Converting Businesses to Cooperatives Just Got Easier

Isabella Garcia | Oct. 10, 2019 --A coming wave of Baby Boomer retirements threatens the survival of many small businesses. This initiative is making employee-ownership a more viable option. 

As Tom Adams, co-founder of Adams & Chittenden Scientific Glass, started planning his exit into retirement, he knew what he didn’t want to happen. Twenty-six years earlier, Adams was a production manager at a scientific glass blowing company in Berkeley, Calif., when the last of the company’s founders decided to sell the company to an MBA with no expertise in the field. Beyond the new discomfort within the company, the final straw was when the new owner denied Adams’s request for a raise.

Resigning and starting a competing scientific glass company with his partner George Chittenden was a “rapid transition” that has served the glass blower well, but that doesn’t mean Adams wants to force any of his employees into the same choice after his own exit from the company.

“It lurked in the back of our minds for a long time because it was apparent we were getting older,” Adams said. “We were part of that classic position of being part of the silver tsunami.” Adams is referring to the wave of baby boomers who are aging out of the workforce.

With nearly half of privately owned U.S. businesses with employees owned by boomers, Adams and Chittenden were facing an increasingly common problem: Develop a succession plan or close the business, which in their case would mean laying off eight employees and shutting a company they had built from the ground up.

Finding a competent buyer was unlikely because of the niche service Adams and Chittenden provided—artisan-level glass blowing for scientific applications. Even if they did find that magic buyer, the two were concerned about the livelihood of the business after they left; the two founders have nearly a century of glass blowing experience between them. 

“You can’t just hand your head to somebody and say ‘here, use this,’” Adams said. “It’s transmittable, but not trivially.”

That’s when Adams and Chittenden started looking into cooperative conversion options.

“Passing it onto a co-op means that we still get to pass that tribal knowledge on,” Adams said.

In early 2017, the pair reached out to Project Equity, a nonprofit organization that helps businesses convert to employee-ownership. That model made sense for Adams & Chittenden, whose employees were career glass blowers, not laborers in unskilled jobs.

Project Equity was at the time finalizing its Accelerate Employee Ownership initiative, a collaboration launched in September with the Shared Capital Cooperative, a national loan fund that provides financing to cooperative businesses and housing in the United States.

"We see employee ownership as creating a stable financial situation for people and their communities."

The initiative aims to lower barriers for businesses converting to employee-owned models by providing access to individuals and organizations who are experienced in co-op conversions, and to lenders familiar with cooperative business models. The initiative is seeded with $5 million from Quality Jobs Fund, an initiative by the New World Foundation and the Federal Home Loan Bank of San Francisco that invests in projects committed to improving quality job opportunities for workers in historically underserved areas. It aims to perform 30 conversions and maintain quality employment for more than 1,000 individuals over the next 10 years in California, Nevada and Arizona. The initiative also focuses on the positive ripple effects employee ownership can have in a community.

“It’s harder and harder for working people to make ends meet,” said Alison Lingane, co-founder of Project Equity. “We see employee ownership as creating a stable financial situation for people and their communities. This is something that addresses a lot of issues all at once.”

According to the Harvard Business Review, employee ownership can reduce economic inequality because the primary beneficiaries of profitable businesses are working- and middle-class people. Also, the businesses act as capital for their employee-owners, which is the first step towards building community wealth, because the employee-owner can use that asset to accumulate more equity, such as buying a house in the community.

A Rutgers University study in 2004 found that not only can employee-ownership boost employee productivity, but during an economic downturn, companies with employee ownership were less likely to disappear than those without. The study argues that higher survival rate of employee-owned businesses is linked to their greater stability as employers, indicating that “employee ownership may have an important role to play in increasing job and income security, and decreasing levels of unemployment.”

“Workers have skin in the game, particularly in certain sectors of the economy,” said Noah Bernstein, senior program officer at the New World Foundation and leader of the Quality Jobs Fund. “When they are given leadership opportunity, they want to take care of each other.”

While employee ownership can be a gateway to more stable jobs, it isn't for every business.

When Adams & Chittenden started its own conversion, Adams noticed the employees started taking interest in all the responsibilities throughout the company.

“Pretty much everybody is paying more attention to how things are going on,” Adams said. “Everyone is gradually learning all aspects of the business.”

Lingane said interest in understanding all parts of the business is the “essence of ownership culture” and a key part of workplace culture for employee-owned businesses.

Lars Ortegren, co-founder of California Solar Electric Co., the second business to receive financing and conversion assistance through the initiative, described the employee-ownership structure as a “business incubator” where worker-owners are constantly building their ownership skillsets.

California Solar is the first co-op in its city, Grass Valley, California. The company’s conversion created local buzz—so much so that California Solar is planning on hosting a co-op open house for other local business owners to learn about the model.

“We are definitely at a point when interest in employee ownership is building on itself,” Lingane said. In the current gig economy, jobs are no longer providing workers with livable wages and reliable employment, Lingane said, “so there is an interest in changing the way we’re doing things.”

While employee ownership can be a gateway to more stable, higher quality jobs, it isn’t for every business, which is why each potential conversion starts with a feasibility assessment.

The first requirement: The company must be profitable. The conversion is basically the sale of the business to itself; the employees each put up a buy-in amount to become an owner and the co-op takes out a loan to make up the rest of the sale price. The payments on the loan are just another line item expense covered by company profits.

“That’s an expense that comes out every month like rent,” Adams said.

Co-op models require literal and metaphorical buy-ins from employee-owners. 

While the sale price can be adjusted to create feasible loan payments, the sellers typically have their own value assessment they expect to sell for. From the expectations of the seller to the profit margins of the business, determining the sale price for a conversion can be a sticky point in the process.

For Tom Adams, agreeing to the proposed sale price “was not without a lot of consideration,” but he understood the logic behind the figure and felt the assessment that was eventually agreed on was fair. Adams did not disclose the sale price.

Another aspect of Project Equity’s initial assessment is workplace culture.

“We go in with our antenna up for what the culture looks like,” Lingane said. “That culture is essential.”

Co-op models require literal and metaphorical buy-ins from employee-owners; if the members aren’t committed to developing an equitable space, then the co-op won’t function as intended. While the initial business culture isn’t a make-or-break for conversion feasibility, it does influence what type of guidance a business will need throughout the transition.

While the conversion itself typically takes nine to 12 months, Project Equity continues advising businesses for two years after they convert, providing resources on developing healthy co-op culture and how to form good saving habits for profit shares.

Adams described the conversion as a relatively straightforward process of jumping through a series of hoops, but he recognized that the conversion wouldn’t have been possible without an experienced facilitator to guide the company through it.

“Without Project Equity, it couldn’t have happened, end of story,” Adams said.

In addition to providing the blueprint for the business’s bylaws, Project Equity also connected Adams & Chittenden to pro bono legal help for various filings—the legal fees alone would have cost the co-op more than $228,000, Adams said.

Project Equity also focuses on connecting businesses with other organizations, such as nonprofits, lenders and law firms, to make conversion assistance more accessible and employee ownership more self-generating, Lingane said.

The need for that support is growing as more laws are passed that incentivize employee-ownership models, like the federal Main Street Employee Ownership Act of 2018. The 2019 legislative session also sees bipartisan bills in both the U.S. House and Senate promoting andexpanding Employee Stock Ownership Plans, another popular model, andproviding funding for employee ownership centers that provide training and technical assistance to similar programs.

Beyond Project Equity, other national organizations providing support to conversations include CooperationWorks!, a network of cooperative developers, and the Democracy at Work Institute, an initiative of the U.S. Federation of Worker Cooperatives.

While co-op conversions can help avoid problems and support job stability and the accumulation of assets, the leaders involved in the initiative acknowledge this is not a one-and-done solution, but rather a gateway to impactful change.

“It’s not a magic bullet,” Bernstein of Quality Jobs Fund said. “This is just one solution that we hope will have an impact on conversion space.”