Employee ownership can be a powerful tool for businesses, providing a wealth of benefits such as increased productivity, higher job satisfaction, and improved financial performance. However, transitioning to this model can come with its unique set of challenges. Here, we outline some common hurdles in employee ownership conversions and provide practical strategies to address them.
Employee ownership conversion is the process through which a company transitions from a traditional ownership structure, where the company is owned by one or a small group of individuals, to a model where the employees collectively own the company. This transition can be achieved through various mechanisms, such as worker cooperatives, other forms of equity sharing, and an Employee Stock Ownership Plan (ESOP). The conversion process usually involves legal, financial, and operational changes to the company, and it requires careful planning and execution. The goal of an employee ownership conversion is typically to provide succession from a business owner (when family or other options are not appealing), preserve local jobs, enhance business performance, and increase employee engagement and wealth.
Often, we talk to business owners and steering committees who say things like:
- “We have been reading about XYZ structure and we really like it and want to implement that for our company”
- “I am exploring employee ownership and trying to learn everything I can about all the different options”
- “I am interested in selling my business to my employees, but I haven’t talked to any of them about it yet”
- “Our business is struggling and I’m ready to retire. I don’t want to just shut it down so I want to discuss selling it to my employees”
- “My employees don’t have the money to buy my company”
Do these statements sound familiar to you? In this post, we’ll discuss how to address common challenges that arise in employee ownership conversions.
**Set Clear but Loosely Held Expectations (and check them often)**
While an employee ownership conversion can take between 6-18 months, we find that most of that time is spent by selling owners and prospective employee owners doing the “exploration and discovery” work, and making decisions. We have done many of these deals and so the legal component of these projects rarely slows things down. With that said, you should set expectations to accommodate the schedule and bandwidth of your “EO Team”, including your employees, attorney, the other party’s attorney (if there is one), CPAs, technical assistance providers, and the scheduling demands to continue running the day-to-day business.
While there is a wide range of attorneys who can assist with employee ownership conversions (including worker cooperative conversions), comparing attorneys (or any professional for that matter) according to rate alone may not yield the best outcome. You should factor in the nature and extent of their experience, their communication and stylistic fit, their ideological approach, and their conversance with all of the related legal aspects of these conversions (tax, securities, employment, mergers/acquisitions, finance and lending, and more). We are a group of lawyers known for our expertise in employee ownership, specializing in worker cooperatives, limited liability companies and other forms of limited employee ownership (think stock options, phantom stock plans, or long term buy-outs).
Lastly, if your business is based in Colorado, you are lucky as you may be eligible for the Employee Ownership Tax Credit, which I helped to create (in my capacity as an Employee Ownership Commissioner). The tax credit can be used to cover conversion related expenses, including legal fees.
**Focus on Broad Purpose and Objectives for Employee Ownership**
A clear purpose and objective for the transition to employee ownership is crucial. This should go beyond the financial benefits. The broader purpose might include promoting workplace democracy, creating wealth for employees, or ensuring the business remains in the local community as part of your legacy. Clearly articulating these objectives to yourselves (both owners and employees) can help guide the conversion process and ensure all stakeholders are on board with the transition. You wouldn’t diagnose your own medical condition using WebMD, so why would you try to select the most suitable legal structure for your employee ownership conversion without talking to a knowledgeable attorney? An attorney knowledgeable about employee ownership, especially worker cooperatives, will cut through the noise and ill-fitting options to narrow a recommendation to the top 2-3 options. Our firm has a combined 50+ years of legal experience with worker cooperatives and other employee ownership structures (except ESOPs) and can help with this part of the planning process.
**Up-to-Date Documents, Books, and Records**
Keeping up-to-date documents, books, and records is a critical aspect of any business, but it becomes even more important during a transition to employee ownership. These records form the basis for valuation of the company and help in determining the structure of the employee ownership plan. They also provide transparency and accountability, which are key to building trust and buy-in from employees. Updating your books and records is a valuable exercise whether you’re selling to private equity, trying to get financing or selling to your employees. Putting in the work also demonstrates to your employees your commitment to transparency as you will be showing these records to interested employees.
**Be Practical with Respect to Governance**
One hurdle for converting to employee ownership is the shift in governance structure that comes with employee ownership. Implementing a model that changes from one or two people being “in charge” to including a group of employees as leaders requires careful consideration and planning. It is important to be practical and realistic. The governance structure (such as a board of directors or managers) should align with the company’s business model and strategic objectives. Prospective or new employee owners may not have any or little experience with managing a company. Investing in training and resources will enhance the effectiveness of the Board and will lead to better organizational resilience. It will also help improve corporate compliance and the understanding of governing documents by all owners.
**Long-Term Financial and Capitalization Planning**
The company also needs to undertake both short and long-term financial and capitalization planning. This involves assessing the company’s current and future capital needs, determining how those needs will be met, and planning for the sustainability of the employee ownership structure. This step is critical to ensuring the financial viability of the employee ownership model in the long term. We can give you practical advice as to how your capitalization and financial needs intersect with and drive entity choice decisions. We also have deep relationships with many employee ownership conversion lenders and can help plan the financing of the actual conversion. There are many options as to how the employees can “buy” the company and we can help find the right option for your business.
**Invest in Training for Newfound Worker Owners**
Finally, the transition to employee ownership often means workers are taking on new roles and responsibilities, not just continuing as employees but also learning about management, leadership, Board governance, communication, finances and more. Learning about ownership in a worker cooperative is vital and slightly different from ownership of other business forms. Investing in training can help prepare workers for these new roles, and ensure they have the skills and knowledge to contribute effectively as owners. Training can also help foster a culture of mutual ownership and engagement, which can drive the success of the employee ownership model.
**Personal Financial and Life Planning**
For the current owners, transitioning to employee ownership often requires significant personal financial and life planning. Owners need to consider their personal financial goals, tax implications (are you eligible for certain tax benefits, for example), and retirement planning. It’s important to involve financial advisors who are knowledgeable about employee ownership and can provide guidance throughout this process. If you’re considering an employee ownership conversion, then there is no better time than now to get really clear and honest with yourself about what you want and need financially, emotionally and practically for the next chapter of your life. All too often I see an owner’s blind spot muddle and complicate an ownership transition, particularly in the realm of power and information sharing. Current owners often struggle with letting go of their authority and allowing others to look closely at a company’s books and records. It may turn out that employee ownership conversion is not for them, and the planning process will highlight that for everyone. Better to find out now, rather than later down the road when resources have been spent and expectations set to go forward with a conversion.
Navigating an employee ownership conversion can be a complex process, but with careful planning and a clear focus on the broader purpose, businesses can overcome these challenges. By addressing these common hurdles, companies can make a successful transition to employee ownership and reap the many benefits this model has to offer. We can help you over or through many of these hurdles. Our firm stands ready with experienced, creative and talented people who know worker cooperatives, employee ownership and the entire conversion process. Let us know if you want to learn more.
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