Everyone involved in employee ownership has a responsibility to strengthen our community. Advocates, service providers, trade organizations, businesses, and employee-owners all benefit when our ranks increase. But to grow successfully, we must understand where employee ownership thrives.
In this article, we combine our certification data with data from the US Census Bureau to analyze where there are a surprisingly large number of employee-owned companies. Looking at company size, industry, and headquarters location, we find insights that will help our community grow:
- Manufacturing, Professional Services, and Construction are the top industries for EO. Combined they have almost 600,000 non-EO firms, which means focusing on these sectors seems like the biggest growth opportunity for employee ownership.
- 100 - 500 employees looks like a sweet spot for employee ownership. It also represents a large growth opportunity with roughly 93,000 non-EO firms and over 18 million employees.
- 10 - 20 employees has far fewer employee-owned firms than baseline, likely due to limits of current structures. With over 640,000 non-EO firms it represents a big opportunity to grow firm numbers (less so employee numbers), but this requires new EO structures such as Direct Share Ownership.
- Vermont, North Dakota, Maine, Iowa, Hawaii are the top states for EO by concentration. Together these states have around 67,000 non-EO firms with more than five employees, which makes it a smaller opportunity in terms of raw numbers. But efforts in these states will benefit from dense networks of peer firms that can advocate for employee ownership.
- California, Pennsylvania, and Ohio are the largest states (by number of firms) with an above-baseline level of employee-owned companies. This represents an alternative geographical approach that might yield more potential conversions because combined these three states have over non-EO 480,000 businesses.
Details on our methodology and additional findings are below.
Data on Employee-Owned and US Companies
To understand where employee ownership thrives, we must have a detailed understanding of both the number of employee-owned companies and the number of all US businesses. Looking at only the raw number of employee-owned companies can be misleading because it ignores baseline concentration. For example, if 5% of employee-owned companies were in a particular state, we would interpret that differently if 10% or 1% of all businesses were in that state.
Data on employee-owned companies comes from our Directory of Employee-Owned Companies, an up-to-date list of all businesses that meet our standards of significant, broad-based employee ownership. We pulled the numbers on March 1, 2023 and in some cases we supplemented our information with 3rd party sources. Data on all US businesses come from the Census Bureau’s Statistics of US Businesses (SUSB). At the time of our analysis the most recently available series was the 2019 data set.
Employee-Owned Companies By Ownership Structure
There are a number of different ways a company can be employee-owned. The following table breaks down the number of employee-owned companies by ownership structure:
By far, the most common structure is the Employee Stock Ownership Plan (ESOP), accounting for roughly 90% of employee-owned companies. Worker cooperatives are the second most common structure, followed by a few emerging structures that are small but have the potential for rapid growth. Direct Share Ownership in particular is showing promise as the best structure for companies with fewer than 30 people, including newly formed businesses. Due to the emerging nature of these structures, our numbers are best thought of as lower bounds. All told there are at least 6,416 employee-owned companies in America.
Employee-Owned Companies By Size
Using information collected during our certification process to project the number of employees at every employee-owned company, we can analyze the size distribution:
It’s important to note that the distributions are censored to exclude firms with fewer than 10 employees. The purpose is to focus on companies that have a substantial number of non-founder employees, which is the relevant comparison group for employee ownership.
The chart clearly shows that employee-owned companies skew larger than baseline. There are fewer in the 10 - 20 size bucket, with 48.9% of all firms in this range but just 12.7% of employee-owned companies. The two distributions are in the same ballpark for 20 - 100 employees. But all buckets greater than 100 employees have far more employee-owned companies than baseline. Roughly a third (32%) of employee-owned companies are in the 100 - 500 range, 4.4x the baseline of 7.2%. We see a similar trend in the 500 - 1,000, 1,000 - 2,500 and 2,500+ categories.
The simplest explanation for the skewed distribution comes from the well-known fact that ESOPs generally don’t work for small companies. The cutoff varies depending on who you ask, but is broadly stated to be between 20 and 40 people. Given that 90% of employee-owned companies have an ESOP, that would explain the skew.
There are two implications for growing employee ownership. First, if you’re doing ESOPs, focus on firms with at least 100 people. The large difference in concentrations leads us to think that the 100 - 500 size range in particularly good. According to the SUSB this range has 94,957 total firms with 18,612,620 employees, which makes it a sizeable growth opportunity.
Second, there is probably a huge opportunity to create and promote structures that work for firms too small for an ESOP. The 10 - 20 size range has 640,827 firms in the 2019 SUSB, but we estimate just 712 employee-owned companies. In my opinion, Direct Share Ownership models using stock options are the most promising opportunity here.
Employee-Owned Companies By Industry
Next we can use the North American Industry Classification Systems (NAICS) to look at the distribution of employee-owned companies by industry:
Three data notes. First, while NAICS is included in the DOL 5500 data for ESOPs, it is extremely messy. We have gone through and recategorized the industry information for all 6,300+ companies in our database. Second, we exclude the “Finance and Insurance” category for this analysis because there are a large number of community banks with a small ESOP (below our 30% threshold) that we are still cleaning. Finally, again we exclude small firms, this time those with fewer than five employees.
Three sectors, Manufacturing, Professional Services, and Construction, account for nearly half of all employee-owned companies (48.7% combined). All three sectors far exceed the baseline distribution, but Manufacturing in particular stands out with 2.7x the expected concentration. These industries likely represent a substantial growth opportunity for our community. In the 2019 SUSB there are 144,201 Manufacturing firms, 213,955 Professional Service firms, and 242,885 Construction firms. Converting and additional 1% of each of these industries would roughly double the number of employee-owned companies.
The importance of the baseline analysis are clear when looking at Retail Trade. On an absolute basis this is the 5th largest sector for employee-owned companies. But the concentration is 48% lower than baseline.
There are three sectors that jump out as particularly challenging for employee ownership. Health Care, Accommodation & Food Services, and Other Services (details on this category can be found here). While there are employee-owned companies in each of these sectors, they all lag the baseline substantially. These industries account for 39.6% of all businesses but just 3.4% of all employee-owned companies.
There are two ways to interpret this lag. There might be something about these sectors that makes it difficult to be employee-owned, or these might be industries where there are missed opportunities. A good starting point might be to connect with the employee-owned companies who do operate in this sector to get their thoughts on what is driving this trend.
Employee-Owned Companies By State
We can use the headquarters location of each firm to look at concentration by State. Again we focus on firms with at least 5 employees:
California, New York, and Texas are the top three states for total number of employee-owned companies with 13.4%, 5.5%, and 5.2% respectively. But again the baseline analysis provides a more nuanced picture. Both New York and Texas have a lower share of employee-owned companies than expected given their share of all businesses. The implication is that these states might not actually be as opportune for employee ownership as the raw numbers imply.
In terms of concentration relative to baseline, the top states for employee ownership are:
- Vermont (3.0x baseline)
- North Dakota (2.5x baseline)
- Maine (2.3x baseline)
- Iowa (2.2x baseline)
- Hawaii (2.0x baseline)
Together these states account for 6% of all employee-owned companies but just 2.7% of all companies. Together they represent 67,348 total firms with more than five employees, many of which will have peers or neighbors that are employee-owned.
Another approach to geography is to look at the largest states with an above-baseline level of employee-owned companies. This would suggest California (1.1x baseline), Pennsylvania (1.1x baseline), and Ohio (1.4x baseline) are the places to focus. This approach might yield more conversions because these three states have over 480,000 businesses with at least 5 employees.
The states with the lowest number of employee-owned firms relative to baseline are Delaware (18%), Rhode Island (44%), Nevada (45%), New Jersey (45%), and Florida (48%). Again the interpretation here is a complex. Perhaps there is something about these states that discourages employee ownership, or perhaps these states simply represent opportunities to bring employee ownership up to par. The only way to know for sure is by contacting some of the 267,410 businesses in these states to see how many are interested in exploring employee ownership.
