In Connecticut, tens of thousands of business owners are on the precipice of retiring — this trend has implications far beyond our state borders. Currently, Baby Boomers own about half of all privately held firms in the U.S., almost 2.9 million businesses. This phenomenon has the potential to be so impactful that it has its own name: the silver tsunami.
This wave of retirements is set to impact roughly half of all job-creating businesses in the state. While many small business owners hope to retire within the next decade, fewer than 15% have a formal exit plan. A small fraction of these businesses will be passed on to family members or be sold to another company, which means that businesses will be forced to close and liquidate their assets if they do not find another option.
Luckily, there is another option: Employee ownership, a succession planning strategy that allows business owners to receive market value for the company while also sustaining their legacy. There are already millions of employee-owners in the U.S.
Take a deeper dive into succession planning and employee ownerships options; watch the recording of “Exit, Succession Planning, & Employee Ownership Options.”
What is employee ownership?
The definition of employee ownership is deceptively simple. It describes any arrangement in which all of a company’s employees have an ownership stake in the company, or the right to the value of shares in their company. (This is not the same as stock options or key management buy-outs which involve giving an equity stake to select employees of a company.)
The reality, however, is that employee ownership is a broad concept which can take several forms ranging from democratic voting style co-ops to highly structured retirement plans.
Three types of employee ownership
There are three major forms of broad-based employee ownership: Employee Stock Ownership Plans (ESOPS), Worker Cooperatives (Co-ops), and Employee Ownership Trusts (EOTs). It should be noted that ESOPs, Co-ops, and EOTS have been around for decades. Each model of employee ownership has unique key characteristics.
Employee Stock Ownership Plans (ESOPS)
ESOPs are part of a qualified defined-contribution employee benefit plan designed to invest primarily in the stock of the sponsoring employer, and are overseen by ERISA/DOL. This option is often more expensive with high setup costs and ongoing administrative costs and are generally best-suited for companies with more than 40-50+ employees and $2 million in revenue.
Worker Cooperatives (Co-ops)
Worker cooperatives are solely owned and democratically governed by their workers. For instance, the Dairy Farmers of America is a worker cooperative of 13,445 member farms. Each employee-owner gets a vote to elect board members and vote on other major strategic decisions as defined in the bylaws. Co-ops also tend to be less expensive with lower setup and ongoing administration costs.
Employee Ownership Trusts (EOTs)
Although new in the U. S., EOTs are the primary form of employee ownership in the United Kingdom. They are general purpose trusts that own some or all the shares of a company and have governance documents that protect the character of the company, and the interests of employees. Employees typically receive financial benefit through annual profit sharing. This option has lower setup and administration costs and is free to employees.
Getting started with employee ownership options
The Main Street Employee Ownership Act created an opportunity for businesses to adopt a business structure that puts decision-making in the hands of employees; those people who have invested time, energy, and talent to help make the business successful. Importantly, this act also improves access to capital and technical assistance to help businesses transition to an employee-owned model through enhanced SBA lending and other supports