Contributed by Project Equity, an IMEC partner
Like many business owners nearing retirement age, when it came time for Select Machine owners Doug Beavers and Bill Sagaser to think about stepping away from the company, they investigated a range of options. They ultimately decided that selling their business to their employees was the option that best met their retirement goals of keeping their company healthy and profitable, and keeping their trusted employees in their jobs.
Select Machine, founded in 1994, manufactures and sells custom parts for demolition and construction equipment. When founders Beavers and Sagaser decided that the time had come to retire, they were confronted with a difficult choice. Their children weren’t interested in taking over the company, and prospective buyers planned to dismantle the company and lay off its workers, preserving only the company’s client list. Sagasar said of their employees, “These are our guys, our family, and we wanted them to keep on working.”
Why employee ownership?
Studies demonstrate that worker-owned businesses are stronger businesses: they outlast their competitors in economic downturns, have higher productivity and growth, and lower employee turnover. Plus, employees, their families, and their communities are better off: worker-owned businesses have higher wages, better benefits, and workers build assets through business ownership.
How does it work to retire by selling to my employees?
Tactically, a “conversion” to a worker-owned business is three things:
1) The creation of a new business entity that is a worker-owned co-op
2) A sale of the business (or its assets) to the worker co-op
- The sale is often financed by a lender (which could be the owner) or by selling non-voting equity shares; loans are paid back out of future profits from the business.
- Financial buy-in by workers is usually required but doesn’t cover the entire purchase amount. Businesses often allows employees to pay some or all of this out of their paychecks over time to make worker-ownership broadly accessible.
- After the ‘founding’ worker-owners, there is typically a candidacy period for new employees to assess fit from both sides.
- Not all employees have to be worker-owners, but there needs to be a genuine offer to all permanent employees who are interested.
3) A transition over time of roles and culture as new worker-owners take on the ownership and governance responsibility of the new entity.
And depending on the specifics of your company, there may be significant tax advantages to selling your business to your employees.
Does your business have a succession plan?
Surprisingly few U.S. business owners have an ownership succession plan. When looking at family-owned businesses, it turns out that only 30% of family businesses succeed to the 2nd generation, and only 15% to the 3rd generation.
With baby boomers currently owning an estimated two-thirds of all businesses with employees, there is a potentially huge impact of keeping those businesses anchored in our communities. Doug Beavers, one of the selling owners of Select Machine, expressed his thoughts on the conversion: “We did not set out to establish a precedent or develop a model. We wanted to do what was best for the employees of our company and for ourselves. We chose the employee-owned cooperative because it made sense.”
How can I learn more?
Project Equity, a nonprofit that assists businesses through the process of assessing, then transitioning to employee ownership, provides information about conversions to worker ownership and hands on support to businesses throughout the transition. Visit their website to read Select Machine’s and many other case studies, or to sign up for an upcoming webinar or individual consultation.
IMEC business transition solutions are geared toward manufacturers and small businesses interested in positioning their firm for future in the next generation. Whether a family-owned or closely-held business, we're here to help. Visit www.imec.org/Strategy.cfm to learn more.