,000 can best support the employee conversion strategy. According to the Democracy at Work Institute, the number of firms exploring this opportunity grew from 16 in 2014 to more than 190 in 2017, and that number continues to increase.
Based on the numbers presented, the market for employee conversions is growing and is estimated to continue to grow until at least 2029. A financing opportunity exists because most employees lack the resources to raise the capital needed to complete an employee-owned conversion.
Small, independent business owners need to be educated about the opportunity and the benefit of selling their company to their employees.
Employee ownership is a fantastic endeavor that changes the lives of employees and helps communities remain vibrant and economically viable. Economically disadvantaged areas are especially open to the opportunity conversion presents, with help available at both the state and local levels.
Lenders need to work with TA providers and capital markets to identify more businesses that can benefit from the employee-owned model. They must educate all parties and demonstrate how employee co-operative conversions can be a driving force behind the enrichment of employees and helping them maintain strong business ties to their communities.