Factors for a Successful Business Succession through Worker Ownership

For a few years now, we have been hearing about the approach of a “silver tsunami.” For those unfamiliar with the term, it refers to the demographic phenomenon of an aging population, associated mostly with the large wave of retirement that the baby boomer generation is about to go through. With small businesses employing roughly 50% of the US population, this wave is expected to impact various aspects of society, notably, workforce, health care, and business ownership.

Over two thirds of small business owners plan to retire in the next two years, leaving a big question mark about the future of their businesses and their employees. Planning for transfer of ownership is essential. The question is, how to retire? Is selling a business (that you spent an entire life building) to a newcomer, who is detached from the business’ history and the story of your employees, the right choice?

In this context, a compelling and transformative trend is gaining momentum—the conversion of traditional, big and small, enterprises into worker cooperatives. The benefits are numerous: continuity and stability, employee engagement and benefit to those with the most at stake, preservation of company culture, knowledge retention, local economic impact, improved employee satisfaction, long-term value creation, improved employee satisfaction, tax benefits, and the list goes on.

This shift also represents a departure from hierarchical structures, placing power and decision-making into the hands of the workforce.

As I recently told a new client, worker-ownership conversions are some of my favorite transactions: I get a front row seat to employee empowerment, the owner/seller’s satisfaction in seeing their employees become owners and take charge of their future in a unique way, while preserving the seller’s life’s work.

Assessing whether a business is a good candidate for sale to employees involves a comprehensive evaluation of various factors. Here are key considerations to help guide your assessment:

  1. Company Culture:

– Evaluate the existing company culture. Businesses with a collaborative, inclusive, and team-oriented culture are more likely to thrive under employee ownership.

  1. Employee Engagement:

– Assess the level of employee engagement and commitment. High levels of employee satisfaction and loyalty indicate a workforce that may be receptive to the idea of ownership.

  1. Profitability and Financial Stability:

– Examine the financial health of the business. A profitable and financially stable company is more likely to provide a secure foundation for employee ownership.

  1. Leadership Succession:

– Consider the current leadership team and their plans for succession. If there is a need for succession planning and no clear succession within a family, selling to employees could be a viable option.

  1. Owner’s Exit Strategy:

– Understand the owner’s motivations for selling. If the owner values legacy and is interested in the well-being of employees, selling to them might align with their objectives.

  1. Business Size and Complexity:

– Assess the size and complexity of the business. Smaller to medium-sized businesses with straightforward operations may be more suitable for employee ownership (although large cooperatives can be extremely successful as well).

  1. Employee Skill Set:

– Evaluate the skill set of the existing employees. Businesses requiring specialized skills that are already present within the workforce are excellent candidates for employee ownership.

  1. Communication and Transparency:

– Consider the level of communication and transparency within the organization. Open communication fosters trust, a crucial element in successful transitions to employee ownership. Open books and shared management practices are also supportive of an employee ownership conversion.

  1. Employee Training and Education:

– Assess the willingness of employees to undergo training and education related to business ownership. Employee ownership often requires a certain level of financial literacy and business understanding. And again, open books and shared management practices play a significant role here.

  1. Potential for Employee Buy-In:

– Gauge the level of interest and enthusiasm among employees for the idea of ownership. If there is genuine interest and a desire for responsibility, the transition may be more successful.

  1. Financing Options:

– Explore financing options for the sale. Determine whether employees have access to financing or if external financing will be required to facilitate the transaction. Or whether and how much the owner is willing to finance.

  1. Existing Employee Ownership Structures:

– If the business already operates with some form of employee ownership (e.g., profit-sharing or stock options), assess the success and acceptance of these structures.

  1. Legal and Regulatory Compliance:

– Ensure that the business complies with relevant legal and regulatory requirements. Understanding the legal implications of employee ownership structures is essential for a smooth transition.

  1. Legal and Financial Advisors:

– Engage legal and financial advisors experienced in employee ownership transitions. Their expertise can guide you through the legal, financial, and operational aspects of the sale.

Take the Next Step.

The transformation of businesses into worker cooperatives represents a paradigm shift towards a more inclusive, equitable, and sustainable economic model. The benefits extend beyond the workplace, influencing communities and contributing to a broader movement towards economic democracy. As more businesses explore this transformative journey, the ripple effects are poised to reshape the landscape of business for the better, fostering a future where shared ownership and collective empowerment drive success.

Assessing the factors listed above will provide a comprehensive understanding of whether a business is well-suited for sale to employees. It is crucial to involve key stakeholders, communicate transparently, and seek professional advice to ensure a successful transition to employee ownership. Converting to a worker-owned business can be a lengthy process, but one that’s worthwhile.

Our experienced team can support you through this process, no matter the stage of your business succession planning, or your industry. You can reach out to us via info@jrwiener.com or directly to one of your attorneys.