HOW TO CONVERT YOUR BUSINESS TO A COOPERATIVE
BY FRANZI CHAREN
The reality is setting in for Baby Boomer business owners close to retirement: Your life’s work? Your kids have better things to do. Only 15 percent of family-owned businesses make it to the third generation, yet 70 percent of business owners over age 50 lack an exit strategy. What, then, do you do with the business you’ve dedicated years of your life to creating and nurturing when you’re on your way out?
Hilary Abell and Alison Lingane are co-founders of Project Equity, a nonprofit that helps business owners sell their businesses to their employees as cooperatives. “We envision a future where most business decisions are made through a lens of what is good for workers and communities, generating businesses that are more successful and workers who have good, stable jobs and economic security,” explains Abell. “Cooperatives have this built into their structures.” Their advice follows.
5 FREQUENTLY ASKED QUESTIONS FOR COMPANIES INTERESTED IN CONVERTING TO COOPERATIVE EMPLOYEE OWNERSHIP
Why would I choose the cooperative model over an ESOP?
Employee Stock Ownership Plans (ESOPs) are another form of employee ownership. However, co-op conversions are less expensive and have many similar tax benefits. Most importantly, cooperatives have employee engagement baked into the business structure through employee governance and profit sharing.
Can my employees really run my company?
Yes, with the right leadership. Your employees do not have to be the ones to step into your role in management of the company. You can find someone to become the general manager — whether from within the company or a new leader — then engage your team around the expanded mission and culture shift as they transition into their new role as worker-owners. Most typically, management and day-to-day operations don’t change when a business becomes a co-op, but the new board of directors made up of majority worker-owners is responsible for governance decisions.
How much time will the conversion take?
Some business owners want to stay with the company and continue to engage with employees to plan the transition. Others are seeking a faster exit and are looking to retire or transition out of the business quickly. Both scenarios can work with the right planning and support. (Project Equity and others can provide technical assistance and training.) A full conversion can take as little as six months and up to three years depending on the nature, size, and culture of the business. The future owners will share the responsibility and actively engage in the conversion process.
Like any good challenge, the best part is the outcome — the satisfaction of having carved out a path for others to follow.
What kind of legal structure does employee ownership take?
The legal requirements vary from state to state. In some states a cooperative is a legal entity for a corporation. Some businesses choose to form an LLC and incorporate cooperative principles and practices in their governing documents. The Sustainable Economies Law Center has a library of resources to guide you through best practices and link you to regional attorneys well-versed in cooperatives.
How is employee ownership financed?
Employee ownership is quite likely the investment opportunity of a generation, and Community Development Financial Institutions, credit unions, and local banks are increasingly banking on the cooperative model. National organizations like Shared Capital Cooperative, which has 37 years of experience and over 800 loans to cooperatives, actively seek to invest in employee ownership. To give another example, the regional organization Cooperative Fund of New England just celebrated 40 years in business and over $42 million in loans to cooperative businesses.
Some businesses are able to finance the sale to employees through a Direct Public Offering, a tool that allows both accredited and unaccredited investors to participate (see page 76 and our story in Issue 2: bit.ly/issue2_dpo.)
2 QUESTIONS TO ASK YOURSELF PRIOR TO MAKING THE FIRST MOVE TO BECOME A COOPERATIVE
Is my company a salable entity?
Selling your company to your employees as a cooperative invokes the same set of questions you would have to answer for any potential buyer. Do you have a profitable company? Do you have a diverse portfolio of customers and clients? Is your business dynamic, and can you envision the variety of ways your company can grow to stay competitive in the market? You will need accurate and detailed financial history as well as clear and reasonable projections. Sometimes both parties will have an independent valuation conducted and engage experts to help negotiate a fair market price.
Am I willing to get help along the way?
Project Equity has dozens of case studies, and most likely can put you in touch with others in your industry who are in the process of or have completed the conversion to cooperative employee ownership. Through their Cooperative Business Incubator, Project Equity is helping multiple companies spanning a variety of industries with their conversions. Of the existing cooperatives in the US, almost half were formed by converting from an existing traditional business structure. With one of the seven core principles of cooperatives being cooperation among cooperatives, help or advice isn’t far away.
Increasingly, cities like New York, Madison, Rochester, Oakland, Berkeley, and Austin are realizing the positive economic impact that converting companies to cooperative employee ownership can have on the local tax base and are investing in regional efforts to support the process. “We need creative people and bold entrepreneurs like you to shift the expectations we have of the role of business in our society and our communities,” Project Equity co-founder Alison Lingane adds. “You are the true leaders in this movement, and we can help make it a reality.”
Franzi Charen has been an independent business owner in Asheville, NC, for 14 years and is the founder and director of the Asheville Grown Business Alliance, which has over 460 members. She recently joined the team at Project Equity and is passionate about the potential of cooperatives to deepen the local economies movement.