As boomer owners prepare to sell, a push for workers to buy

 

Your company’s next owner could be sitting in a cubicle down the hall, assembling parts on a factory floor or laboring on a construction site down the street. That, at least, is the hope of a burgeoning movement concerned about what will happen to the thousands of small and mid-sized businesses owned by baby boomers in Central Pennsylvania.

Most, if not all, of those owners will be looking to sell their companies over the next few years.

While many will turn to family members, industry peers or even private equity firms, an effort led by a Lancaster-based nonprofit is hoping owners will at least contemplate handing over the reins to employees.

“Widespread ownership transitions in our community offer us an opportunity to harness the moment to retain local jobs, root wealth locally and maintain a vibrant local economy. Employee ownership structures are a powerful way to do this,” said Craig Dalen, director of impact business strategy at Assets, the nonprofit that is leading the charge to spread awareness about employee ownership.

The nonprofit is describing the wave of anticipated sales as a “silver tsunami.”

At stake is the fate of roughly 11,550 businesses employing nearly 135,000 people in Berks, Dauphin, Lancaster, Lebanon and York counties, the areas covered by Assets, according to data the nonprofit gathered from the most recent U.S. Census survey of small-business owners, taken in 2012. The region’s boomer-owned companies represent $30.87 billion in sales and $4.79 billion in payroll.

 

 

 

 

As it looks to put employee ownership on the menu of exit strategies, Assets is collaborating with local lawyers, advisers and business owners, as well as an Oakland-based nonprofit, Project Equity, that is undertaking similar campaigns in other communities around the country.

Employee ownership remains relatively rare. Out of nearly 6 million companies of all sizes nationwide, just under 7,000 are held by employee stock ownership plans, or ESOPs, one of the most common vehicles for selling a business to its workers, according to the National Center for Employee Ownership. Another 1,000 companies operate under other forms of employee ownership, Project Equity estimates.

Employee ownership is not a fit for every business, its advocates acknowledge. And it is not the only way to preserve local control. Passing a business from a parent to a child or children, for example, also keeps wealth and ownership in a community.

But it is better than simply shutting a company down, which is often the path of least resistance, or selling to a third party from outside the community, said the co-founders of Project Equity, Alison Lingane and Hilary Abell

“Typically that means you’re going to lose at least some portion of the jobs in administrative and back-end operations,” said Lingane, noting that a company’s spending and profits also may leave the community after a sale.

Advocates of employee ownership want to ensure departing owners are rewarded fairly for what often represents their life’s work. But they also hope owners will value other factors besides the final sale price.

“The problem is that many advisers are pushing cash and that becomes a proxy for value,” said Ed Renenger, an attorney and ESOP specialist with Reading-based law firm Stevens & Lee. “In our experience if a business owner receives enough cash consideration to take care of their personal, family and charitable needs, it frees them up to think about other value drivers. There are lots of owners that find value in other things, such as legacy, community and employees.”

A sale to employees often entails risk and complications that don’t arise during a sale to a third party, Renenger and other advisers acknowledged. But the complexity ultimately is no greater than it is for a more typical sale.

“The reality is that the transition of a business to a third party, with the exception of an intergenerational transfer, is a very emotional event for the owner,” Renenger said. “It’s a complicated transaction that involves a detailed examination of current operations, current compliance with the law, current financial statements in ways that may feel very intrusive, and a sale to an ESOP is not unique in that.”

The ESOP, however, creates an opportunity to reward employees and preserve a business owner’s legacy, advocates said. And there are tax benefits, Renenger said. For one, an ESOP is considered a retirement plan, so a company that buys stock for its employees via contributions to an ESOP can use pre-tax dollars to do so, just like it would if it were making contributions to an employee’s 401(k) account.

Employee ownership also dovetails with changing expectations for the workplace, said Roger North, president of North Group Consultants Inc., a Lititz-based leadership consulting firm.

After World War II, workplaces followed a command-and-control approach fashioned along military lines, North said. Employees mostly accepted decisions handed down from above.

People entering the workplace today expect to have greater input into decision-making, he said. An ownership stake, whether held by children or employees, can help sharpen that input.

“My observation would be, if you don’t shift to that way of thinking, particularly over the next 10 to 15 years, you’ll likely be behind your competition,” North said.

 

 

It’s a way of thinking that has become ingrained at business software company Cargas Systems Inc. Employees have owned a growing stake in the company since 1998, said founder and CEO Chip Cargas.

Cargas now owns about 40 percent of the company. About 70 of the firm’s 100 employees hold the remaining 60 percent. Employees have two opportunities a year to buy at least $600 worth of stock. Shareholders help elect the company’s board, but all employees have access to the company’s financial performance and profit-sharing bonuses and other perks.

Cargas may no longer be the majority owner. But, he said, he feels he has a more engaged workforce and a sustainable company where people want to work. They pitch in when times are hard and celebrate when times are good.

“When we started employee ownership, I was 100 percent owner of a small pie,” he said. “Today I’m the 40 percent owner of a much larger pie and 40 percent of that much larger pie dwarfs the 100 percent of the smaller pie.”

The pie, he said, would not have grown as large without the effort and engagement of employee-owners. “Yes, we have a hierarchical organizational structure with titles and whatnot, but the way we operate is so collaborative,” he said.

And Cargas doesn’t have to fret about what will happen to the company when he retires. The succession is already under way, allowing employees to focus on customers.

“We don’t need to be worried about shocks to the system from huge ownership changes,” Cargas said.

 

As they move ahead, Assets and Project Equity plan to do more than raise awareness. Their goal eventually is to conduct feasibility studies for companies interested in employee ownership and to work with them to make it happen. Details are still being worked out, Dalen said.

Project Equity already has undertaken several transitions in the San Francisco area and has been developing studies for companies in western North Carolina, where it is working with a local partner called Industrial Commons, Lingane and Abell said.

The chief risks for retiring business owners include ensuring employees are prepared to become owners, both mentally and financially.

“Most small businesses are looking to rely on key employees who have management potential, who can keep the ship sailing and keep things going,” said Peter Kraybill, an attorney and leader of the corporate practice group at Lancaster County law firm Gibbel Kraybill & Hess LLP.

The key employees also need money to pay for the business. It typically involves a combination of debt and a promise to pay the selling owner over time as the buying employees acquire ever-greater chunks of the company, Kraybill said.

Among the risks is less-than-complete payment to the seller, especially if the new owners stumble during the transition, Kraybill said. The new owners may not buy in at the original rate preferred by the seller, or they may not earn the full confidence of customers.

“It’s quite a bit to navigate for an owner,” Kraybill said. “There are a lot of nervous-making moments.”

But, he said, there is a risk when a business is sold to an outside party. A third party could require payments over time instead of in a lump sum, and it may run the company very differently.

“That’s also a risk to a departing owner who very often, particularly for small businesses, has built this as their life work,” Kraybill said.

Opportunity for All Breakfast – August 4

We’re all better off when we’re all better off.

We’ll be talking about inequality in Lancaster and what we can do about it to create opportunity for all on Tuesday, August 4 from 7:30 – 9 AM at the ASSETS Transforming Communities Through Business Breakfast Series. Find more information about the breakfast series and its inspiration through the highlighted links and register by emailing events@assetslancaster.org.

Angelique Arroyo will lead a panel and table discussions about how real security comes from embracing the strengths of a diverse community. Breakfast, catered by Upohar, will begin at 7:30 am and end promptly by 9:00 am at the Southern Market Center

Panelists include: 

Dr. Stephanie Crumpton: Stephanie joined Lancaster Theological Seminary in Fall 2014 from Salisbury, N.C., where she was assistant professor of Pastoral Care and Counseling at Hood Theological Seminary. Previously she was an adjunct professor at Chicago Theological Seminary, a lecturer at Candler School of Theology at Emory University, and a teaching fellow at Atlanta’s Interdenominational Theological Center. In Georgia she has served as a state court advocate, and consultant on the Georgia Commission on Family Violence. She is an ordained minister in the United Church of Christ. She received a Doctor of Theology, Pastoral Care & Counseling, from Columbia Theological Seminary in Decatur, Georgia; a Master of Divinity from Johnson C. Smith Presbyterian Seminary at the Interdenominational Theological Center, Atlanta; and a Bachelor of Arts in Broadcast Journalism from Oklahoma’s Langston University.

Fran Rodriguez: Fran joined the Lancaster County Community Foundation team in 2014 as the lead of the Ah-Ha Seed Fund grantmaking, scholarship program, volunteer recruitment and to work with the Extraordinary Give. Fran has an extensive background in community building, including being a founder of the Latino Empowerment Project and Lancaster Adelante Education Committee. Fran has spent the past 10 years working with and advocating on behalf of Latino-driven issues within Lancaster County and Pennsylvania. She has worked in the areas of public education, state government and the legal community.

Marylee Sauder: Marylee worked as a newspaper reporter and editor for 10 years before starting her own corporate writing business, Sauder INK, in 1994. She writes for Fortune 500 corporations, government agencies and healthcare systems.  A Philadelphia native, Marylee lives with her family in Lancaster and is an active community volunteer. Currently, she is involved with social justice and sexual assault prevention work through the YWCA Lancaster. She also writes on a pro bono basis for the Pennsylvania Coalition Against Rape and PA Says No More. 

Breakfast #3: Making Capital Work for Lancaster

July 7th’s Transforming Communities Through Business Breakfast Series kicked off yet again with Upohar’s wonderful breakfast stylings at the Southern Market Center. Local business owners, investors, and community members alike gathered for some early morning, “get to know your neighbor” exercises led by Randy Newswanger. After breaking the ice, ASSETS Executive Director Jessica King settled in behind the podium to start unpacking the topic at hand, “Community Capital.”

Community Capital is one of 8 principles embraced by the Business Alliance for Local Living Economies (BALLE). BALLE is a national network that aims to promote local, sustainable, impact-oriented businesses and economies. The intent behind Community Capital is to encourage communities to put their capital to work in their local environments, because all too often, financial investments are sent far way, out of sight. This investment trend leaves community members with little to no tangible ties to the impact of their investments.

“There’s a disconnect,” King began her address. She was referring to a traditional investment cycle – sharing examples of foundations that made grants to assist communities with problems caused in part by the businesses the same foundations profited from. “Traditional philanthropy may not be the answer,” King said, referring to making as much money as possible and giving some of the profit away, rather than examining the harm or the benefit of the business model making the profit.

The answer isn’t so simple, though. And the point of the “Community Capital” topic was not to lambast big business–King instead prompted the audience to consider their personal assets. She urged listeners to reflect on where their money comes from, how it was made, and how this income translates to personal assets. Could we all make small changes to see more of our money circulating in our immediate environment?  While foundations and community funds can jumpstart capital for social good–and this already occurs in Lancaster County–individuals can also deploy capital to create socioeconomic change.

Shifting your shopping from large, corporate stores, to smaller, local businesses is proven to have a deeper impact in immediate communities. As King cited a statistic comparing the number of jobs created per $10 million consumer dollars spent, listeners learned that a site like Amazon.com only created 14 jobs with that capital, while the same $10 million could create 57 jobs, if spent locally.

As if on cue, King sensed the awe and reminded the audience that they could be the source of “very real impact on jobs and people locally.” But community capital doesn’t necessarily need to be focused on job creation. King encouraged attendees to consider what matters to them, individually.

The most promising part of the morning’s talk came with King’s final words to the audience. “How can we take a step?” she questioned. “It doesn’t need to be the whole hog,” she encouraged with a smile. Part of the crucial work in service of this mission was already getting started. The biggest takeaway from the morning’s musings was the hope that through conversations about these ideas, personal reflection about spending decisions, and sharing input with community members, we can begin to change our own community, through business, for the better. What a morning!


Look for more information to come on next month’s breakfast focusing on “Opportunity for All,” August 4th. We hope you’ll join us. 🙂