Don’t just sell, sell to your employees

SMALL BUSINESSES IN MASSACHUSETTS will soon face a generational impasse. As baby boomers begin to retire, the businesses they have built will need new owners, but who these owners will be is still unclear. While baby boomers collectively own more than 50 percent of businesses with employees in America, only 28 percent of them have a succession plan, with barely 30 percent of family businesses succeeding to a second generation.

As a result, up to one third of these companies could end up shutting their doors; over the next decade, this could mean $10 trillion of solvent businesses lost or sold to outside buyers. The ramifications on our economy—not to mention our tax base—would be dire.

But this uncertainty could also offer a huge opportunity for business owners: Sell to your employees. By selling to their employees, business owners could keep their local businesses locally owned by the very people who helped build them. As a report from the Department of Labor recently concluded, “Worker-ownership is not just a practical solution, it has the potential to turn this crisis into an opportunity. It could make what would otherwise be a severe economic contraction into the largest intergenerational and inclusive transfer of wealth in our history.”

Employee ownership addresses two core economic issues: how to preserve and grow jobs in local communities, and how to build wealth for employees across the income distribution. Retiring owners are given a fair valuation for their companies as employees, with a combination of cash and debt, take control over time. 

Unfortunately, while employee ownership models can make sense for a significant portion of businesses across the economy, widespread adoption is being held back by a severe lack of understanding. First and foremost, many business owners do not recognize the option exists. While they are off trying to find competitors or financial buyers, they don’t realize there are ways for the employees themselves to buy them out. What’s more, employees don’t know how to find the resources to conduct and structure a conversion.

Even large companies have to put in the effort to explore employee ownership. As Dan Kenary, founder of Harpoon Brewery, explains. “It’s easy to sell to an institutional buyer, but we had to find outside expertise to sell Harpoon to the folks that helped build this great place,” he says. “What’s required can be onerous, especially for a small shop.” For Kenary, the process was worth it. Harpoon converted to an employee-owned business in 2014 and hasn’t looked back. Since then, the firm has created an internal ESOP Communications Committee to ensure all employees are knowledgeable about their stake and what it means to be an owner of the storied brewery. The company has also seen an uptick in meaningful engagement: employee-owners regularly submit ideas to optimize their jobs and cut down on costs. Harpoon President Charlie Storey can attest to this: “something as simple as labeling hoses curled up on the floor so we know their exact length can save pennies on every case we send to our customers. When relatively minor savings like this are applied to every unit we produce, it adds up to a substantial financial impact over the course of a year.  Those savings, multiplied by our valuation, are passed onto our shareholders: the folks that work here day in and day out.”

To meaningfully expand access to employee ownership, the Commonwealth must make the resources to conduct employee purchases more available and widely known. The Massachusetts Legislature is currently considering a budget amendment to fund the Office for Employee Involvement and Ownership. While the office was shuttered in 2008 due to the financial crisis, its work from 1989 until then is what initially made Massachusetts a prime ecosystem for employee ownership. A re-funded Office for Employee Involvement and Ownership would build widespread awareness for employee ownership as a viable exit model for retiring business owners, and it would help those owners navigate the conversion process, making what Kenary and his co-founders did for Harpoon a possibility for every small business owner in the Commonwealth.

When faced with the budget concerns we see today, our legislators must have the foresight to turn threats like the wave of baby boomer retirements into economic success stories. That means protecting the tax base by preventing local business closures and ensuring that the next generation of employees can buy a piece of their workplace. “In an era of troubling inequality and too limited opportunity,” Kenary said, “employee ownership changes the rules of engagement, making capitalism truly a team sport.” 

We urge those in the Legislature and in the executive branch to support the Office for Employee Involvement and Ownership and spread the common-sense benefits of employee ownership and middle-class entrepreneurialism across the Commonwealth.

Adam Vartikar is chair of Working Wealth, an employee ownership advocacy organization in Massachusetts. Michael O’Leary is head of policy for Working Wealth and an investor with Bain Capital Double Impact, the impact investing arm of Bain Capital.