Ideal Candidate for Conversion to Worker Ownership

If you look at the landscape of business owners, you will quickly realize that they are not all the same. At one end of the scale are the people who run a small business as a side hustle or even as a full time occupation, but they never hire anybody. They usually stay small, sometimes because they like it that way. This is by far the largest group of owners.

At the other end of the scale are the entrepreneurs who have built a business from scratch and now use other people's money to grow it beyond what he could have done alone. These are the ones who eventually sell for some ridiculous multiples. This is the smallest group of owners. Only few are able to achieve this. When they do, they sell and then often do it over again.

In between these extremes are the small business owners who just want to escape the shackles of a regular job. John Warrillow, author of Built to Sell: Creating a Business That Can Thrive Without You by John Warrillow (28-Feb-2013) Paperback, calls them Freedom Fighters and that's what they are. They value their freedom to live their lives on their terms sometimes even if it means making sacrifices in other areas of their lives.

They comprise about 25% of the owners and have revenue of roughly $500K to $10M. They do typically hire at least some employees and sometimes grow to significant size. They typically rely on their accountants and lawyers for advice and sometimes other entrepreneurs like themselves. Growth is often on their minds, but they cannot quite make it happen preoccupied as they are with day-to-day operation. They typically hold on to it for decades. They rarely sell it until they have to and rarely make plans ahead of time for how to go about it.

In one respect they resemble their self-employed brethren: They are firmly in control of their business. They do not share decision making with anyone. As a result, just like them, the business cannot run without them. It totally depends on their presence day in and day out and that is a problem. It makes the business unsalable, particularly the smaller ones. No one else can step in and successfully run it. Everything will grind to a halt should the owner suddenly leave which happens in a lot more cases than you might think.

That makes them perfect candidates for conversion to worker cooperatives

The workers are the perfect buyers. They already know how to operate the business. They are concerned about the alternatives, loosing their jobs or have them changed by a new owner. The biggest obstacles are 

• Leadership and 
• Financing

One of the reasons their serial entrepreneur colleagues are able to start and grow multiple businesses is their ability to see the big picture. Unlike small business owners who remain small, they are visionaries who rarely get bogged down with the details. They hire people to do that.

Small business owners tend to have tunnel vision focusing on the day-to-day and tend to overlook the obvious and therefore frequently dismiss ideas like selling to their employees without even considering the possibilities. How we solve these obstacles will be the subjects of other posts, but now at least you know who the best candidates are.

Related article:
Is Employee Ownership for Your Company?

Built to Sell: Creating a Business That Can Thrive Without You by John Warrillow (28-Feb-2013) Paperback

Warrilow tells the story of a fictitious heads-down small business owner as he gets mentored into a heads-up owner who successfully turns a struggling business into a salable one.

How A Child's Place Became Worker Owned

This video shows how A Child's Place in Queens, New York was founded and later converted to a worker cooperative. The owners' reason for selling to their employees was clearly more values based than financial. It was important for them that children could continue to receive quality care, the same reason it was founded in the first place.

It would be easy to think that selling to your employees would mean you would have to make a financial sacrifice. That is not so. A valuation will be made and provided the business is healthy and able to support the debt burden, there is no reason to sell at a discount. On the contrary, employee buyers are more motivated than any other buyer you can find. They are more likely to pay fair market value than anyone else.

Convert an Existing Business to a Worker Cooperative

If the business is not ready to be sold, there may be things you can do to make it salable. One of the easiest ways to increase the value of a small business is for the owner to assign responsibilities and leadership to managers. Another is to document systems and processes. With these two value drivers in place, the business should be able to run without the owner's constant presence.

Is Your Business Salable? Is it Profitable?

Building Co-operative Power: Stories and Strategies from Worker Co-operatives in the Connecticut River Valley

It is no secret that a group of people can achieve more than the sum of their individual effort. That is what cooperatives are about. When cooperatives cooperative with other cooperatives, you have virtually unlimited potential.

This easy to read book gives you an introduction to worker cooperatives, but also uncovers what is potential of cooperatives working together to achieve their common goals.

Would Your Employees Want to Buy Your Business?

Preparing Your Business for Sale

Well, of course they would, you might think and that is understandable, but not necessarily true. You may consider yourself to be pretty objective, but chances are that you are far more guided by emotion than you think. The same goes for your employees, but unless you have cultivated a uniquely cooperative corporate culture, their concerns are different from yours because their perspective is different. Chances are that they will be far more emotionally detached from the business than you are. They may consider it just a job that puts food on the table. Some might even dread going to work at your place every day.

Lots of surveys have attempted to uncover what employees are looking for in a job and pay is not always at the top of the list. Faced with the possibility of becoming owners, chances are that the question of how it will impact them financially suddenly moves up that list. They are going to want to know if they will continue to get a paycheck.

There are industries where employees are well paid, but many are not and most of the purchase price will have to be financed either by you or someone else. No matter who finances the sale, they are going to want to know that they will get their money back.

Therefore, the question for you shifts from if they want to buy it to can they buy it. They may not value the benefits of owning their own business as much as they value their paycheck and it may be more attractive for them to go work for someone else. If it can't pay their bill, it has no value for them. Likewise, if the bank can't get its money back, they will not finance the sale.

So what do you do about it? Basically, you would have to do the same things you would have to do to sell it to a third-party. You have to make sure it makes financial sense for them and you do that by installing value drivers and we are going to talk more about them in future posts. All of these things take time. You simply cannot start early enough. Do it today.

Business Exit Planning: Options, Value Enhancement, and Transaction Management for Business Owners

The truth is that most business owners are woefully unprepared for their exit. Most fail. Too many end up closing leaving the owners with very little to show for a lifetime of hard work they thought would finance their retirement. Even if your buyers are your employees, they, like any other buyer, are going to want to buy something that has value. This book will teach you how to sell a valuable business.

Is Employee Ownership for Your Company?

Introduction

As a matter of principle, there are few limitations on the kind of business that can be employee owned. The limiting factors are mostly factors that apply to all businesses. A business that cannot provide enough income for its owners and employees to survive should either be revived or be allowed to close. Let us look at some of these factors:

Culture

Does the company already have a culture of unity, collaboration, corporate pride and strong morale? It is possible to convert a business with a tradition of authoritarian and vertical leadership. It just takes a little more time and effort than if those things are already in place.

Health

Is the business financially healthy? Is the industry contracting or expanding? Is there a lot of competition? Does it have a process for acquiring and retaining customers? Does it have a diversified customer base? Is it dependent on the owner’s presence? Can the business generate enough income for the employees to live, pay off the owner as well as any outside financing? If there are concerns in any of these areas, can they be remedied? How long would that take?

Other Exit Options

Are there any better options such as family members, management buyout or sale to a third-party? What are the tax ramifications of all of these options?

Employee Readiness

Are key employees likely to remain with the company after conversion? To what extent will they be able to run the company on their own? What is needed for them to be able to do that?

Customers

Are customers likely to remain with the company after conversion?

Owner Role

Is the owner willing to take on the additional educational tasks needed for a successful transition? Will he or she be willing to stay until company has been stabilized under new management?

Conclusion

You have probably realized by now that whenever adjustments have to be made, they take time. Therefore, scheduling enough time will increase the chance of successful conversion.

Although it may be possible to rescue a business that has been neglected, is declining or even failing, the chances of a successful transition increases dramatically when those issues are addressed ahead of time instead of after.

Exit Planning: The Definitive Guide

Selling to your employees is in many ways similar to exiting any of  the traditional ways. You still have to set some goals for yourself. You still have to have a salable business with transferable value. Most of the things you have to worry about apply to the sale of any other business.

Telling Your Employees

Telling your employees that they will be the new owners.

Once you have decided that selling your business to your employees is the best way to achieve your retirement goals, you will have to tell them. They may not necessarily be as open to the idea as you think. You know more than anybody that being a business owner is a big responsibility. In fact, this is one of two major reasons most employees are not already owners. Here are some of the considerations you will need to address.

The Timing
It is only natural that, once you have made the decision to sell to them, you also want to share it with them. That would probably be a mistake unless you are also ready to share it with everyone else as well. There are two primary reasons you want to hold off on telling them. First, they may get nervous and start looking for work elsewhere at a time when you need them the most to make your business as salable as possible. Second, they may tell their friends and family and sooner or later customers, competitors and vendors will know as well.

What to Tell Them
They are going to need assurance that what you are going to turn over to them is a healthy business that can not only continue to generate income for them, but also enough to pay off the financing they will need to buy it and that it will continue to do so into the future. In other words, you need to have a bullet proof business plan with solid projections several years ahead. Remember, they may be employees, but they are also buyers just like any other buyers and they will and should behave just like any other buyer. They will want to be treated the same way. Selling to employees is not a shortcut to retirement. You will still have to convince them that what you are selling has value just like any other buyer.

The Presentation
Because your employees are not yet owners, your presentation will need to be dramatically different from the one you would make to a more sophisticated buyer. It will need to be far more detailed and with lots of explanations of technical terms.

It is best to share the news with a few trusted employees first. The role of such a steering committee will be to share information with their colleagues, but also to learn what their concerns are. Allow enough time between meetings for the employees to become fully informed about and comfortable with what is about to happen. They will need to be convinced that their lives will be better, not worse.

Confidentiality
Even if you are prepared to share the news with the world, the employees as buyers will need to be furnished with all kinds of information about your company just like any other buyer would. The difference is that, unlike third-party buyers, employees are not used to handle such confidential information. Therefore, you will need to spend extra time explaining to them why it is important not to share what they learn with others and what could happen if they do. By all means, do collect confidentiality agreements, but realize that they may only be worth the value of the paper they are written on. This will just be the first of many new experiences for them to learn to think and act like business owners. You will be assuming the role of their teacher.


Complete Guide to Selling a Business, The

Many of the things you have to do when you sell a business are the same whether the business is small or not so small. One difference is that the stakes may be higher when you sell a large business, but even when you sell a small business, getting it right may be just as important. Your retirement or your family's well being may depend on it. You may not be comfortable going it alone, but the better informed you are about what to expect, the better. The Complete Guide to Selling a Business will give you that confidence.

Employee Satisfaction

Whenever I go to an event about workforce or employee benefits or employee retention or something like that, someone will inevitably say something like: “You have to make them feel and behave like owners.” That always makes me reach for my blood pressure medication, because what they are really saying is that you have to manipulate or deceive them into behaving like owners. So far, no one has suggested the possibility of making them actual owners.

Of course, if your motivation is to make lots of money off someone else’s labor, you can stop reading now. You deserve to have terrible employees. They should all go look for another job.

If, on the other hand, you are a small business owner just getting by, nothing extraordinary, just paying the bills, clothing and feeding the family like other middle class people do, this might be for you, too.

A small group of people, currently about 7,000 in the US, have figured out how to have great jobs without working for someone else and without going it alone starting a new business. They work in worker cooperatives. Worker cooperatives are companies 100% owned and controlled by their workers. They enjoy two major benefits:

1. They share all of the profits of their labor. No one else makes money off of them.
2. They govern the company through the democratic process. No one else decides how they should run their business.

Worker cooperatives are good for these four groups of people:

1. People who are struggling to find employment the traditional way, people who are over 50, who have been incarcerated, have disabilities, etc., etc.
2. People who are dissatisfied with their jobs. More than half are in this category.
3. Business owners who want to retire, but can't find anyone to take over so they simply shut the business down. Then the employees become the most motivated buyers.
4. Business owners who are struggling under the responsibility of being the one everyone looks to for leadership. Shared ownership could yield the same financial reward and reduce the stress of business ownership.

None of the fancy incentive programs come close when it comes to job satisfaction. Only actual ownership will provide the motivation workers want.

Building Co-operative Power: Stories and Strategies from Worker Co-operatives in the Connecticut River Valley

Worker cooperatives is a way for workers to take control of their lives, work the way they want and reap the benefits of their labor.