The Mindful Marketplace with Joel Skene

Innovative Financing Solutions for Employee Ownership Initiatives - Part 2

• Joel Skene / Alison Lingange

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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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Joel:

What if investing in each other could change the world? I'm Joel Skeen with bizradious, and this is the Mindful Marketplace.

Joel:

Welcome back to part two of the conversation I'm having with the wonderful Allison Lengain about employee ownership, about capital, about democratic business practices, about all kinds of stuff. Man, we're having a great talk here and I am excited. If you didn't get a chance to listen to part one, go back and listen to that, because Allison got to share with us kind of how she became passionate about the work that she's done with an organization that she co-founded called Project Equity and a new project that she's working on called the Ownership Capital Lab. It was a really great conversation because I think it was a really great overview into the mindset around why is employee ownership becoming such a hotter topic of conversation right now? And I think that's sort of where we want to pick up when we were finishing our conversation. Allison, thank you, welcome back to the show, so glad to have you here today.

Alison:

Glad to be here. Thanks so much for having me.

Joel:

Yeah, so we were kind of finishing off by talking about that. There's these different ways that businesses have been transitioning to models where, instead of just having a private owner which is what we traditionally think of in an entrepreneur, business owner situation two models where there's actually more democratic and usually employee-owned aspects of the business. You mentioned this could just be having employees on the board, it could just be allowing them to vote on certain things, it could just be putting in your structure some ways where employees get to have ownership and take ownership of their work. So I guess I'm curious if I was a business owner listening to this out there and I might think to myself why on earth would I want to do that? Why on earth would I want to give up any ownership of my business? I took all the risks. I started this thing, whatever they might be thinking. I guess when you see business owners who are excited to transition to employee ownership, what is going on there? Why would someone want to do that?

Alison:

Yeah, well, it's usually one of two things. So a business owner that may be earlier in their career might see this as a way to really put a lot of fuel behind that employee engagement piece of the business. So if you were to think about you know you're a business owner and most typically a business owner has all of their assets in their business. You know, sometimes you'd also have, you know, money on the side or investments on the side, but the typical business owner that business really is their asset base. So you can do two things at once. You can do a partial liquidity for your you know, maybe you're 10 years in, you know, for your 10 years of work and you can get a little bit of that value out of the business to be able to diversify your assets by doing a partial 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 now have this powerful tool for increasing employee engagement, for really building that ownership culture that we're talking about. That can have outsized business results for your going forward. Say, 70% ownership value of that business. So if you think about the ability to grow the whole pie. So maybe you've sold a portion of it and you've gotten your liquidity out of that, but then the rest of the whole pie, the whole value grows as you have this deeper employee engagement. So that's really the first scenario that we see and most typically we do in that scenario see a partial sale.

Alison:

I often call it the on-ramp to 100% employee ownership, because now, okay, so maybe you're 10 years in and maybe at that 20 years or at 30 years you're ready to exit fully and you're ready to retire. You actually have your retirement vehicle already set up so that you can then sell the remaining, say 70% of that business at retirement. And you can do it on your own timeline. You know, quote, unquote on your own terms. Of course the financial terms are going to be a negotiation and based on market value and all of the above.

Alison:

But you have a tremendous control over how that unfolds. You can separate the timing of your own exit operationally from the business and the partial or full sale of the ownership structure. So those two can be separated in time, either because that's what works best for you and or because that helps the business have, you know, fewer big changes at once. So it helps it be more stable and, and you know, ultimately more profitable for all involved and you're looking for an exit, or it's really about employee engagement as a tool to increase the business results? You know you can think of employee ownership in both of those ways.

Joel:

Yeah, I definitely think that there's a bit of a mindset in the business culture that is very much influenced, obviously, by Silicon Valley, right, and that mindset that I've seen a lot of is very much scale and exit, you know, like let's scale this thing and then let's exit.

Joel:

But I also know that, like, when I think about the small businesses that I grew up in, kind of the you know, whether it was the coffee shop in the beat up downtown that I grew up in or it was, you know, any of the other number of businesses that I really loved and really made the place that I lived in feel like home, you know, it seemed like it was more for those businesses, it was more about a legacy and it was more about their community. And I think that, with that trend that we see in tech and then in some other places, where the trend seems to be that you build a business so that it can be bought up by a bigger business and then just absorbed into some larger conglomerate of businesses, it seems like this might be a way for those business owners to leave that legacy in their community without having to just kind of get eaten up by the big guys as they're retiring.

Alison:

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 you growing in order to be able to exit it?

Alison:

Now, if you rewind the clock 40 or 50 years, or a couple of generations, that's not at all how people thought about their businesses. You know, they thought about businesses as well. I'm going to start a business and 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 do good things, right, you think about the who's sponsoring Little League, just to call it that, but many, many wonderful things in our communities, right, it's the small businesses that are vested in those communities. And you know, when we think about again, roll back the clock 40 or 50 years, if you were to land in any town USA, right, it would look unique, it would have its unique character, its unique set of businesses. Today, if you land in any town USA, we don't have that as much anymore, right, because many of the same brands are in. You know, what is your local coffee shop, what is your right? And so, yes, the difference between a business owner starting today or a business owner who is retiring. Today, you know, the baby boomer generation is generation of entrepreneurs. So you know, today we have nearly 3 million businesses that are have owners at or near retirement age, and that is that is because the baby boomer generation and you know generations prior that are still running their businesses are very, very entrepreneurial. That's one in every two locally owned businesses with employees. So one in every two private employers is owned by somebody who needs to find a buyer for their business because they're at or near retirement age. So we have, first off, we have this massive number of local businesses in our community that are the community connected organizations, right? They're the ones who hire our teenagers. That are the community connected organizations right? They're the ones who hire our teenagers. They're the ones who sponsor our local organizations and they circulate their money in the economy three times more than national chains or corporations. So half of those businesses need to find a buyer in the next 10, 15, maybe even extend it to 20 years forward, and we. So that means we have a supply demand imbalance happening, and the good one of the other like really powerful things about employee ownership is that it creates a buyer group for every single business. Every business has a built-in buyer group in the form of its employees.

Alison:

So you're a business owner and you're trying to figure out how to sell your company right. What are your options? Well, many business owners are regularly getting inbound emails from private equity talking about interest in investing or acquiring. So you can definitely go that route. And, by the way, there are some employee-owned private equity firms. Definitely go that route. And, by the way, there are some employee-owned private equity firms I'm sorry, firms that are operating like private equity, that focus on employee ownership, that are doing the same thing. They're going and contacting business owners and saying, hey, I'm interested in acquiring your business and, by the way, we can do it and maintain your legacy. So you may be getting inbound interest. Or maybe you're thinking I'm going to go list with a broker and I'm going to find a buyer for my business that way.

Alison:

Well, depending on the community, you may have a varying amount of luck. We find that business owners in rural communities have a harder time finding buyers, and it's simply a numbers game, right? There aren't as many people there who are likely to be interested in that particular business at this particular moment in time, and so you know whether it's a rural business owner, suburban, urban, you do have a built-in buyer group in the form of your employees and you can really leverage that opportunity to be able to keep that business locally owned. For many businesses their name is on you know you're the founder of the business, you put your name on the business right. So this is your legacy, your family's legacy, and you can maintain that local ownership and have it carry forward and be a really impactful local business that you can look back on from retirement and be really, really proud of.

Joel:

Yeah, and be able to say that not only did you start something, but that it's going to continue on, cause I, you know.

Joel:

One of the things I've been seeing is that a lot of these folks who are hitting retirement age and spent their whole lives dedicated to building their business, you know when you, a lot of times people want to think the ideal of passing that onto their children.

Joel:

But you do see the numbers of that.

Joel:

Usually, when that happens, it's out 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 it maybe, or sell to some mega conglomeration, this gives them a path to be able to say, hey, the people who helped me build this, the people who have been with me for all these years, let's pass it on to them. And I also know that there's a new model where there's you can set up a trust that the business would be housed within, and then the mission of the trust is to serve the interests of the business, of the business and of the people who work in the business, and you can even include the community that the business lives in, which I think is just this really kind of beautiful way for someone who wants to start a business to make the world a better place, to have their impact on the world, to be able to actually see that live on past them rather than just seeing it bought up by you know some conglomerate.

Alison:

Yeah, absolutely yeah. So so you were. You were referring to to the employee ownership trust, or EOT for short.

Joel:

Yeah, we had on Jenny Everett and her colleague Mark to talk about that a couple episodes ago.

Alison:

Yeah, Fantastic, yeah. So just just for your listeners, the three main forms of broad-based employee ownership include the ESOP Employee Stock Ownership Plan which comes with a tremendous, tremendous tax benefits Largest form of employee ownership in the United States because of those tax benefits. The second largest form today is the worker-owned cooperative, which is a cooperative in the same vein that a farmer co-op or a rural electric co-op or a consumer food co-op is a cooperative, but it's the workers who are. It's owned and governed by and for the benefit of the workers. And then the third main form, which is the newest in the United States but is well-established in Europe, is called the EOT or employee ownership trust, and it utilizes a perpetual purpose trust, trust that's the trust structure and so that word purpose is really embedded.

Alison:

So you can, you know, for those business owners who who really think about their business and operate their business with a double or triple bottom line and that and that mission is centrally important to their work, having that mission really sort of protected over the long term in that perpetual purpose, trust can be a very beneficial approach to take. And you know, when we talk to business owners, we never start with oh which form of employee ownership. We always start with what your goals are, what are your goals personally, what are the goals of, and then goals for and the needs of the business and the workforce and the broader stakeholder set. You will often do an exercise with a business owner and ask them to think about okay, you've sold your business. Now imagine you're sitting five years hence looking back on it. What is it that you want to see, what really matters to you? So that kind of a thought process really helps to crystallize what those goals are and what the priority is of those goals. Of course everyone wants to be paid fairly for their life's work. Check right, employee ownership does that. It's a market sale. But then the other things around legacy and who's taken care of and what's taken care of. Do you want that mission ensconced Right Like what? What are those priorities? And then from there we can help match to what is the right form of employee ownership that's going to help you meet those goals most effectively. And I wanted to also just just pick up on a thread we were chatting about a couple seconds ago about all of the important ways that employee ownership operates within a local economy.

Alison:

And you know, when we think about especially economies that depend on manufacturing or production, where you've got supply chains and other suppliers, and we think about the fact that one out of every two privately held employer businesses needs a buyer, you know we often think about the big companies. So you know you've got a really big manufacturing company and it's really important that we maintain that business. But what we don't frequently talk about is well, who are the suppliers to that big company? You know we often call those tier one is the really big ones, tier two are the first level suppliers, and then there's the tier three suppliers and the size of those companies. Right, tier two are smaller than tier one and tier three are going to be significantly smaller because they're smaller than the tier two and when we get down to those smaller tier three, that's the bedrock, right. Without those tier three suppliers, those tier two companies can't be successful, and so on and so forth up the chain. And so it matters that we are thinking about all companies, all sizes of companies, in our economy, and that we have a tool to retain all of those businesses as we go through this great silver tsunami of the business, the ownership transition of companies.

Alison:

And for you know, for your listeners, 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 or you're a tier three, you are as important as the big guys. And so you know the importance for you of prioritizing succession planning. It's a first order business, right. Succession planning often ends on tomorrow's today list to-do list because, oh, I'll get to it later. Right, it's like saving for retirement or eating more broccoli oh, I'll get to it later. But we really need all of our business owners to be paying attention to their own succession so that those assets that you've spent your life building up, those business assets and those jobs, that those don't go away when you retire. We want those assets to maintain in our communities and in our local economies.

Joel:

Yeah, because when I do think back to cities and communities, whether they're I mean, I grew up in a town of 600 people and I've lived in cities as well but it's when I think about the stakeholders in the community who usually really kind of cares, care a lot about the community that they're in. A lot of times it is those small business owners and so I it just it makes sense to me on that level. I guess you know one of the biggest things that I think we we touched on it a little bit in the first half, but I'm wondering it still felt a little fuzzy to me. You mentioned that if a business were to move in this direction and say, yeah, like I want to sell a portion or maybe you know half of, or whatever it is, of my business to my employees, but my employees, like, they're not capital investors, they don't have a ton of money laying around how exactly does that process work?

Alison:

Yeah, yeah. So the high level takeaway for anybody listening is that in an employee ownership transaction, it is not the employees that come with the financing. The business is the one that takes on the financing for the sale of the business. So I'm gonna just use a simple example here. So, whether your business is worth $10 million or $1 million or some totally different number, let's say that it's a million dollars, just for easy math. So you're going to sell your million dollar business and turn it into an employee ownership trust, and so where does that million dollars come from?

Alison:

So most typically, there is going to be a seller note for any of these transactions, and that seller note, depending on where the financing comes from, it, can range from, say, 15 or 20% if you're engaging with one of the more private equity style investors, to 30% if your financing is coming from a CDFI, a community development financial institution. Or if you're in the 10 or $20 million range and you're getting bank financing for an ESOP transaction, you may need a more like a 50% seller note. So there is at least some skin in the game that that business owner is going to need to hold on to. So let's say it's 20% in my million dollar example. So that means that what's going to happen to the remaining $800,000? So you're typically going to have a senior lender, maybe a senior and a junior more likely to have a senior and a junior if it's a much larger transaction size. So you'll maybe have a lender that is bringing $800,000 of loan capital to the table. And so that means that on the day that you sell your business, you're getting a check for $800,000.

Alison:

And then, over a period of, say, five years, you're getting a payment think of it like a five-year annuity payment on that remaining 20% value of the company, with interest. So you know, yes, you're holding on to that seller note and you are getting compensated through interest. So you know where does that financing come from? And this is you know back to. We were talking in our previous conversation about the how. Employee ownership is very siloed, so a typical business owner isn't going to know where to get financing, because it's very hard to walk into a local bank and say, hey, I'm selling my company and I've got 30 people who are the buyer group on the other end and the bank's going to say, well, which one of them is going to sign for the personal guarantee?

Alison:

Well, that doesn't really make sense right. That's kind of a square peg round hole issue, but the good news is is that because of this issue, there have been a number of I mentioned CDFIs. That stands for Community Development Financial Institutions. These are federally regulated financial institutions that have more flexibility because of that community mission, and so there are a number of CDFIs that exist. Some are regional of that community mission, and so there are a number of CDFIs that exist. Some are regional, but there are several that are national in scope, or nonprofit loan funds that have stepped in to really bridge this gap that is, the bank financing gap. So there is financing out there and the best way to identify it is to work with an organization that specializes in employee ownership, because they're going to know all the people, because they're going to know all the people, they're going to know which sources of financing are going to be the best fit for you and they're just going to make it a whole lot easier.

Joel:

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, how many businesses through through Project Equity, the organization you co-founded have you all helped transition to models of employee ownership?

Alison:

Yeah, in its first decade, project Equity has supported 25 companies to become employee-owned, so we've got a lot of experience across all three forms of broad-based employee ownership. And I say we, I mostly mean the team that is carrying the project equity forward.

Alison:

But you know I personally, of course, have experience with that and you know project equity also has, you know, raised capital to finance the transitions. And you know I founded a fund called the Employee Ownership Catalyst Fund that is wholly owned by project Equity. That does provide flexible capital for all of the main forms of broad-based employee ownership.

Joel:

Well, I wish we had time to get into what you're moving into next, but we'll just have to have you back. Thank you, alison. So much for your time today and for all of you listening out there. Thank you, make sure to subscribe on all of the platforms where you get your podcasts and until next time, remember we are each other.