July 30, 2024 • 23 mins
Ever wondered why more business owners are shifting towards employee ownership models? Get ready to uncover the secrets behind this rising trend in our latest episode featuring Alison Lingange, co-founder of Project Equity and the Ownership Capital Lab. Allison breaks down the benefits of partial employee ownership, from boosting employee engagement to enhancing overall business value. We also discuss the contrasting motivations behind such transitions, such as operational efficiency versus legacy building, and the distinct differences between the Silicon Valley approach and the community-focused ethos of small businesses.
Tune in as we explore the critical role of employee ownership in sustaining local economies, especially those reliant on manufacturing and production. Alison emphasizes the urgency of succession planning amid the "silver tsunami" of business ownership transitions and explains various financing structures for employee ownership transactions, including seller notes and Community Development Financial Institutions (CDFIs). We also get a sneak peek into Alison's current and future projects, leaving you eager for more insights. Don't miss this enlightening discussion that could change how you think about business ownership and succession planning.
https://project-equity.org/press-releases/project-equity-co-founder-alison-lingane-announces-transition/
https://project-equity.org/
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Arc Integrated
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Joel (00:00):
What if investing in each other could change the world?
I'm Joel Skeen with bizradious,and this is the Mindful
Marketplace.
Welcome back to part two of theconversation I'm having with the
wonderful Allison Lengain aboutemployee ownership, about
(00:22):
capital, about democraticbusiness practices, about all
kinds of stuff.
Man, we're having a great talkhere and I am excited.
If you didn't get a chance tolisten to part one, go back and
listen to that, because Allisongot to share with us kind of how
she became passionate about thework that she's done with an
organization that she co-foundedcalled Project Equity and a new
(00:45):
project that she's working oncalled the Ownership Capital Lab
.
It was a really greatconversation because I think it
was a really great overview intothe mindset around why is
employee ownership becoming sucha hotter topic of conversation
right now?
And I think that's sort ofwhere we want to pick up when we
were finishing our conversation.
Allison, thank you, welcomeback to the show, so glad to
have you here today.
Alison (01:05):
Glad to be here.
Thanks so much for having me.
Joel (01:14):
Yeah, so we were kind of finishing off by talking about
that.
There's these different waysthat businesses have been
transitioning to models where,instead of just having a private
owner which is what wetraditionally think of in an
entrepreneur, business ownersituation two models where
there's actually more democraticand usually employee-owned
aspects of the business.
You mentioned this could justbe having employees on the board
(01:35):
, it could just be allowing themto vote on certain things, it
could just be putting in yourstructure some ways where
employees get to have ownershipand take ownership of their work
.
So I guess I'm curious if I wasa business owner listening to
this out there and I might thinkto myself why on earth would I
want to do that?
Why on earth would I want togive up any ownership of my
(01:58):
business?
I took all the risks.
I started this thing, whateverthey might be thinking.
I guess when you see businessowners who are excited to
transition to employee ownership, what is going on there?
Why would someone want to dothat?
Alison (02:12):
Yeah, well, it's usually one of two things.
So a business owner that may beearlier in their career might
see this as a way to really puta lot of fuel behind that
employee engagement piece of thebusiness.
So if you were to think aboutyou know you're a business owner
(02:32):
and most typically a businessowner has all of their assets in
their business.
You know, sometimes you'd alsohave, you know, money on the
side or investments on the side,but the typical business owner
that business really is theirasset base.
So you can do two things atonce.
You can do a partial liquidityfor your you know, maybe you're
(02:53):
10 years in, you know, for your10 years of work and you can get
a little bit of that value outof the business to be able to
diversify your assets by doing apartial sale of your business
to employee ownership.
So maybe you start with a 10%or a 30% sale of the business
and by doing that you really nowhave this powerful tool for
(03:16):
increasing employee engagement,for really building that
ownership culture that we'retalking about.
That can have outsized businessresults for your going forward.
Say, 70% ownership value ofthat business.
So if you think about theability to grow the whole pie.
So maybe you've sold a portionof it and you've gotten your
liquidity out of that, but thenthe rest of the whole pie, the
(03:39):
whole value grows as you havethis deeper employee engagement.
So that's really the firstscenario that we see and most
typically we do in that scenariosee a partial sale.
I often call it the on-ramp to100% employee ownership, because
now, okay, so maybe you're 10years in and maybe at that 20
years or at 30 years you'reready to exit fully and you're
(04:00):
ready to retire.
You actually have yourretirement vehicle already set
up so that you can then sell theremaining, say 70% of that
business at retirement.
And you can do it on your owntimeline.
You know, quote, unquote onyour own terms.
Of course the financial termsare going to be a negotiation
(04:21):
and based on market value andall of the above.
But you have a tremendouscontrol over how that unfolds.
You can separate the timing ofyour own exit operationally from
the business and the partial orfull sale of the ownership
structure.
So those two can be separatedin time, either because that's
(04:44):
what works best for you and orbecause that helps the business
have, you know, fewer bigchanges at once.
So it helps it be more stableand, and you know, ultimately
more profitable for all involvedand you're looking for an exit,
or it's really about employeeengagement as a tool to increase
(05:06):
the business results?
You know you can think ofemployee ownership in both of
those ways.
Joel (05:12):
Yeah, I definitely think that there's a bit of a mindset
in the business culture that isvery much influenced, obviously,
by Silicon Valley, right, andthat mindset that I've seen a
lot of is very much scale andexit, you know, like let's scale
this thing and then let's exit.
But I also know that, like, whenI think about the small
businesses that I grew up in,kind of the you know, whether it
(05:35):
was the coffee shop in the beatup downtown that I grew up in
or it was, you know, any of theother number of businesses that
I really loved and really madethe place that I lived in feel
like home, you know, it seemedlike it was more for those
businesses, it was more about alegacy and it was more about
their community.
And I think that, with thattrend that we see in tech and
(05:56):
then in some other places, wherethe trend seems to be that you
build a business so that it canbe bought up by a bigger
business and then just absorbedinto some larger conglomerate of
businesses, it seems like thismight be a way for those
business owners to leave thatlegacy in their community
(06:16):
without having to just kind ofget eaten up by the big guys as
they're retiring.
Alison (06:21):
Yeah, very well said.
You know, today we teach.
When we teach entrepreneurship,we usually also talk about
planning for your exit.
Like how are you, what are yougrowing in order to be able to
exit it?
Now, if you rewind the clock 40or 50 years, or a couple of
generations, that's not at allhow people thought about their
businesses.
(06:42):
You know, they thought aboutbusinesses as well.
I'm going to start a businessand it's going to support me and
my family, and then you know,we're going to be a community
anchor and we're going to dogood things, right, you think
about the who's sponsoringLittle League, just to call it
that, but many, many wonderfulthings in our communities, right
, it's the small businesses thatare vested in those communities
(07:03):
.
And you know, when we thinkabout again, roll back the clock
40 or 50 years, if you were toland in any town USA, right, it
would look unique, it would haveits unique character, its
unique set of businesses.
Today, if you land in any townUSA, we don't have that as much
anymore, right, because many ofthe same brands are in.
(07:24):
You know, what is your localcoffee shop, what is your right?
And so, yes, the differencebetween a business owner
starting today or a businessowner who is retiring.
Today, you know, the babyboomer generation is generation
of entrepreneurs.
So you know, today we havenearly 3 million businesses that
(07:48):
are have owners at or nearretirement age, and that is that
is because the baby boomergeneration and you know
generations prior that are stillrunning their businesses are
very, very entrepreneurial.
That's one in every two locallyowned businesses with employees
.
So one in every two privateemployers is owned by somebody
(08:10):
who needs to find a buyer fortheir business because they're
at or near retirement age.
So we have, first off, we havethis massive number of local
businesses in our community thatare the community connected
organizations, right?
They're the ones who hire ourteenagers.
That are the communityconnected organizations right?
They're the ones who hire ourteenagers.
(08:30):
They're the ones who sponsorour local organizations and they
circulate their money in theeconomy three times more than
national chains or corporations.
So half of those businessesneed to find a buyer in the next
10, 15, maybe even extend it to20 years forward, and we.
So that means we have a supplydemand imbalance happening, and
(08:52):
the good one of the other likereally powerful things about
employee ownership is that itcreates a buyer group for every
single business.
Every business has a built-inbuyer group in the form of its
employees.
So you're a business owner andyou're trying to figure out how
to sell your company right.
What are your options?
Well, many business owners areregularly getting inbound emails
(09:14):
from private equity talkingabout interest in investing or
acquiring.
So you can definitely go thatroute.
And, by the way, there are someemployee-owned private equity
firms.
Definitely go that route.
And, by the way, there are someemployee-owned private equity
firms I'm sorry, firms that areoperating like private equity,
that focus on employee ownership, that are doing the same thing.
They're going and contactingbusiness owners and saying, hey,
(09:36):
I'm interested in acquiringyour business and, by the way,
we can do it and maintain yourlegacy.
So you may be getting inboundinterest.
Or maybe you're thinking I'mgoing to go list with a broker
and I'm going to find a buyerfor my business that way.
Well, depending on the community, you may have a varying amount
of luck.
We find that business owners inrural communities have a harder
(09:58):
time finding buyers, and it'ssimply a numbers game, right?
There aren't as many peoplethere who are likely to be
interested in that particularbusiness at this particular
moment in time, and so you knowwhether it's a rural business
owner, suburban, urban, you dohave a built-in buyer group in
the form of your employees andyou can really leverage that
(10:20):
opportunity to be able to keepthat business locally owned.
For many businesses their nameis on you know you're the
founder of the business, you putyour name on the business right
.
So this is your legacy, yourfamily's legacy, and you can
maintain that local ownershipand have it carry forward and be
a really impactful localbusiness that you can look back
(10:41):
on from retirement and be really, really proud of.
Joel (10:44):
Yeah, and be able to say that not only did you start
something, but that it's goingto continue on, cause I, you
know.
One of the things I've beenseeing is that a lot of these
folks who are hitting retirementage and spent their whole lives
dedicated to building theirbusiness, you know when you, a
lot of times people want tothink the ideal of passing that
onto their children.
But you do see the numbers ofthat.
(11:05):
Usually, when that happens, it'sout of business within a
generation, if not two.
And so it does seem like well,if the option is either force it
on my kids, who don't want itmaybe, or sell to some mega
conglomeration, this gives thema path to be able to say, hey,
the people who helped me buildthis, the people who have been
with me for all these years,let's pass it on to them.
(11:27):
And I also know that there's anew model where there's you can
set up a trust that the businesswould be housed within, and
then the mission of the trust isto serve the interests of the
business, of the business and ofthe people who work in the
business, and you can eveninclude the community that the
business lives in, which I thinkis just this really kind of
(11:49):
beautiful way for someone whowants to start a business to
make the world a better place,to have their impact on the
world, to be able to actuallysee that live on past them
rather than just seeing itbought up by you know some
conglomerate.
Alison (12:02):
Yeah, absolutely yeah.
So so you were.
You were referring to to theemployee ownership trust, or EOT
for short.
Joel (12:11):
Yeah, we had on Jenny Everett and her colleague Mark
to talk about that a coupleepisodes ago.
Alison (12:18):
Yeah, Fantastic, yeah.
So just just for your listeners, the three main forms of
broad-based employee ownershipinclude the ESOP Employee Stock
Ownership Plan which comes witha tremendous, tremendous tax
benefits Largest form ofemployee ownership in the United
States because of those taxbenefits.
The second largest form todayis the worker-owned cooperative,
(12:40):
which is a cooperative in thesame vein that a farmer co-op or
a rural electric co-op or aconsumer food co-op is a
cooperative, but it's theworkers who are.
It's owned and governed by andfor the benefit of the workers.
And then the third main form,which is the newest in the
United States but iswell-established in Europe, is
called the EOT or employeeownership trust, and it utilizes
(13:03):
a perpetual purpose trust,trust that's the trust structure
and so that word purpose isreally embedded.
So you can, you know, for thosebusiness owners who who really
think about their business andoperate their business with a
double or triple bottom line andthat and that mission is
centrally important to theirwork, having that mission really
(13:26):
sort of protected over the longterm in that perpetual purpose,
trust can be a very beneficialapproach to take.
And you know, when we talk tobusiness owners, we never start
with oh which form of employeeownership.
We always start with what yourgoals are, what are your goals
personally, what are the goalsof, and then goals for and the
(13:47):
needs of the business and theworkforce and the broader
stakeholder set.
You will often do an exercisewith a business owner and ask
them to think about okay, you'vesold your business.
Now imagine you're sitting fiveyears hence looking back on it.
What is it that you want to see, what really matters to you?
So that kind of a thoughtprocess really helps to
(14:08):
crystallize what those goals areand what the priority is of
those goals.
Of course everyone wants to bepaid fairly for their life's
work.
Check right, employee ownershipdoes that.
It's a market sale.
But then the other thingsaround legacy and who's taken
care of and what's taken care of.
Do you want that missionensconced Right Like what?
(14:31):
What are those priorities?
And then from there we can helpmatch to what is the right form
of employee ownership that'sgoing to help you meet those
goals most effectively.
And I wanted to also just justpick up on a thread we were
chatting about a couple secondsago about all of the important
ways that employee ownershipoperates within a local economy.
And you know, when we thinkabout especially economies that
depend on manufacturing orproduction, where you've got
(14:55):
supply chains and othersuppliers, and we think about
the fact that one out of everytwo privately held employer
businesses needs a buyer, youknow we often think about the
big companies.
So you know you've got a reallybig manufacturing company and
it's really important that wemaintain that business.
But what we don't frequentlytalk about is well, who are the
(15:18):
suppliers to that big company?
You know we often call thosetier one is the really big ones,
tier two are the first levelsuppliers, and then there's the
tier three suppliers and thesize of those companies.
Right, tier two are smallerthan tier one and tier three are
going to be significantlysmaller because they're smaller
than the tier two and when weget down to those smaller tier
three, that's the bedrock, right.
(15:40):
Without those tier threesuppliers, those tier two
companies can't be successful,and so on and so forth up the
chain.
And so it matters that we arethinking about all companies,
all sizes of companies, in oureconomy, and that we have a tool
to retain all of thosebusinesses as we go through this
great silver tsunami of thebusiness, the ownership
transition of companies.
(16:01):
And for you know, for yourlisteners, who may be business
advisors or businesses, you know, for your listeners, who may be
business advisors or businesses, you know, recognize your value
in the supply chain.
Right, if you're a tier two oryou're a tier three, you are as
important as the big guys.
And so you know the importancefor you of prioritizing
succession planning.
It's a first order business,right.
Succession planning often endson tomorrow's today list to-do
(16:25):
list because, oh, I'll get to itlater.
Right, it's like saving forretirement or eating more
broccoli oh, I'll get to itlater.
But we really need all of ourbusiness owners to be paying
attention to their ownsuccession so that those assets
that you've spent your lifebuilding up, those business
assets and those jobs, thatthose don't go away when you
(16:45):
retire.
We want those assets tomaintain in our communities and
in our local economies.
Joel (16:52):
Yeah, because when I do think back to cities and
communities, whether they're Imean, I grew up in a town of 600
people and I've lived in citiesas well but it's when I think
about the stakeholders in thecommunity who usually really
kind of cares, care a lot aboutthe community that they're in.
A lot of times it is thosesmall business owners and so I
(17:16):
it just it makes sense to me onthat level.
I guess you know one of thebiggest things that I think we
we touched on it a little bit inthe first half, but I'm
wondering it still felt a littlefuzzy to me.
You mentioned that if abusiness were to move in this
direction and say, yeah, like Iwant to sell a portion or maybe
you know half of, or whatever itis, of my business to my
employees, but my employees,like, they're not capital
(17:40):
investors, they don't have a tonof money laying around how
exactly does that process work?
Alison (17:45):
Yeah, yeah.
So the high level takeaway foranybody listening is that in an
employee ownership transaction,it is not the employees that
come with the financing.
The business is the one thattakes on the financing for the
sale of the business.
So I'm gonna just use a simpleexample here.
So, whether your business isworth $10 million or $1 million
(18:10):
or some totally different number, let's say that it's a million
dollars, just for easy math.
So you're going to sell yourmillion dollar business and turn
it into an employee ownershiptrust, and so where does that
million dollars come from?
So most typically, there isgoing to be a seller note for
any of these transactions, andthat seller note, depending on
(18:32):
where the financing comes from,it, can range from, say, 15 or
20% if you're engaging with oneof the more private equity style
investors, to 30% if yourfinancing is coming from a CDFI,
a community developmentfinancial institution.
Or if you're in the 10 or $20million range and you're getting
bank financing for an ESOPtransaction, you may need a more
(18:56):
like a 50% seller note.
So there is at least some skinin the game that that business
owner is going to need to holdon to.
So let's say it's 20% in mymillion dollar example.
So that means that what's goingto happen to the remaining
$800,000?
So you're typically going tohave a senior lender, maybe a
(19:19):
senior and a junior more likelyto have a senior and a junior if
it's a much larger transactionsize.
So you'll maybe have a lenderthat is bringing $800,000 of
loan capital to the table.
And so that means that on theday that you sell your business,
you're getting a check for$800,000.
And then, over a period of, say,five years, you're getting a
(19:40):
payment think of it like afive-year annuity payment on
that remaining 20% value of thecompany, with interest.
So you know, yes, you'reholding on to that seller note
and you are getting compensatedthrough interest.
So you know where does thatfinancing come from?
And this is you know back to.
We were talking in our previousconversation about the how.
(20:03):
Employee ownership is verysiloed, so a typical business
owner isn't going to know whereto get financing, because it's
very hard to walk into a localbank and say, hey, I'm selling
my company and I've got 30people who are the buyer group
on the other end and the bank'sgoing to say, well, which one of
them is going to sign for thepersonal guarantee?
Well, that doesn't really makesense right.
That's kind of a square peground hole issue, but the good
(20:25):
news is is that because of thisissue, there have been a number
of I mentioned CDFIs.
That stands for CommunityDevelopment Financial
Institutions.
These are federally regulatedfinancial institutions that have
more flexibility because ofthat community mission, and so
there are a number of CDFIs thatexist.
Some are regional of thatcommunity mission, and so there
are a number of CDFIs that exist.
(20:45):
Some are regional, but thereare several that are national in
scope, or nonprofit loan fundsthat have stepped in to really
bridge this gap that is, thebank financing gap.
So there is financing out thereand the best way to identify it
is to work with an organizationthat specializes in employee
ownership, because they're goingto know all the people, because
they're going to know all thepeople, they're going to know
which sources of financing aregoing to be the best fit for you
(21:07):
and they're just going to makeit a whole lot easier.
Joel (21:10):
Yeah, yeah, and that's I mean that's where your
background really lies was in,actually, you've, you've helped
dozens and I mean how many, howmany businesses through through
Project Equity, the organizationyou co-founded have you all
helped transition to models ofemployee ownership?
Alison (21:31):
Yeah, in its first decade, project Equity has
supported 25 companies to becomeemployee-owned, so we've got a
lot of experience across allthree forms of broad-based
employee ownership.
And I say we, I mostly mean theteam that is carrying the
project equity forward.
But you know I personally, ofcourse, have experience with
that and you know project equityalso has, you know, raised
(21:53):
capital to finance thetransitions.
And you know I founded a fundcalled the Employee Ownership
Catalyst Fund that is whollyowned by project Equity.
That does provide flexiblecapital for all of the main
forms of broad-based employeeownership.
Joel (22:07):
Well, I wish we had time to get into what you're moving
into next, but we'll just haveto have you back.
Thank you, alison.
So much for your time today andfor all of you listening out
there.
Thank you, make sure tosubscribe on all of the
platforms where you get yourpodcasts and until next time,
remember we are each other.
What if investing in each other could change the world?
I'm Joel Skeen with bizradious,and this is the Mindful
Marketplace.
Welcome back to part two of theconversation I'm having with the
wonderful Allison Lengain aboutemployee ownership, about
(00:22):
capital, about democraticbusiness practices, about all
kinds of stuff.
Man, we're having a great talkhere and I am excited.
If you didn't get a chance tolisten to part one, go back and
listen to that, because Allisongot to share with us kind of how
she became passionate about thework that she's done with an
organization that she co-foundedcalled Project Equity and a new
(00:45):
project that she's working oncalled the Ownership Capital Lab
.
It was a really greatconversation because I think it
was a really great overview intothe mindset around why is
employee ownership becoming sucha hotter topic of conversation
right now?
And I think that's sort ofwhere we want to pick up when we
were finishing our conversation.
Allison, thank you, welcomeback to the show, so glad to
have you here today.
Alison (01:05):
Glad to be here.
Thanks so much for having me.
Joel (01:14):
Yeah, so we were kind of finishing off by talking about
that.
There's these different waysthat businesses have been
transitioning to models where,instead of just having a private
owner which is what wetraditionally think of in an
entrepreneur, business ownersituation two models where
there's actually more democraticand usually employee-owned
aspects of the business.
You mentioned this could justbe having employees on the board
(01:35):
, it could just be allowing themto vote on certain things, it
could just be putting in yourstructure some ways where
employees get to have ownershipand take ownership of their work
.
So I guess I'm curious if I wasa business owner listening to
this out there and I might thinkto myself why on earth would I
want to do that?
Why on earth would I want togive up any ownership of my
(01:58):
business?
I took all the risks.
I started this thing, whateverthey might be thinking.
I guess when you see businessowners who are excited to
transition to employee ownership, what is going on there?
Why would someone want to dothat?
Alison (02:12):
Yeah, well, it's usually one of two things.
So a business owner that may beearlier in their career might
see this as a way to really puta lot of fuel behind that
employee engagement piece of thebusiness.
So if you were to think aboutyou know you're a business owner
(02:32):
and most typically a businessowner has all of their assets in
their business.
You know, sometimes you'd alsohave, you know, money on the
side or investments on the side,but the typical business owner
that business really is theirasset base.
So you can do two things atonce.
You can do a partial liquidityfor your you know, maybe you're
(02:53):
10 years in, you know, for your10 years of work and you can get
a little bit of that value outof the business to be able to
diversify your assets by doing apartial sale of your business
to employee ownership.
So maybe you start with a 10%or a 30% sale of the business
and by doing that you really nowhave this powerful tool for
(03:16):
increasing employee engagement,for really building that
ownership culture that we'retalking about.
That can have outsized businessresults for your going forward.
Say, 70% ownership value ofthat business.
So if you think about theability to grow the whole pie.
So maybe you've sold a portionof it and you've gotten your
liquidity out of that, but thenthe rest of the whole pie, the
(03:39):
whole value grows as you havethis deeper employee engagement.
So that's really the firstscenario that we see and most
typically we do in that scenariosee a partial sale.
I often call it the on-ramp to100% employee ownership, because
now, okay, so maybe you're 10years in and maybe at that 20
years or at 30 years you'reready to exit fully and you're
(04:00):
ready to retire.
You actually have yourretirement vehicle already set
up so that you can then sell theremaining, say 70% of that
business at retirement.
And you can do it on your owntimeline.
You know, quote, unquote onyour own terms.
Of course the financial termsare going to be a negotiation
(04:21):
and based on market value andall of the above.
But you have a tremendouscontrol over how that unfolds.
You can separate the timing ofyour own exit operationally from
the business and the partial orfull sale of the ownership
structure.
So those two can be separatedin time, either because that's
(04:44):
what works best for you and orbecause that helps the business
have, you know, fewer bigchanges at once.
So it helps it be more stableand, and you know, ultimately
more profitable for all involvedand you're looking for an exit,
or it's really about employeeengagement as a tool to increase
(05:06):
the business results?
You know you can think ofemployee ownership in both of
those ways.
Joel (05:12):
Yeah, I definitely think that there's a bit of a mindset
in the business culture that isvery much influenced, obviously,
by Silicon Valley, right, andthat mindset that I've seen a
lot of is very much scale andexit, you know, like let's scale
this thing and then let's exit.
But I also know that, like, whenI think about the small
businesses that I grew up in,kind of the you know, whether it
(05:35):
was the coffee shop in the beatup downtown that I grew up in
or it was, you know, any of theother number of businesses that
I really loved and really madethe place that I lived in feel
like home, you know, it seemedlike it was more for those
businesses, it was more about alegacy and it was more about
their community.
And I think that, with thattrend that we see in tech and
(05:56):
then in some other places, wherethe trend seems to be that you
build a business so that it canbe bought up by a bigger
business and then just absorbedinto some larger conglomerate of
businesses, it seems like thismight be a way for those
business owners to leave thatlegacy in their community
(06:16):
without having to just kind ofget eaten up by the big guys as
they're retiring.
Alison (06:21):
Yeah, very well said.
You know, today we teach.
When we teach entrepreneurship,we usually also talk about
planning for your exit.
Like how are you, what are yougrowing in order to be able to
exit it?
Now, if you rewind the clock 40or 50 years, or a couple of
generations, that's not at allhow people thought about their
businesses.
(06:42):
You know, they thought aboutbusinesses as well.
I'm going to start a businessand it's going to support me and
my family, and then you know,we're going to be a community
anchor and we're going to dogood things, right, you think
about the who's sponsoringLittle League, just to call it
that, but many, many wonderfulthings in our communities, right
, it's the small businesses thatare vested in those communities
(07:03):
.
And you know, when we thinkabout again, roll back the clock
40 or 50 years, if you were toland in any town USA, right, it
would look unique, it would haveits unique character, its
unique set of businesses.
Today, if you land in any townUSA, we don't have that as much
anymore, right, because many ofthe same brands are in.
(07:24):
You know, what is your localcoffee shop, what is your right?
And so, yes, the differencebetween a business owner
starting today or a businessowner who is retiring.
Today, you know, the babyboomer generation is generation
of entrepreneurs.
So you know, today we havenearly 3 million businesses that
(07:48):
are have owners at or nearretirement age, and that is that
is because the baby boomergeneration and you know
generations prior that are stillrunning their businesses are
very, very entrepreneurial.
That's one in every two locallyowned businesses with employees
.
So one in every two privateemployers is owned by somebody
(08:10):
who needs to find a buyer fortheir business because they're
at or near retirement age.
So we have, first off, we havethis massive number of local
businesses in our community thatare the community connected
organizations, right?
They're the ones who hire ourteenagers.
That are the communityconnected organizations right?
They're the ones who hire ourteenagers.
(08:30):
They're the ones who sponsorour local organizations and they
circulate their money in theeconomy three times more than
national chains or corporations.
So half of those businessesneed to find a buyer in the next
10, 15, maybe even extend it to20 years forward, and we.
So that means we have a supplydemand imbalance happening, and
(08:52):
the good one of the other likereally powerful things about
employee ownership is that itcreates a buyer group for every
single business.
Every business has a built-inbuyer group in the form of its
employees.
So you're a business owner andyou're trying to figure out how
to sell your company right.
What are your options?
Well, many business owners areregularly getting inbound emails
(09:14):
from private equity talkingabout interest in investing or
acquiring.
So you can definitely go thatroute.
And, by the way, there are someemployee-owned private equity
firms.
Definitely go that route.
And, by the way, there are someemployee-owned private equity
firms I'm sorry, firms that areoperating like private equity,
that focus on employee ownership, that are doing the same thing.
They're going and contactingbusiness owners and saying, hey,
(09:36):
I'm interested in acquiringyour business and, by the way,
we can do it and maintain yourlegacy.
So you may be getting inboundinterest.
Or maybe you're thinking I'mgoing to go list with a broker
and I'm going to find a buyerfor my business that way.
Well, depending on the community, you may have a varying amount
of luck.
We find that business owners inrural communities have a harder
(09:58):
time finding buyers, and it'ssimply a numbers game, right?
There aren't as many peoplethere who are likely to be
interested in that particularbusiness at this particular
moment in time, and so you knowwhether it's a rural business
owner, suburban, urban, you dohave a built-in buyer group in
the form of your employees andyou can really leverage that
(10:20):
opportunity to be able to keepthat business locally owned.
For many businesses their nameis on you know you're the
founder of the business, you putyour name on the business right
.
So this is your legacy, yourfamily's legacy, and you can
maintain that local ownershipand have it carry forward and be
a really impactful localbusiness that you can look back
(10:41):
on from retirement and be really, really proud of.
Joel (10:44):
Yeah, and be able to say that not only did you start
something, but that it's goingto continue on, cause I, you
know.
One of the things I've beenseeing is that a lot of these
folks who are hitting retirementage and spent their whole lives
dedicated to building theirbusiness, you know when you, a
lot of times people want tothink the ideal of passing that
onto their children.
But you do see the numbers ofthat.
(11:05):
Usually, when that happens, it'sout of business within a
generation, if not two.
And so it does seem like well,if the option is either force it
on my kids, who don't want itmaybe, or sell to some mega
conglomeration, this gives thema path to be able to say, hey,
the people who helped me buildthis, the people who have been
with me for all these years,let's pass it on to them.
(11:27):
And I also know that there's anew model where there's you can
set up a trust that the businesswould be housed within, and
then the mission of the trust isto serve the interests of the
business, of the business and ofthe people who work in the
business, and you can eveninclude the community that the
business lives in, which I thinkis just this really kind of
(11:49):
beautiful way for someone whowants to start a business to
make the world a better place,to have their impact on the
world, to be able to actuallysee that live on past them
rather than just seeing itbought up by you know some
conglomerate.
Alison (12:02):
Yeah, absolutely yeah.
So so you were.
You were referring to to theemployee ownership trust, or EOT
for short.
Joel (12:11):
Yeah, we had on Jenny Everett and her colleague Mark
to talk about that a coupleepisodes ago.
Alison (12:18):
Yeah, Fantastic, yeah.
So just just for your listeners, the three main forms of
broad-based employee ownershipinclude the ESOP Employee Stock
Ownership Plan which comes witha tremendous, tremendous tax
benefits Largest form ofemployee ownership in the United
States because of those taxbenefits.
The second largest form todayis the worker-owned cooperative,
(12:40):
which is a cooperative in thesame vein that a farmer co-op or
a rural electric co-op or aconsumer food co-op is a
cooperative, but it's theworkers who are.
It's owned and governed by andfor the benefit of the workers.
And then the third main form,which is the newest in the
United States but iswell-established in Europe, is
called the EOT or employeeownership trust, and it utilizes
(13:03):
a perpetual purpose trust,trust that's the trust structure
and so that word purpose isreally embedded.
So you can, you know, for thosebusiness owners who who really
think about their business andoperate their business with a
double or triple bottom line andthat and that mission is
centrally important to theirwork, having that mission really
(13:26):
sort of protected over the longterm in that perpetual purpose,
trust can be a very beneficialapproach to take.
And you know, when we talk tobusiness owners, we never start
with oh which form of employeeownership.
We always start with what yourgoals are, what are your goals
personally, what are the goalsof, and then goals for and the
(13:47):
needs of the business and theworkforce and the broader
stakeholder set.
You will often do an exercisewith a business owner and ask
them to think about okay, you'vesold your business.
Now imagine you're sitting fiveyears hence looking back on it.
What is it that you want to see, what really matters to you?
So that kind of a thoughtprocess really helps to
(14:08):
crystallize what those goals areand what the priority is of
those goals.
Of course everyone wants to bepaid fairly for their life's
work.
Check right, employee ownershipdoes that.
It's a market sale.
But then the other thingsaround legacy and who's taken
care of and what's taken care of.
Do you want that missionensconced Right Like what?
(14:31):
What are those priorities?
And then from there we can helpmatch to what is the right form
of employee ownership that'sgoing to help you meet those
goals most effectively.
And I wanted to also just justpick up on a thread we were
chatting about a couple secondsago about all of the important
ways that employee ownershipoperates within a local economy.
And you know, when we thinkabout especially economies that
depend on manufacturing orproduction, where you've got
(14:55):
supply chains and othersuppliers, and we think about
the fact that one out of everytwo privately held employer
businesses needs a buyer, youknow we often think about the
big companies.
So you know you've got a reallybig manufacturing company and
it's really important that wemaintain that business.
But what we don't frequentlytalk about is well, who are the
(15:18):
suppliers to that big company?
You know we often call thosetier one is the really big ones,
tier two are the first levelsuppliers, and then there's the
tier three suppliers and thesize of those companies.
Right, tier two are smallerthan tier one and tier three are
going to be significantlysmaller because they're smaller
than the tier two and when weget down to those smaller tier
three, that's the bedrock, right.
(15:40):
Without those tier threesuppliers, those tier two
companies can't be successful,and so on and so forth up the
chain.
And so it matters that we arethinking about all companies,
all sizes of companies, in oureconomy, and that we have a tool
to retain all of thosebusinesses as we go through this
great silver tsunami of thebusiness, the ownership
transition of companies.
(16:01):
And for you know, for yourlisteners, who may be business
advisors or businesses, you know, for your listeners, who may be
business advisors or businesses, you know, recognize your value
in the supply chain.
Right, if you're a tier two oryou're a tier three, you are as
important as the big guys.
And so you know the importancefor you of prioritizing
succession planning.
It's a first order business,right.
Succession planning often endson tomorrow's today list to-do
(16:25):
list because, oh, I'll get to itlater.
Right, it's like saving forretirement or eating more
broccoli oh, I'll get to itlater.
But we really need all of ourbusiness owners to be paying
attention to their ownsuccession so that those assets
that you've spent your lifebuilding up, those business
assets and those jobs, thatthose don't go away when you
(16:45):
retire.
We want those assets tomaintain in our communities and
in our local economies.
Joel (16:52):
Yeah, because when I do think back to cities and
communities, whether they're Imean, I grew up in a town of 600
people and I've lived in citiesas well but it's when I think
about the stakeholders in thecommunity who usually really
kind of cares, care a lot aboutthe community that they're in.
A lot of times it is thosesmall business owners and so I
(17:16):
it just it makes sense to me onthat level.
I guess you know one of thebiggest things that I think we
we touched on it a little bit inthe first half, but I'm
wondering it still felt a littlefuzzy to me.
You mentioned that if abusiness were to move in this
direction and say, yeah, like Iwant to sell a portion or maybe
you know half of, or whatever itis, of my business to my
employees, but my employees,like, they're not capital
(17:40):
investors, they don't have a tonof money laying around how
exactly does that process work?
Alison (17:45):
Yeah, yeah.
So the high level takeaway foranybody listening is that in an
employee ownership transaction,it is not the employees that
come with the financing.
The business is the one thattakes on the financing for the
sale of the business.
So I'm gonna just use a simpleexample here.
So, whether your business isworth $10 million or $1 million
(18:10):
or some totally different number, let's say that it's a million
dollars, just for easy math.
So you're going to sell yourmillion dollar business and turn
it into an employee ownershiptrust, and so where does that
million dollars come from?
So most typically, there isgoing to be a seller note for
any of these transactions, andthat seller note, depending on
(18:32):
where the financing comes from,it, can range from, say, 15 or
20% if you're engaging with oneof the more private equity style
investors, to 30% if yourfinancing is coming from a CDFI,
a community developmentfinancial institution.
Or if you're in the 10 or $20million range and you're getting
bank financing for an ESOPtransaction, you may need a more
(18:56):
like a 50% seller note.
So there is at least some skinin the game that that business
owner is going to need to holdon to.
So let's say it's 20% in mymillion dollar example.
So that means that what's goingto happen to the remaining
$800,000?
So you're typically going tohave a senior lender, maybe a
(19:19):
senior and a junior more likelyto have a senior and a junior if
it's a much larger transactionsize.
So you'll maybe have a lenderthat is bringing $800,000 of
loan capital to the table.
And so that means that on theday that you sell your business,
you're getting a check for$800,000.
And then, over a period of, say,five years, you're getting a
(19:40):
payment think of it like afive-year annuity payment on
that remaining 20% value of thecompany, with interest.
So you know, yes, you'reholding on to that seller note
and you are getting compensatedthrough interest.
So you know where does thatfinancing come from?
And this is you know back to.
We were talking in our previousconversation about the how.
(20:03):
Employee ownership is verysiloed, so a typical business
owner isn't going to know whereto get financing, because it's
very hard to walk into a localbank and say, hey, I'm selling
my company and I've got 30people who are the buyer group
on the other end and the bank'sgoing to say, well, which one of
them is going to sign for thepersonal guarantee?
Well, that doesn't really makesense right.
That's kind of a square peground hole issue, but the good
(20:25):
news is is that because of thisissue, there have been a number
of I mentioned CDFIs.
That stands for CommunityDevelopment Financial
Institutions.
These are federally regulatedfinancial institutions that have
more flexibility because ofthat community mission, and so
there are a number of CDFIs thatexist.
Some are regional of thatcommunity mission, and so there
are a number of CDFIs that exist.
(20:45):
Some are regional, but thereare several that are national in
scope, or nonprofit loan fundsthat have stepped in to really
bridge this gap that is, thebank financing gap.
So there is financing out thereand the best way to identify it
is to work with an organizationthat specializes in employee
ownership, because they're goingto know all the people, because
they're going to know all thepeople, they're going to know
which sources of financing aregoing to be the best fit for you
(21:07):
and they're just going to makeit a whole lot easier.
Joel (21:10):
Yeah, yeah, and that's I mean that's where your
background really lies was in,actually, you've, you've helped
dozens and I mean how many, howmany businesses through through
Project Equity, the organizationyou co-founded have you all
helped transition to models ofemployee ownership?
Alison (21:31):
Yeah, in its first decade, project Equity has
supported 25 companies to becomeemployee-owned, so we've got a
lot of experience across allthree forms of broad-based
employee ownership.
And I say we, I mostly mean theteam that is carrying the
project equity forward.
But you know I personally, ofcourse, have experience with
that and you know project equityalso has, you know, raised
(21:53):
capital to finance thetransitions.
And you know I founded a fundcalled the Employee Ownership
Catalyst Fund that is whollyowned by project Equity.
That does provide flexiblecapital for all of the main
forms of broad-based employeeownership.
Joel (22:07):
Well, I wish we had time to get into what you're moving
into next, but we'll just haveto have you back.
Thank you, alison.
So much for your time today andfor all of you listening out
there.
Thank you, make sure tosubscribe on all of the
platforms where you get yourpodcasts and until next time,
remember we are each other.
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