Over the coming years, more than 2.3 million Baby Boomer business owners employing some 25 million Americans are set to retire. This Silver Tsunami, as it’s been called, presents the largest opportunity in generations to transfer ownership to workers—an idea that has gained fresh interest in recent years as wealth inequality and corporate concentration have grown.
But the process of selling to employees can seem complicated for owners. And a lack of funding for these conversions means that business owners often have to finance the sale largely by themselves. “There isn’t a large amount of capital available for these deals,” says Camille Kerr, associate director at The ICA Group, a nonprofit focused on advancing worker ownership.
Just in time, new sources of funding and assistance are arising to help traditional businesses convert to structures such as worker-owned cooperatives and Employee Stock Ownership Plans (ESOPs) that share ownership, wealth and governance more broadly.
Last week, in a rare show of bipartisan cooperation, the Main Street Employee Ownership Act was signed into law. The landmark bill is the first significant employee ownership-related legislation in two decades and the result of years of groundwork by worker advocates. It makes Small Business Administration (SBA) loans and technical assistance more accessible for companies transitioning to employee ownership.
On top of that, Transform Finance, a nonprofit that envisions capital as a tool for transformation and social justice, is investigating the creation of a fund that would dramatically expand the pool of capital available to support conversions to ESOPs and worker coops.
Imagining a New Kind of Investment Fund
At $50 to $100 million, the proposed fund could eclipse the total amount of financing available today for worker-owned businesses, says Kerr, who has been leading the project for Transform Finance. That kind of visibility and scale, she adds, “has the potential to bring a level of ‘realness’ to the field.”
The fund, as envisioned, would buy companies from exiting owners and convert them to employee ownership through a form of leveraged buyout— a term typically associated associate with Wall Street and corporate raiders, but in this case with a more positive outcome.
“Think of it as a structure akin to a traditional private equity fund,” says Andrea Armeni, cofounder and executive director of Transform Finance. “The fund buys the companies, holds them, does its magic, then sells them.” Except that in this case, the company is sold to the workers—and without piling on debt, he says.
The creation of a fund or funds targeting worker-owned entities would fill a gap in the market. The emergence of impact investing in recent years has seen investment funds of all shapes and sizes pop up, from those targeting women and minority-owned businesses, to others building financial inclusion in emerging markets. But only a few funds, such as The Working World, explicitly target coops and employee ownership. And none of them help existing companies convert to employee ownership at a high volume.
Transform Finance would not create or run the fund itself; rather, it envisions an anchor investor committing to the concept and then soliciting an investment firm to set up and manage the fund, based upon the blueprint.
The concept is attracting interest from mission-related investors, foundations and family offices as prospective limited partners, and a fund could debut as early as next year. Such a fund could also appeal to place-based investors. Worker conversions help preserve jobs and other local benefits of businesses rooted in community, and the fund’s managers could potentially pursue a place-based strategy in revitalizing communities, notes Armeni. Returns are likely to be below market.
It’s also a potentially powerful social justice tool—Transform Finance’s sweet spot. A big focus is “wealth building opportunities for low-income communities and people of color as a way to shrink the wealth gap,” says Kerr. “We’re looking at what industries and demographics make the most sense for this model of ownership,” she adds.
A High Touch Approach
Converting to employee ownership can be a complex process. A financial transaction with a mix of debt and equity takes place between the departing owner and employees. “Right now, there isn’t a way for founders to just walk away with a check and retire,” Kerr points out. “Conversions require deep continued financial commitment from the seller.” That can be difficult for sellers to swing, and has limited the number of conversions. With an equity fund facilitating the deal, retiring business owners would not have to shoulder the financing burden themselves.
But finance is just half the challenge. A culture of democratic governance must also be nurtured in the new entity. While not all ESOPs involve employee governance, research suggests those that include participatory management as well as shared ownership perform the best.
Transform Finance’s blueprinted investment fund would play two key roles: Leveraging a significant amount of capital for converting businesses, and maintaining a “high touch” role in cultivating democratic coop principles within them. Those staffing the fund, Kerr says, “would have a heavier hand in the process of conversion to teach best practices, set the culture, help manage finances, and figure out team dynamics.”
As for the new business entity, the employee ownership structure would be selected on a case-by-case basis. “Tax efficiency is a major factor” in conversions, says Kerr, and “democratic governance can be layered into any form,” whether that’s an ESOP or worker cooperative.
Putting Workers at the Center
Given Transform Finance’s deeply held principles of fairness and community involvement, a key concern is ensuring the conversions are a good deal for employees and their companies. “The interesting trick is to make sure that the workers are in a position to buy the ownership of the company from the fund on terms that are non-extractive and don’t end up over-indebting the company and leaving the worker-owners saddled with the debt,” says Armeni.
Kerr has outlined some of the general guidelines that fund managers should adhere to, including establishing meaningful, long-term ownership stakes for employees; strengthening worker agency through democratic decision making structures; maintaining the level of wages, benefits, and existing unions; and avoiding saddling the company with excessive debt.
As she runs through iterations of the proposed fund model−many parts inspired by The Working World’s own model of non-extractive finance−Kerr highlights the importance of the Transform Finance team playing an ongoing advisory role throughout development, capital raises, and investment decisions if the fund ever comes to fruition. For now, though, she’s focused on making sure her research thoroughly articulates the potential impact for prospective investors.
“We want to generate more interest and attract more capital given the impact these models can have,” Kerr says. “This mechanism is a financially viable, scalable one, and one that will excite people as a larger-scale strategy.”
Randy Mueller is an undergraduate student at Fordham University who is interested in localism, worker ownership, and impact investing.