Industry Trends
Why Aren't There More Employee-Owned Companies?
January 24, 2024
Supporters of employee ownership see it as a win-win that benefits workers and companies alike. They point to the life changing wealth built by employee-owners and the transformational impacts of ownership culture on business performance. The research done by proponents is so positive and the success stories are so prevalent that it can be startling to learn that fewer than 1 in 200 American businesses are employee-owned. If employee ownership is so great, why aren’t there more employee-owned companies?Taking a clear-eyed look at the constraints holding our community back can be challenging, but to grow it’s necessary to be honest with ourselves. In this blog post I outline four leading theories on how to grow the number of employee-owned companies, each associated with a potential blocker:Raise AwarenessImprove Financing OptionsReduce Transaction Cost and ComplexityCreate New StructuresRaise AwarenessPerhaps the most straightforward theory about what’s limiting employee ownership is that there are a large number of people who simply don’t know about the model. Awareness is certainly low among the general public. According to estimates based on data collected from our Members and the companies we’ve listed on our Directory of Employee-Owned Companies, just one percent of the labor force works at an employee-owned company. Our Members report that most new employees come in with zero familiarity. You can easily go through high school and college without hearing the words “employee ownership.” I myself never heard about the concept during three years at a major management consulting firm. To grow the number of employee-owned companies, the key audience to reach is business owners. Based on our 630+ Members, over 90% of employee-owned companies are created through conversion, and clearly business owners can’t covert to EO if they aren’t aware that it’s an option. Is awareness low among business owners? This is much more difficult to gauge. But there are a number of efforts that propose the answer is yes and are focused on raising awareness among business owners, either by reaching out to business owners directly or by targeting trusted advisors such as accountants, lawyers, and bankers. Two prominent recent awareness campaign are the EO Equals effort spearheaded by Project Equity and the Pittsburgh Citywide Taskforce on Employee Ownership led by the Pennsylvania Center for Employee Ownership.Improve Financing OptionsA second theory sees issues related to financing as the primary barrier to growing the number of employee-owned companies. As mentioned previously, the vast majority of employee-owned companies are created through a conversion where the owner(s) of the business sell it to the employees. A large portion of these transactions require the owner to provide seller financing. The details vary from deal-to-deal, but seller financing has two main challenges:The seller doesn’t get their money right away and instead is paid out over time, often over the course of 10 years. Sellers, like all people, tend to prefer money upfront.Due to #1, the seller is still linked to the company for many years. Many business owners prefer a clean break. Employee ownership is rarely the only option considered by a selling owner. Alternatives such as private equity or selling to a competitor are often able to provide most, if not all, of the purchase price upfront. It’s easy to see why a seller might take that deal, even if they prefer the legacy preservation that comes from converting to employee ownership.There are a number of creative new initiatives looking to provide improved financing options for employee ownership. Funds such as Mosaic Capital Partners and Apis & Heritage are turning the private equity model on its head and use private capital to create employee-owned companies. Venture-backed Teamshares offers small-business owners cash upfront and then sells the company back to employees over a 10 to 20-year time period. Recent policy proposals have floated the idea of government loan guarantees for employee ownership conversions, both and the national and state level. Reduce Transaction Cost and ComplexityToday, over 95% of employee-owned companies use an Employee Stock Ownership Plan (ESOP). According to Department of Labor data, roughly 250 - 300 new ESOPs are created annually and we estimate that currently around 5,700 employee-owned companies have an ESOP. While ESOPs are popular, they also have substantial transaction cost and complexity. ESOPs are great, but they can also be expensive. The cost to create an ESOP can vary widely, but a conversion generally ranges from $80,000 to over $250,000 and ongoing administration can be $50,000 to $100,000 a year. While certainly comparable, or sometimes less, than investment banking fees involved in an alternative path, the cost of ESOPs makes them out of reach for most companies under 40 employees. One major source of cost and complexity is regulatory. The ESOP structure was codified in law along with 401ks and profit sharing plans in 1974 as part of the Employee Retirement Income Security Act (ERISA). As a result ESOPs, are overseen by the Department of Labor (DoL). The DoL ensures that ESOPs are executed in a fair manner that sets employees up for success. However, for many years, the DoL has declined to provide clear and specific guidance around their expectations for important aspects of ESOP creation and oversight, opting instead to use litigation. This has created an unfortunate level of uncertainty for ESOP professionals and for owners who want to do something good by transitioning the business to their employees.In 2023 major progress was made when The ESOP Association successfully lobbied the DoL to provide clarity on the definition of adequate consideration when it comes to ESOP valuations. This is a huge step forward in reducing regulatory uncertainty that hopefully will result in the creation of more ESOPs.An ambitious idea to further reduce the cost and complexity of the ESOP is to take it out of ERISA entirely. ESOPs are not part of ERISA for any fundamental reason, but simply because Senator Russell Long was a champion for the idea and was the Chairman of the Senate Finance Committee at the time that ERISA was being created. While these favorable circumstances led to the creation of the most successful vehicle for employee-owned companies today, they have also led to much of the burdensome regulation that could be holding our community back. Removing the ESOP from ERISA and greatly streamlining the tax benefits could unleash growth analogous to the recent success of the Employee Ownership Trust in the UK. Driven by a much simpler framework, the number of employee-owned companies in the UK increased 37% in 2022. During that same time period, the number of employee-owned companies in America remained flat at around 6,400. Perhaps we can use the UK as inspiration to simplify our structure and unleash growth.There have been a number of non-regulatory proposals to streamline the cost and complexity of the ESOP. One idea is to create a “simple ESOP” with standardized plan design that receives streamlined regulatory treatment. Another is to use technology to reduce many of the ongoing administrative costs. Create New StructuresPerhaps the most creative and high-potential idea for creating new employee-owned companies is to create new structures. While the two legacy models - ESOPs and worker cooperatives - have been very successful, there might be untapped markets waiting for new approaches. This offers huge potential grow the employee ownership community, for example by increasing adoption among smaller companies, which as we pointed out in the 2022 blog post, could expnd the market for potential employee ownership conversions by hundreds of thousands of companies. Currently there are three promising new structures being explored. The first is the Employee Ownership Trust (EOT). Inspired by the success of the UK, groups such as EOT Law, Common Trust, and Purpose Owned have been setting up EOTs in the US since 2016. EOTs generally are more flexibly than legacy structures, and they’re substantially cheaper than ESOPs. The model is still in its early stages in the US and unfortunately doesn’t yet have tax incentives, but despite that headwind today there are roughly two dozen EOTs in the US. The second alternative structure is to do employee ownership through broad-based, direct ownership of company stock. This approach is being spearheaded by Teamshares (mentioned above) and the summary of the approach is that Teamshares offers a selling owner favorable terms, and then the employees buy up to 80% of the company from Teamshares over a period of 10 to 20 years. Teamshares is off to a hot start, with over 80 companies converted since their launch in 2019.The third alternative approach would be to implement broad-based employee ownership through stock options. Stock options are most well-known for their use in Silicon Valley, but they are an extremely flexible structure that can be designed in a broad-based way. Options plans are also low-cost, typically costing a few thousands dollars to implement and administer. Options are generally not a long-term solution, but could be a great fit for new companies who want to give early employees a stake in the outcome and then later convert to another employee ownership structure such as an ESOP.Which of these four theories is the correct approach? Weighing in on the likelihood is a matter of speculation. Advocates for each approach to growing employee ownership all have passionate and persuasive arguments, but ultimately nobody knows what will work until the number of employee-owned companies in the US starts to grow. At Certified EO, we’re diligently tracking the creation of new employee-owned companies as part of our larger effort to make our Directory an up-to-date list of all employee-owned companies. When we see that number start to grow, we’ll be sure to let you know.
Read More ▶How Many Businesses Are There in America and What Does it Mean for Employee Ownership?
July 14, 2022
Building an employee-owned economy can create a more prosperous future. Employee-owners benefit from higher retirement savings and increased job security, while employee-owned companies anchor jobs in local communities. That future begins by increasing the number of employee-owners. Some companies start out as employee-owned, but the vast majority convert after operating for some time under a different ownership structure. Since launching Certified Employee-Owned in 2017, we have spoken to over 1,000 employee-owned companies. Fewer than 10 began as employee-owned. It’s difficult to generalize, but based on our experience we think that over 95% of employee-owned companies were created through conversion. The importance of conversion means that advocates of employee ownership need a good understanding of the broader business landscape. The best source on the size and number of American businesses is the Census Bureau’s Statistics of U.S. Businesses (SUSB). In this article we will use the SUSB to analyze the business landscape and draw implications for the employee ownership community. Our key takeaways include: The number of companies large enough for employee ownership has been steadily rising since 2011 and now stands at just over 1.3 million. Most Americans work at large companies, but most US businesses are small. To drive a dramatic increase in the number of employee-owners, the employee ownership community needs a strategy for converting businesses with over 500 employees. Three sectors represent major opportunities for growing employee ownership: Health Care & Social Assistance; Accommodation & Food Service; Professional, and Scientific & Technical Services. Total Number of American Businesses According to the U.S. Small Business Administration, there are 33.2 million American businesses in 2023, but there’s a catch. That number is skewed because it counts every single corporation, including those setup by independent contractors and even shell companies created solely to hold an asset. There’s no bright line between a legal corporation and what a normal person would consider a business, but a reasonable breakpoint might be having at least one paid employee. That is the line used by the SUSB, and in 2019 there were 6,102,412 businesses meeting this criterion. The concept of employee ownership only starts to have real meaning when a company includes multiple non-founder employees. While there are exceptions, most companies exploring employee ownership have at least 10 total employees. A company of this size will generally have the resources that enable conversion while also seeing benefits from a formal employee ownership structure. Using the SUSB’s size categories, we found that in 2019 there were 1,311,698 businesses with at least 10 employees. We estimate that there are roughly 6,000 employee-owned companies in America (our Directory provides an up-to-date list of all the ones we know about). That means that employee-owned companies are just 0.5% of the total number of companies with at least 10 employees. The chart above shows how the number of companies with at least 10 employees has changed since 1999. It dipped slightly at the turn of the millenium following the dotcom crash, increased steadily in the early 2000s before dipping again after 2006 and plunging after the 2008 financial crisis. After hitting a bottom of 1,173,373 in 2011, the number of companies with at least 10 employees has seen year-over-year increases every year through 2019. For the employee ownership community, it’s encouraging to see that the number of companies that are large enough to consider employee ownership has been steadily rising for almost a decade. Size Distribution Analyzing the SUSB size categories, we see that US businesses have a skewed distribution of size. While most firms are small, most people work at large employers. Roughly 30% of private-sector workers work at the 1,112 firms with over 10,000 employees, while the 4,790,714 businesses with fewer than 10 employees account for less than 10% of private sector employment. In other words, firms large enough to support an employee ownership program account for over 90% of the private-sector workforce. The skewed distribution of firm size presents a tradeoff for employee ownership advocates: do we focus on the number of companies that are employee-owned or the number of people working at employee-owned companies? If we are interested in maximizing the number of employee-owned firms, we’re going to have the most success focusing on small companies. But if we are interested in maximizing the total number of employee-owners, the emphasis should be on the big companies. This tradeoff is mirrored in the change in firms and employment from 1999 to 2019. The bulk of firm and employment growth was driven by large firms. Over this time period, the total number of firms with at least 10 employees increased 9% and employment at these companies increased 22%. Almost all of the increase in the number of firms was driven by companies with less than 500 employees, while 75% of the change in employment was driven by firms with 500 or more employees. The trend is clear: while there are more companies now than 20 years ago, the bulk of new private sector employment over the past two decades has been due to growth of larger firms. Industry Distribution Finally, we use the SUSB industry categroies to analyze changes in employment and total number of firms by industry. It’s worth noting that all categories here are based on the North American Industrial Classification System (NAICS) and that the SUSB excludes railroad employees, agricultural production employees, and most government employees. The following chart shows employment by Industry for 2019 for all firms with at least 10 employees. Below is a table with both employment and number of firms by industry. Note that the number of firms doesn’t align exactly with the previous section, likely because some firms operate in multiple industries. The four largest industries by employment - Healthcare & Social Assistance, Retail Trade, Accommodation & Food Services, and Admin, Support & Waste Management - are all part of the service sector. Manufacturing, once the backbone of the American economy, is now the fifth largest sector by employment. Construction and Professional, Scientific & Technical Services, and Other Services (excluding Public Admin) are notable for having a high number of firms of a smaller average size. Finally we look at how the number of firms and employment by industry have changed over the last two decades. This chart above shows the percent change from 1999 to 2019. Dramatic increases of over 50% employment occured in many service sectors including: Accommodation & Food Services; Educational Services; Health Care & Social Assistance; Arts, Entertainment & Recreation, Professional, and Scientific & Technical Services; and Admin, Support & Waste Management. Several industries show signs of consolidation with increasing employment and decreasing number of firms: Information; Finance & Insurance; Retail Trade; and Wholesale Trade. Finally, the dramatic decline in manufacturing can be seen in a 26% decrease in the number of firms and 28% decrease in total employment. Combining current firm size and employment with growth trends can help identify large and growing industries which would be good to target for the expansion of employee ownership. Based on the above charts, Health Care & Social Assistance; Accommodation & Food Service; and Professional, Scientific & Technical Services merit further investigation.
Read More ▶New Partnership: Certified Employee-Owned & The Healthcare Anchor Network
May 24, 2022
Certified Employee-Owned and The Healthcare Anchor Network (HAN) are excited to announce a new partnership to help over 1,000 hospitals identify procurement opportunities with employee-owned companies! HAN is a nationally recognized collaboration of health systems leveraging their purchasing, hiring, and investing power to improve health and well-being by addressing economic and racial inequities in the communities they serve. HAN works to achieve a critical mass of health systems adopting the anchor mission, a proactive commitment to leverage their economic, political, and human capital to drive equitable, local economic impact. HAN was launched in May 2017 and today represents over 70 health systems with more than 1,000 hospitals, $75 billion of purchasing power, $150 billion of invested assets, and almost 2 million staff. HAN members include Boston Children’s Hospital, Cleveland Clinic, Kaiser Permanente, and University of California San Francisco. “We’re delighted to have the support of Certified Employee-Owned's knowledge of the field to help our members know the Certified Employee-Owned companies in their service areas and look for opportunities to do business with them,” stated David Zuckerman, President & Founder, Healthcare Anchor Network. Employee ownership is increasingly recognized as a way to reduce wealth inequality and strengthen local economies. By procuring products and services from employee-owned companies, anchor institutions will create good jobs while benefiting from increased service quality. To date, the main challenge preventing anchors from accessing this win-win opportunity has been the difficulty of finding employee-owned companies. As the only national certification focused on employee-owned companies, Certified Employee-Owned is perfectly positioned to help anchor institutions find employee-owned suppliers. Our standards of significant and broad-based employee ownership span all types of employee-owned companies including Employee Stock Ownership Plans (ESOPs), Worker Cooperatives, Employee Ownership Trusts (EOTs), Equity Compensation Plans, and more. Since our launch in September 2017, we have been working to build a list of verified employee-owned companies as well as tools to help people explore employee ownership, for example our Directory of Employee-Owned Companies. This partnership represents the first step to creating widespread purchasing preferences for employee-owned companies. The initial focus with HAN will be on helping their health systems identify current vendors who are employee-owned and educating HAN members on the benefits of doing business with employee-owned companies. Some health systems may be interested in taking the next step of integrating employee ownership into their process for identifying future vendors and filling open contracts. The experience and success stories from this partnership will help us build toward future purchasing engagements and could provide the proof-of-concept required for state or even federal purchasing preferences for employee-owned companies. To learn more about how we are working with HAN to promote purchasing from employee-owned companies, register for our upcoming webinar on July 21st.
Read More ▶10 Reasons Business Owners Have Transitioned to Employee Ownership
January 20, 2022
Since launching Certified Employee-Owned in 2017, I’ve spoken to over 1,000 employee-owned companies. These conversations are the highlight of my day. I love hearing stories about entrepreneurs starting companies and I'm always curious to learn how founders have come across employee ownership. Spending so much time talking to entrepreneurs and leaders in the employee ownership space has shown me a few interesting trends. Most notably, the vast majority of companies I have spoken with did not start out as employee-owned, but transitioned after many years in business. I haven’t kept exact numbers, but I would estimate this is the case with over 95% of the companies I know. While there are as many reasons for conversion as there are founders, there are a few trends that stick out. Here are 10 reasons that stand out as to why business owners have made the transition to employee ownership, along with a paraphrased story for each one that captures the essence of the journey: 1. Keeping it in the family“ Starting this company was my dad’s greatest accomplishment and growing the business has been my life’s work. But none of my kids were interested in taking the reins. I know what can happen when a company is taken over by a strategic or private equity and I didn’t have the heart to do that to people I’ve known my entire life. Transitioning to 100% employee-owned was my way of keeping the company in the family.” 2. Giving our owners partial liquidity“ To me going 30% employee-owned was a no-brainer. I got some liquidity, and now my people have a direct stake in the action, so the company is doing even better. As a bonus I have a built in succession plan. I don’t have any plans to step back, but you never know what will happen and it’s great to have that option.” 3. Continuity through succession“ This company was her baby, she wasn't going to sell it. She really liked the idea of leaving the company in the hands of the employees, because the alternative was going the way of other companies that she had seen bought out and changed completely.” 4. Staying an anchor in our community “Our founder was deeply concerned with what would happen to the local economy. He knew that if he sold to a strategic buyer, they would move the headquarters and maybe even the factory. We’re the biggest employer in the area so that would have devastated the town. By transitioning to EO our founder kept us local and kept the town alive.” 5. Start-up business sharing equity “A lot of start-ups share equity with talented employees in exchange for under-market wages, but my vision for sharing equity in the company was different. I wanted all my dedicated employees to have skin in the game from the beginning. The set formulas for sharing equity with only early employees didn’t work for me.” 6. Aligning employees at a time of growth “After years of start-up hustle, we were finally poised to take our company to the next level, and employees were going to be critical to our growth. We wanted to align the interests of owners and employees by giving employees a stake and a better understanding of what makes our company tick.” 7. Finding alternatives to private equity“ Private equity started knocking at our door and it made us think critically about the future of our company. We believe in our mission, our people, and the services we provide and are not willing to compromise those to get the highest dollar. Some of our shareholders were pressuring us for liquidity, and we needed to figure out how to provide that without overburdening the company with debt.” 8. Mission-driven at our core “We have been mission-first since day one. I started the business to help us transition to a sustainable future. Growing the company and making money has always been an outcome of our success, not a goal. I transitioned us to employee-owned to lock that mission-focus into our DNA. I want everyone here to have a stake in our future and to feel as bought-in as I feel as the founder.” 9. Feeling alone at the top “I did not expect to become a solo entrepreneur running a company by myself. I always wanted to do this as a team. I don’t have a co-founder anymore, and I want everyone to be more bought in and engaged as co-owners of this business.” 10. Democracy at work“ We wanted to be a worker cooperative from the start. It is the only corporate structure that aligns with our values - that each worker should have equal say in the governance of the company. We are in this together and that should be reflected in every aspect of our structure and culture. ”Are you a business owner looking to learn more about employee ownership? A great place to start is our overview.
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