Transitioning To Employee Ownership

DOING BUSINESS

TOOLKIT

TRANSITIONING TO

EMPLOYEE

OWNERSHIP In Public-Private Partnership with

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The WASHINGTON DC ECONOMIC PARTNERSHIP (WDCEP) is a non-profit, public-private organization whose core purpose is to actively position, promote, and support economic development and business opportunities in the District of Columbia.

WDCEP stays one step ahead of the vibrant and evolving economic landscape by monitoring the pulse of the District’s evolution shaped by entrepreneurs, start-ups, investors, as well as both small and large businesses.

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THE TOOLKIT This document is designed to help business owners understand basics of the employee ownership business model and the steps necessary to transition to employee ownership. The toolkit contains sufficient detail in combination with appropriate technical assistance to address various stages and requirements for small businesses to follow in transitioning their business.

This document contains names of third parties and links to third-party websites or content belonging to or originating from third parties. The third-party site owners, and not WDCEP, own the intellectual property rights to the materials in any and all linked sites.

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WDCEP does not assume responsibility for the accuracy or reliability of any information offered by third-party websites linked in this guide. Please consult the appropriate professionals before taking any action based on information contained herein. Use of and access to this guide or any of resources contained within this guide does not create any type of relationship between the user and WDCEP, or any of its agents. All liability with respect to any user’s reliance on this guide is hereby expressly disclaimed.

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introduction to becoming employee-owned WHAT IS EMPLOYEE OWNERSHIP? In an employee-owned company, the workers — not outside shareholders — own all or at least a significant percentage of their workplace.

Employee-owned companies are found throughout the world, in almost every industry, and are often leaders in their field.

This toolkit explores two forms of broad-based employee ownership: worker-owned cooperatives and Employee Stock Ownership Plans (ESOPs).

In a worker-owned cooperative, the workers share ownership of the business and share in democratic decision-making for the business.

The 7 Cooperative Principles are the core values guiding worker-owned cooperative businesses.​

An Employee Stock Ownership Plan (ESOP) is an employee benefit plan that allows a company’s employees to own shares in a business. An ESOP can be 100% or partially employeeowned. Some ESOPs are also democratically governed, although that is not the case for all ESOPs. ESOPs are generally mid to largesized businesses as this form of employeeownership has higher upfront costs to start.​ In the United States today, there are over 6700 Employee stock ownership plans (ESOPs) and approximately over 500 worker cooperatives.

Internationally, many countries have a much higher density of democratic employee-owned firms than exists currently in the United States. For example, Italy has an estimated 25,000 worker cooperatives, there are several thousand in Spain, and

approximately 2,000 in France. Argentina has also seen a rapid rise in worker cooperatives and now has an estimated 6,000 worker-owned companies employing approximately 300,000 people.​ Although there are many ways to organize an employee-owned business, this toolkit will discuss how to create an employee-owned business that is both worker-owned and democratically​managed.

WHAT ARE THE BENEFITS OF EMPLOYEE OWNERSHIP? Transitioning a small business to employee ownership can have positive impacts on employee engagement, productivity, and retention; anchor a lasting legacy for your efforts building the business; and offer a financially rewarding exit path that can be supported by experienced professional assistance. Small business owners throughout the United States are increasingly seeing employees as highly desirable buyers because their expertise operating business offers continuity, which buoys company value, and because of their commitment to the main street social fabric that could be jeopardized by outside buyers.

HOW DOES IT WORK? An employee-owned business is owned and controlled by its employees. While there are a number of legal entity options — corporations, LLCs, trusts — they all share equity ownership that gives employees real risk and reward, and a path for employee participation to voice their desires, and to improve their work life.

GOOD FOR THE BUSINESS •

Studies show that the combination of employee ownership and employee participation yield substantial improvements in firm performance.

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As companies that maintain jobs and wealth in the community, employeeowned businesses often have loyal customers who patronize the business for their values as well as their services.

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Employee-owned businesses have been shown to attract talent and have above average retention rates.

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Employee ownership keeps companies competitive by engaging all employees as problem-solvers and innovators.

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Depending on the form, employee ownership can have significant tax advantages that allow for increased working capital to grow and improve the business.

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For businesses looking to sell, the best — and sometimes the only — buyers are their employees.

built, which is not generally possible in a sale to a competitor or private equity firm.

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GOOD FOR THE BUSINESS OWNER •

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Selling to employees is a flexible exit strategy.

The selling owner(s) can reduce involvement in the company on their own timeline.

The selling owners can institutionalize the values and culture of the company they

Owners can protect jobs and reward the employees who helped make the company successful.

GOOD FOR THE COMMUNITY •

In an employee-owned company, the profits of the business go to employees, not distant investors, building community wealth and strong local economies.

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Employee-owned companies provide quality jobs with better compensation and meaningful opportunities to participate in decision-making.

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As locally rooted businesses, employeeowned companies often give back to their communities by supporting local causes

IS EMPLOYEE OWNERSHIP RIGHT FOR ME? DESIRES

CONCERNS

IDENTITY

This quick assessment can help guide an early conversation with an experienced professional assistance provider. The structure of employee ownership transitions can be flexible, and can be designed to meet desires and address concerns.

roost

— it was a team effort of sophisticated, smart, and dedicated employees that were all working really hard to make the company the best it could be. So in that moment, I knew I wanted them to share the fruits of success beyond the typical profit-sharing, raises, or acknowledgments that make staff feel rewarded and included. I wanted to create an ownership opportunity for them. Most people don’t ever get to think of themselves as future business owners, but that vision can be life changing.”​ This influenced Wise’s decision to create Roost as a business unit parallel to and aligned with the values of Nest DC but with an intentional employee ownership structure.​

Lisa Wise, Roost’s founder, is on a mission to run a values-based company that puts people and places over profit. Roost is truly an outlier in their industry in terms of the way that work is approached. They strive to be employee centric and honestly care about the community they are a part of, which shows throughout the Flock family. In Wise’s words, “Doing good business is just good business, and we bring that mentality to every facet of the company.”​ Roost manages communities by handling the day-to-day operational support and management for multi-unit buildings and condo associations across DC. That means anything from financial engagement, to building governance, to thinking through what preservation of the building looks like. They focus particularly on high-density urban living environments and the communities Roost supports range in size from three to 130 units.

As a sister company to Nest DC, the inaugural brand under the Flock family, Roost brings human connection to home management.​ Once the company became profitable enough for Wise to quit her day-job and actually draw a salary for the first time after four years of its existence, she felt an enormous sense of relief. She shares,​ “It seemed like an impossible dream come true!

But at the same time, I realized that it wasn’t me the founder who had made that dream come true

Wise stressed that she had zero background in business and that everything she learned about running a company was gleaned from reading magazines. A big challenge the company faced was working with an attorney that actually put together an operating agreement that was ultimately dysfunctional and misaligned with their purpose.​ “We basically had to dismantle his work and start again. It was a disappointing and difficult experience with a lot of heavy lifting, but we definitely came out of it stronger as a company,” says Wise. “You have to find and advocate for what structures, valuation metrics, and formulas work for your needs.”​ One of the keys to being a successful business is to differentiate, and there is no faster way to differentiate than to be an employee-owned company. With a laser focus on empathy and a commitment to community, Roost becomes instantly more attractive to potential clients.

“We attract better business and have higher employee retention rates,” mentions Wise, the latter point referring to the fact that Roost doesn’t experience the same turnover that others in the industry usually face. Their staff wants to stay.​ “Ownership inspires people to be happier and more engaged in their work because they can see those growth opportunities in front of them. It’s a very elegant, win-win approach to running a business,” concludes Wise.​

WASHINGTON, D.C. AREA COMPANIES What are some employee-owned businesses around Washington, DC? DULCE HOGAR Washington, DC • Cleaning • 5 employees

Other notable businesses include:

BRIGHTER DAYS Washington, DC

• Employee owned since 2019

JUST WALK Washington, DC

EARTH-BOUND BUILDING Brandywine, MD

RED EMMAS Baltimore, MD

• Construction

CHEMONICS INTERNATIONAL, INC. Washington, DC

• 4 employees • Employee owned since 2014

JMT ENGINEERING Washington D.C & Hunt Valley, MD • 1710 employees • Employee owned since 2011

WESTAT Rockville, MD AMERICAN SYSTEMS Chantilly, VA

ALEXANDRIA UNION CAB CO-OP Alexandria, VA • Taxi • 225 employees • Employee owned since 2007

ZENFUL BITES Washington, DC • Food and Beverage • 3 employees • Employee owned since 2012

Stories linked here are available at becomingemployeeownded.org.

stages of transition WHAT ARE THE TRANSITION STAGES?

and professional assistance to

Transitioning a small business

ensure success and long-term

to employee ownership can

benefits. While unique for each

be a practical solution for

business, the process generally

ownership succession, job

has five stages. Durations

stabilization, and employee

can vary depending on the

retention. The process takes

complexity of the company and

an investment of resources

its readiness for a transition.