This is a "nuts & bolts" session on transitioning existing businesses to worker-owned cooperatives. Attendees learn about the option and process of worker buyouts and hear a wide variety of company transition stories, from initial exploration through deal structuring, financing and post-transaction support. Business owners considering a sale to employees as well as current workers exploring or engaged in a buyout will find value in the session.
Speakers:
Rob Brown, Director of Business Ownership Solutions, Cooperative Development Institute
Elena Kuhn, Production Assistant, Dean's Beans
Tyler Sweeney, Administrative Assistant, Dean's Beans
Transcript
Rob Brown: Thanks, everyone for coming. Is this good? We're good. Thank you all for your interest in this topic. You had a number of choices. There were a number of people who said, "I'm going to that one," but they're not here, so I suspect a few people will be rolling in after their post-lunch coma walk. So thank you all for being here.
My name is Rob Brown. I'm with the Cooperative Development Institute. This is meant to be - just to make sure you're all in the right place - this is meant to be very practical, like how to get from, "I need to retire," or "I want to do something different with my business. Tell me what it is you do. What is this worker cooperative you speak of?" You know, there's that initial conversation, and then there's a transaction, and there's this mystery about what happens in between those two things. So this is meant to be a very nuts-and-bolts, practical walk-through that process with some additional information in between.
I'm going to walk you through, just very superficially, some examples because it's I think it's helpful to see just a variety of types of businesses, sizes of businesses, sectors, geographies, etc.. So I'll walk you through a few stories. Folks from Dean's Beans in Orange, Massachusetts are going to tell a more robust story about what they went through, and just give you their perspective, on their way to buying out the company from the previous owner. And we'll just open it up to all your questions. If you've got questions, or you need me to slow down, or I say something you don't understand, interrupt. I'm fine. So we can make it as conversational or not as you'd like. But we will definitely have plenty of time at the end also for you to ask them questions or me questions, and so forth.
There's a quick introduction, let's see, did I even put a... There we go. Okay, sponsors. You're all here, so I don't think this is news to anyone here, so I'm going to rush through a few, but just to make the point - this is from the Business Enterprise Institute national survey. You know, baby boomers started a lot of businesses, they were successful, now they want to retire and they don't know what to do with those businesses. Long story short, right? Lots of business owners say they want to retire in relatively short order. They are largely in their 50s and 60s, in rural regions, just older in general. They are older in rural regions as well. And the cumulative impact of that, if you're thinking about our communities and our states, not just about perhaps your business or your employer. The cumulative impact of that is, across the Northeast - this is census data - there are over 200,000 small businesses with employees where the owner's nearing retirement age, so that is 55+. It's a lot of businesses. And so that's businesses of five employees to 500. So that's from the census.
Among small businesses with over 15 employees, over 77% are nearing retirement age. So bigger businesses, more established businesses are actually tend to have older business owners. And the issue is that it is now, and becoming even more so, a buyer's market. If you are looking to sell a business, there are a limited number of people out there who are interested in buying that business. And the smaller and more- well, that's on the next slide.
So few of those business owners have succession plans. So there's a huge gap, right? 70, 75% of business owners saying they're going to retire in the next relatively short number of years, but very few of them have actually done anything to plan for that: developed a plan, done their due diligence, figured out an exit plan. And family transitions, for all sorts of complicated but relatively obvious reasons, are the prevalence. Success rate is going down. Fewer than 20% of business listings ever sell. And then when you look through some other lenses, 85% of all businesses with employees are white-owned. And and for larger businesses, it's 90%. So there is a racial wealth building element to this as well. For every business that sells, nine liquidate and close. Like, these are not good odds, right?
If you're a 55, 60, 65 year old business owner thinking, with no real plan, your kids don't want it, you don't really know anything about options and process of exit planning, these are not good odds. And the smaller and more rural the business, the greater the likelihood of liquidation and closure. So, again, just not good odds. It's a buyer's market, and becoming more and more so. So that's both the danger and the opportunity, which I think if you're in this room, you recognize something about an opportunity here. And it is referred to - AARP came up with this phrase, silver tsunami, I did not - but has referred to this as the silver tsunami, right? This aging wave of baby boomer business owners who built great businesses, employed a bunch of people, but they have no idea, about what the process or options are for exiting that business. And they don't know who to turn to for help. So from our perspective, this is what we do.
I actually didn't introduce myself very well. I would just say I'm a I run a program that just does this. I just work with existing businesses, business owners, groups of workers, on transitions of existing businesses to worker cooperatives. I don't do anything with ESOPs - or almost nothing with ESOPs - I just do this work. It's transaction development. It's a lot of employee education, coaching, training, transaction design and such. So that's what I do with the Cooperative Development Institue.
But this is a quote from entrepreneur magazine, that I just like to hold out there. It's an option that does not make sense in all circumstances, maybe even many circumstances - your kids may want the business, you may have a very marketable business - all of those things can be true, but they are not true for the vast majority of businesses out there. And so outside of liquidation and closure, which in and of itself can be a good option for some businesses, I don't want to discount that. If the bulk of your business is really real estate and inventory, and there's not a lot of goodwill, liquidation and closure is it, right? Or you don't have many employees. So not to discount any other, but this is an option that people, business owners, really should consider, should explore and understand. So that's what we're trying to do here today.
So the basic definition of a worker cooperative - I'll say the basic definition of any cooperative is an enterprise that is jointly owned and controlled by members, and it's operated for the benefit of those members. That is a fundamental definition of any cooperative, whether you're a dairy co-op or a lobster - I'm from Maine - lobster co-ops, or your an electric co-op or a housing co-op. That is the fundamental definition of any co-op: an enterprise that is jointly owned and controlled by members, and operates for the benefit of those members. For a worker cooperative, the refined definition is a business that is jointly owned and democratically controlled by its workers, and that operates for the benefit of those workers. So as opposed to a person, a family, a partnership owning a business, operating it for themselves, their benefit; the people who work there, in a broad based way - some sort of broad-based ownership model, owned and controlled that business and operated for their benefit. That changes some fundamental characteristics of how a business, may make decisions or may make choices. But this is the fundamental definition of a worker cooperative.
And then just some basics, and I, I'm guessing some number of you might have gone to the earlier kind of intro 101 thing. So I don't want to overstate this, but I just wanted to at least cover these few things. The idea here, from the seller's perspective, is that you're creating a ready-made market for your business: they're your employees. This this can be done in a closely held, quiet way, organizing this transaction. It's an inside sale, inside the company.
I do want to emphasize - and this is the key distinction, I think, with an ESOP - an ESOP is still a traditional capital-based corporation. However, a worker cooperative is a membership-based corporation. And some are LLCs. I don't do LLCs personally. I try to avoid it unless there's a real reason to do it; we prefer corporations when we structure it. But they are a membership-based corporation, and by that I mean: in a traditional capital-based corporation, someone owns 50%, somebody owns 10%, somebody owns 1%, 5%, right? Your ownership interest is defined by your capital investment. That is a traditional capital-based corporation that we all know, including ESOPs are that. With a cooperative, it is as the next two bullet points state: your ownership interest is based on your membership in the cooperative. And that's where this idea of one member, one share, one vote comes from.
And we're going to get into what does that one vote mean? Because that's where lots of business owners are, like, "vote on what?" But the the other big distinction between, say, an ESOP and this, is that this is a real transaction between buyer and seller. This is the workers are buying a share and directly owning that business. So it is real capital investment. They have to become a credible, bankable buyer of that business. So that takes a bit of time and implies some of the work that I do with folks like Dean's Beans and others. But that is the the other big difference is that if they want to do it, it takes quite a bit of work, and they have to go through the due diligence process that anybody who's going to buy a business would go through in order to buy that business.
You want to see the financials, you're going to do a business plan, you want to do market research. You want to do all this work to understand that, yeah, this is viable, this would this work for me. The exact same process, frankly, is what I walk a group of workers through to do that due diligence, feasibility, assessment around that to the point where they have convinced themselves that we can do this, this is a good deal. And they understand what the business value is and where it came from. And they understand how the company makes money, and where all that money goes. So that's the work that we do.
In a worker cooperative, not everybody has to be an owner. This is does not this is not an all or nothing proposition. So I'm psyched when two thirds or more of the employees are like, "yeah, we want to do this." Great. Three quarters I'm like, "wow," 80%, "wow." But you'll hear from Dean's Beans it's rare that it's 100% of the workers actually do it. So it is not an all or nothing proposition. If for whatever personal reason or financial reason or whatever it may be, that you as an individual worker are not interested in becoming an owner, that's fine. You just keep keep on keeping on, with your work and your job and somebody new owns the company.
So, the flip side of that is that owners have no guarantee of employment. How many people here own a business? Okay. Oh. Well, nice. Yeah. It's like owning a business is no guarantee of an income, right? There are good years and bad years. There are ups and downs. There are lots of hard lessons learned that cost you a lot of money. And you're accountable, right? Like the buck stops with you. The same is true of a group of worker owners. They still have a supervisor. Everyone will have a supervisor in that worker cooperative. They still have a job to do. They have to do it to the best of their ability. They still have a schedule they have to adhere to, right? It's work. It's normal work. It's not pixie dust that guarantees employment and profits as far as the eye can see. Just to become a worker cooperative, it's still business. It's still risky. There's still ups and downs.
Unidentified: I'm a little confused by this, because if you're an owner and bought in and everything like that, and the team decides that you need to be fired. What happens, generally?
Rob Brown: Yeah. I go to great lengths to make sure groups understand the difference between employment and ownership, and understand the distinction between employment and ownership. You are still a worker, you are a W-2 wage earning - maybe a salary - but payroll tax, unemployment. You're an employee in the eyes of the law and the eyes of labor law. And you have a supervisor, and you have a job to do and all of that, and you'll be held accountable for doing whatever you're hired to do. That's your employment. And you're compensated for that, and for that work.
Separate from that, you are also an owner of the company. And in that way, you're an equal owner of the company, who sharing equitably in the profits. And you have an equal say in the things that the corporate bylaws say you have a say in. So if somebody has to be terminated, that is an employment matter. Performance, whatever the reasons people get fired for, right? Separately, their ownership rights are terminated by the cooperative. You cannot take away somebody's ownership rights in a business simply by firing them as an employee, right? So it's a it is a two step process.
And that the material benefit, is that on an annual basis members are getting a share of the net income, and that could be either as equity building up on the balance sheet in the company, or as cash distribution. But it's a profit sharing that's an equitable profit sharing. It is not an equal profit sharing necessarily, but it is an equitable profit sharing.
So I always get this question: "Well, who's a good candidate for this?" And really, if you are out looking for a business, what makes a good candidate? It's a track record, a track record of stability, cash flow, leadership, the market, customers, vendors, suppliers, workforce. This is what drives company value in any company, right? And it's the same thing that a group of workers should be thinking about if they're thinking about buying the company that they work at. So we do a lot of work around teaching, but first and foremost business education, financial education - we do go in deep on financial education - that company's financial education. But these are the key things. Is there a leadership bench, or if not the ability to develop one in a reasonable period of time?
But all of these are the normal things that you would be looking for if you are looking to buy a business, and the employees should be thinking in the same way. So they're analyzing their own business that they work in, or the business that they work in in a way that they've never thought about it before, right? "I don't know, I never thought about it in that way." But now they have to because they're thinking about buying it. This is most certainly not an all inclusive list, but, there are certainly advantages to this.
As I mentioned at the outset, I do tend to think one of the biggest advantages often that I see from the perspective of the owner is this first one, this "flexible, insider friendly sale." It feels less risky, in some respects, once they get over their initial weird ideas or assumptions about what's a worker cooperative. Once they stop and think about it, it's like you're not marketing your business on the open market. You're not having a business broker put it out there. Your customers don't have to know, nobody has to know you're doing this except you and your employees. You can speed it up, you can slow it down, you can hit pause, right? You can take your time and get to know each other in a new way. And that is more comfortable to do in this this closely held, close to the vest, kind of transaction. And that greater control of process equals reduced risk, right? If things are getting a little rocky, tensions are getting frayed: "Let's hit pause. Let's just go back to work for a while. Let's pick this up at the end of summer, or the end of winter. Let's take a couple months off." You can do that. And that just makes it more palatable, oftentimes.
Owners and buyers know each other's strengths and weaknesses, more or less. But there's definitely a familiarity that, again, can reduce risk. And the owner can remain in control in many different ways until they're paid off. So an owner may be like, "I'll do this and I'll finance half of it, but I'm going to be on the board," or "I'm going to stay the CEO," or "I'm going to do this," or "I'm going to do that," or "I have a golden share, and I have a veto decision over certain scope of decisions that get made about the company." There's all sorts of ways you can negotiate that, because in a worker cooperative, you have tremendous flexibility in how you structure things. So those are just a few that I think are most common and high salience.
Challenges, even despite all that: there is a sense of risk. When business owners come to me, they're they're coming to me because they are pursuing options and somebody told them they should, or they read something I wrote, or their friend did this, or... But to them it feels really risky, right? "I built this thing, over however long, and I like these people, they show up for work, they do good work, but really, like, they can do this?" And I'm like, "Yeah, I think they probably can, with some help and some good structures and transparency." And there's a whole process and a lot of coaching and education that can go on, but, that's the hump that most business owners have to get over is just- you know, they like their employees, they trust them to show up at work and do a good job at the work, but they're not sure beyond that.
And then limited financial resources, ability, experience. Most employees, most workers, have never owned a business, otherwise they'd probably still own a business, or be owning other businesses. And the the low risk tolerance that most people have impacts this. Most people are not cut out to be entrepreneurs. Most people are risk averse, if not risk intolerant. So with this model, you can bypass some of that because you're doing it with a group that you know. You know them, you all understand the business together, more or less. You can learn together. You can feel like you're all in it together. And that just reduces the sense of risk that the solo entrepreneur takes on. It also reduces the rewards. So let's be honest, right. When you take on that much risk for decades, you can sell a business for a million bucks and it's your money - or more, or less. But part of the issue is just the uneven and limited financial resources, the abilities, the experiences that those workers have to draw on. You know, it's a challenge, but it's a challenge that can be overcome.
Generally, a longer departure timeline is likely, although I think "likely" overstates it. I have numerous businesses that I've worked with and they had a business broker for two years - and still sitting and waiting. You know, they were 75 and still thinking their kids were going to take it over. They weren't. So that, I think, can be overstated. But there is a longer departure timeline generally. The nice thing about it is you can pace it transparently, in a planned way - methodically. You say, "we have a target date of December 31st, 2024," or December 31st, 2025 or June, whatever, and that gives you something to plan for. So that's really nice. It may be a longer departure timeline - it may not be - but what is nice is you can control that process and set the timeline and then pace everything to meet that timeline. So that's that feels good to a lot of business owners.
And then, differing perceptions of value. Many business owners - I would say most - think their business is worth more than it actually is. Some think it's worth less than it actually is, but most business owners, even if they have a number in the back of their mind, if they're honest, they have absolutely no clue what their business is worth. And their employees have even less than that, right? So this perception of the value of the business is something that needs to be navigated very carefully, very transparently, around valuation process and outcome. So we explain how business is valued long before we explain what the value of that business is. And I should say we have a CPA on our team that does that financial review, financial analysis, and business valuation.
Unidentified: [indecipherable question]
Rob Brown: A lot of it is similar, and what you are describing is what I call a 'restructuring for growth.' And I've got some examples of that. But I will say right now that, yeah, a lot of this is framed- we're in northern New England, let's be honest, right? A lot of this is framed as sort of exit planning for older business owners, but a good number of our clients are mid-stage entrepreneurs who, for personal reasons, family reasons - all of a sudden they have kids, right? They built a business. They spend all their time on it. Now they're married, they have kids, they want some more sustainability in their own personal life. They also perhaps- it may be by sector, and so there's some self-interest, but just they want to vest their employees with ownership. They want to grow the company in a different and more sustainable way, and they're not going anywhere. So the whole idea of management transition - we're not even talking about that because they're going to stay in charge of the company in like a general manager, CEO kind of way. But I'll give you some examples of that very thing.
So there are some tax advantages. I definitely do not want to overstate the first one, it's very complicated, the 1042 rollover. But we have done three different transactions - I believe some of the only worker cooperative transactions that have made use of the 1042 rollover, but I can't guarantee that. But we've done three different transactions where the seller was able to indefinitely defer capital gains taxes on the sale proceeds. So that is a creature of the tax code, the preferences, the sale of businesses to employees, either as an ESOP or a worker cooperative, so that if that works and that fits, that's a rich benefit. We have a preference for stock sales over asset sales, so that itself can create tax advantages in a transaction.
For the company and the cooperative, just a little bit about how the finances work - a very little bit. In a worker cooperative, the net income of the company is allocated to the individual members, so it is tax deductible at the corporate level. So, they're not paying corporate income taxes - and there's nuance to that which we're not going to get into here - but generally, the net income of the company is allocated to the individuals, sort of like an S Corp, sort of. But it is like that. And those members share of the profits are taxed at their individual income tax rates. So as an enterprise, they're overall paying less total tax, because if you've got a group of owners paying tax on distributed net income at their individual income tax rates - effective income tax rates - it's going to be less total tax. And if you're paying corporate income tax, or if you're the former owner and you were paying individual income tax at a top or near-top marginal tax rate, it's going to be less total tax overall.
The other nice thing, is that for those individual owners, the members, they're paying income tax on their portion of the net income at their individual income tax rate, but they're not paying payroll or self-employment taxes on that. They also have access to the qualified business income deduction, which is 20%. So somebody's share of the net income is $10,000. Automatically they get a 20% deduction. And then they pay their income tax rate on that remaining $8,000. But they're not paying payroll taxes on it, so there is some preferential benefit there.
The IRS does require a minimum 20% distribution of the total allocation, the rest can be accounted for as equity. That's a floor, not a ceiling. I tend to encourage folks to try to do more like 30 or 40%, maybe even, in a good year, 50%. But as you all know, no business owner takes 100% of their profits out on an annual basis or you're out of business pretty quick. So, for the same reason they're building up equity on their balance sheet, in the same way you look to as well. So that's a little bit of the tax implications.
I want to stress this - what we refer to as the three distinct transitions. What we've been talking about here largely is an ownership transition. One person owns it, a partnership owns it, a family owns it, it's a C Corp, it's an S Corp, whatever it is and whatever the ownership structure is, we're just organizing a transaction, in a couple of different ways that we do it. But that's just an ownership transition, and honestly for all that goes into that, it really is the easiest one. So just to set expectations. Willing buyer, willing seller, due diligence, get finance, go to the transaction table, sign a ton of paperwork, move on. The governance transition is the one that does take more time, and can be more challenging because governance - as I say at the bottom - governance is answering the what and the why questions. What are we? Why do we exist? What markets are we in? The big picture, medium-to-long range strategic decisions that business owners make, and don't distinguish from the day to day operational decisions, oftentimes. In their minds it's all the same thing. "I own it, I make all the decisions. I set the schedule, I do the payroll, I do everything. It's all me." And so they don't distinguish between these things. But if you're going to sell your company, particularly if you're going to do this, you really need to think clearly about distinguishing between an ownership transition and what needs to go into that, and a governance transition and what needs to go into that, and a management transition and what needs to go into that. And ideally you're sequencing these things, and I don't care what order you sequence them in. I've done it every which way, and there's no recipe for success in that regard, but trying to do all three of these things at once is really challenging, and you're setting yourself up for some challenges. So that's a little bit about thinking about this in three distinct transitions.
Most of our clients, the owner stays on a year, two years, somewhat indefinitely. There's no immediate departure of the former owner from a management perspective. They were the CEO, general manager, they will continue to be for a few years or something. And we like that generally, but that's not always the case. So sometimes the - well I'll get to that because I'm going to give you some different examples. But yeah, so just thinking about- and when I go back to the "one vote," this is what I'm getting at when I say "one vote." Owners make ownership level decisions and that's governance, right? The policies, the culture, the, hiring and firing policies, the strategic acquisitions. You know, are we going to move into a new facility, or are we going to buy another business, or are we going to...? Those are big picture, governance-level decisions. It's those things that owners have a vote in. We are not talking about groups of workers who are debating the schedule, or product placement on shelves in a retail business. That's not we're talking about. The companies that we work with are managed like any other company that you would see out there. There's a GM, there's supervisors, there's an org chart. Everybody knows their role, everybody's got a job description, everybody reports to somebody. So it's very traditional in that regard in terms of management. But that's a bit about that.
So I'm going to show you a few quick examples. Let me double check - yeah, I'm going to show you a few quick examples, of different types of companies. But I like to say because acronyms are fun, you know, a group of workers E.A.S.E.S. into ownership, meaning it's a process and it takes time, and there's a trust building part of it. Trust is enormously important. And nobody starts with trust at the outset because workers, no matter how much they think they know each other and like each other and get along, you are now asking them to get into a very uncomfortable space and learn how to know each other and trust each other and get along in a whole new way, and that takes time.
So this process of Explore, Assess, Structure, Execute, and Support. I'm going to walk you through our- I want to also say this is kind of how we describe our process; not every person who does this work does it exactly the same way. But, what we call phase one is the Explore phase. It's usually a business owner gets in touch with us. We're having those one or more initial intake conversations, we're doing the valuation and financial analysis, the management assessment, the workforce assessment. This is what we are doing at this point. If that business owner feels comfortable, like, "Okay, I get it. You've answered my questions. Sure, come talk to my workers." That then, is sort of part two of phase one, which is the Explore phase on the part of the workers.
So we'll go we'll do a worker cooperative 101 with a group of workers. Oftentimes we'll take a couple of times, for follow up Q&A. We'll want to meet with the workers without the owner present. It's good to have them present in the first meeting and then not present in a second meeting. Because it's always interesting what they say that's different between the two meetings. But at some point they're comfortable too. And I want to stress they are not comfortable with the idea of we're going to buy a business; they're comfortable with the idea that this could work, and we're willing to engage in a process of exploration, due diligence, assessment and so forth. It's a commitment of interest. It is not a commitment to buy a company at this point.
So at that point, some number of workers will form a steering committee, and they're the ones who are actually doing the due diligence, educational work. So at this point, if there is a group of workers who seem representative of the company - you know, 4 or 5, maybe six workers - and they're willing to form a steering committee, and we're going to meet on a weekly basis or bi-weekly basis, and they're going to do their homework. If they're committing to doing that, I'm like, "Okay, they're serious." And if they're not, it's over, right? Like I said, this is willing buyer, willing seller stuff.
So phase two is this assessment phase. Once we've gotten past that initial, "Everybody good? Everybody want to see if this might work?" "Yes." Here we are in the assessment phase. This is where we're going through a much deeper cooperative education process with that steering committee. Understanding what cooperative corporate bylaws are, what their options are, and drafting those bylaws. We're going to we do a whole business assessment process with them, where they understand the history of the business. They go through a SWOT analysis, they go through a SWOT prioritization, so that they can then start setting goals all in service of writing a business plan. So I walk them through that entire process, and that takes several months, And also the financial assessment. So at that point we're doing a lot of introductory financial education. What is a profit and loss statement, is basically what that amounts to, and what is it telling you about the business?
So we're always framing things up in this continuum of information turns into knowledge; knowledge turns into insight; insight turns into action. And that's where we want to get them, particularly with the financials. Like, "here's information," P&L: information; and it freaks people out. So let's turn that information into knowledge. They understand what this all means. What is margin? What does that mean? And then they can draw insight. Well, if this margin is good, could we do this margin? Could we up it 2%? Could we up it 3%? So that's part of the financial assessment.
And then we walk right through the the historical financials with them just as you would with a valuation. We're looking at 4 or 5 years worth of past historicals so they can understand the track record, the trend of profitability of revenues, expenses, margins, etc.. So by the time we talk valuation with them, they've already gone through that. They know what that company makes from top to bottom of the P&L. That's the assessment phase.
The structure phase: once we've done all that work with them, you know, "Sound good? Do you want to do this? Are you convinced?" Then it's a matter of like, "Okay, let's go talk to lenders, let's get a lawyer, let's start putting together the business plan and the pro forma," and so on and so forth. So that's the structure phase. Including interviewing and recruiting lawyers and lenders if needed.
And then the execution phase which- signing a lot of paperwork, going through the loan committee process with a lender, just executing all the plans. And then for us, perhaps most important was just getting to a deal like this. If you don't do this right then it all blows up. Because if you don't continue to work with a group of workers for some number of years afterwards with some program of continuing education training, coaching - just technical assistance, helping them out - it's going to blow up. So this is what we do post transaction: board member training, we do a lot of participatory management training, and open book management training, and helping them implement open book management systems.
We have also tools. I love the tools. If anybody's interested in that, the workshop in the next phase about open book management will show you the tools that we use with our clients. Six line panels, color coded graphs; really nice, simple, ways to teach financials, to get away from those multi-page 4 point font P&Ls that nobody wants to look at except for CPAs. So that's the support phase where we keep working with folks.
So this is where I was saying like the restructuring for growth. This is what you were asking about. Most of these, I'm going to show you a phased exit because that's why we're here, right? Like, nobody wants the first category [immediate exit]. The business owner, the workers, the customers, us, anyone. That's not good, but it's possible. The fixed exit is really what we're trying to talk about for an exit planning sense. And then there's this category that we call "restructuring for growth," which is becoming more and more common. We're getting more and more mid-stage entrepreneurs who are like, "I built this business and I want it to grow more, but I want to do it with the people I employ." And there's, a motivation there that's more values driven. And sometimes self-interests, particularly in skill trades around vesting employees. Skilled trades, you get them in the fold, or else they go out on their own, hang their own shingle, and become your competition. So there's definitely a- this is particularly true in skilled trades, I think.
But a couple of examples. This is a very remote, very rural, business: Island Employee Cooperative. This is somebody who owned a large grocery store, a medium sized grocery store, and an Ace Hardware, way down east on the coast of Maine. These are very - he owned them for 40 something years, built them up, very lucrative. These businesses are literally on an island that's off an island, that's off a very long peninsula. So selling groceries on an island is a really lucrative business model. But, you know, he just didn't plan. He had no plan. "I'll hire a business broker, and they'll take care of it for me." And two years later, still waiting. So one thing led to another, and we were introduced, and he just felt like, who wouldn't want these businesses? But nobody within this community had the resources to buy these businesses, and nobody from outside the community was going to try and go into this community. It didn't align. So one thing led to another.
So I say immediate exit because he was extremely pushy. He wanted out two years ago. He thought that business broker was going to bring him a buyer within months, and he was still waiting several years later. And it took us - we did this in 13 years. This was a huge, very complicated transaction with four different lenders, all with their own weird needs. And it was really complicated and there was some mistakes made. When you try and rush a transaction this complicated, this large, this fast with a group of people. I will also say he did not- he had what he said was his leadership team, but they did not have leadership in the way we tend to think about leadership. They had operational leadership. They had no strategic leadership whatsoever. So he made promises about his leadership team that turned out to not be true.
There was also a pharmacy, if you'll notice. And so I lead with this example because I want to lead with an example of like big screw ups. See, the pharmacy no longer exists because a week before the transaction, the pharmacist walked and said, "I don't want to be a part of this. I don't trust it." And three months later, he was opening a new pharmacy and a mile down the road. So they bought a business on the balance sheet that no longer existed, because in Maine and most states, if you don't have a pharmacist in charge, license on the wall, the state will come in and seize your inventory and destroy it, and you're done. So they spent a ton of money, having contract pharmacists come in. Nothing worked. They finally shut it down. They had to stop the bleeding, but they had this zombie thing on their balance sheet that they bought that was gone. And there was a provision of the bankruptcy code that allows you to do this very equitable, bankruptcy. I think it's section 5 or 6, of the bankruptcy code. And they finally used it, and it was a way to make the former owner take a haircut because he wouldn't. So now everybody did.
So I just want to say, if you Google Island Employee Cooperative, these articles will come out. So I just point out rushing it does nobody any good. So planning is important. Any one of the lawyers and lenders, the dozen lawyers and lenders sitting around the table, could have said, "maybe we should hit a pause button, since the pharmacists just walked," and nobody did. So, you know, just these things happen, mistakes get made. But, you know, they are thriving - incredibly thriving now, once they got that off the balance sheet, right-size the debt, and they're doing great. So, you know, it's unfortunate that needed to happen.
Here's another example of an immediate exit: Liberty Graphics. This is a pretty famous silk screen manufacturing company - this is in Maine also - about 45 employees, manufacturing. This is an example where the owner kept talking about, "You're all going to own this. We're going to make this a worker cooperative," but never did anything or explained to anyone what that meant. Never did anything to make it happen, and never explained to anyone what that meant. And it actually completely backfired on them because it created this toxic environment where nobody knew what he was talking about, his health was failing, and so nobody knew what was going on with the company. But he kept saying, "you're all going to own it." But he wasn't doing a thing to make that happen.
So this worked out really great. It was rocky because, again, this is somebody who ran a business out of their checkbook. "There's money in the bank account. I'm doing great." You can't do that as a worker co-operative. You have to have really good financial systems, and you have to teach people the financial systems, how they work and what they mean - so that's just one example. So it was rocky but, you know, we got past that. So I just want to stress the idea of planning is critically important if you want this to go smoothly. So on to happier stories.
This is in upstate New Hampshire. This is an example where the business owner was spending like 4 or 5 months of the year in Florida. Went on his month long hunting trip to Wyoming or something every fall. He built his management team who ran this place. He built a profitability committee out of six different workers, and they all took turns on it. So they understood margin and how the company makes money. Like, he built all these systems - around management, definitely, but also even like financial strategy and governance level stuff - and he owned it. I asked him, "so what exactly is it you do?" He said, "I'm the voice on the radio ads." that was-.
So this was pretty good, this company was very smooth. There's 20 some employees, very pro-sales, oriented. They deal mostly just with contractors and architects in the lakes region of New Hampshire - design, design services, and finishes.
Rock City coffee another meticulously planned- this was a four year transition by design, not by necessity. But she was a methodical planner, she turned 60. "My book says when I turn 60, I must begin exit planning, in order to get out when I'm 65." And so that's what she did. So this is a coffee roasting company and cafe in Rockland, Maine. You know, very good brand. So just an example of good planning. There's about 30 employees, 30 or 35.
Ward lumber. You've probably seen some folks here today with their Ward Lumber shirts on. This was a fourth generation family business, in the Ward family. For the first time in, 120 something years, somebody who does not have the last name Ward is now the CEO of this company, as of this year. But this is an example - this was also a large and complicated transaction because it happened in the middle of Covid. So there's a lumber and building materials dealer, we were organizing to a transaction for May or so of 2020, all of a sudden, kind of March, April of 2020 hit, and just everything got put on ice. And the building market just went so crazy - and this is in the Adirondacks. All of a sudden, the whole nature of the transaction changed because all of a sudden they have an extra million dollars in inventory on the balance sheet. It was just haywire. So that just kind of blew up the financials of the transaction. We had to redo a lot. It took a year, but by March of '21, we did this transaction. And that is Senator Kirsten Gillibrand there from New York doing the the board cutting ceremony, violating many OSHA rules: open toed shoes, cutting in the middle of two sawhorses.
I love this example because this is an example of every exit planning strategy gone wrong, over two generations. So, this is a small - very small - Ace Hardware in rural New York. But the gentleman in the middle, Ralph, his parents started this as a Western auto in the early 60s, and he didn't want anything to do with it. He wanted to be a teacher, so he left to become a teacher. His parents died in quick succession, he wound up owning it anyway, so he became an accidental hardware store owner. He tried to sell the business. So lack of planning, failed inter-generational family transfer, he tried to sell it, nobody wants his business. It's too small, it's too marginal. It matters deeply to the community, but nobody from outside of the community would want this. So finally, one thing led to another, and one of his customers knew who I was and suggested he contact me. So they're a thriving worker cooperative now but, you know, that took time.
So restructuring for growth; this is a fifth generation insurance brokerage in Maine with two offices. This company was started before the Civil War. The gentleman way over, mike, he and his father owned the business - so 50/50 S Corp - he worked for the company, his father was a CEO. His father retired, he became the CEO. They still owned it 50/50. He never wanted to inherit a business so he immediately started thinking about this idea. And I say this restructuring for growth, because for him, it was a really long term plan, over the span of what he was thinking a decade and we managed to do it in about seven years, as he went from 50/50 owner with his father, to one amongst all of his coworkers as a worker owner, but still the CEO. Then he staged a management transition, so there's a new CEO. So now he's just like selling insurance. Loving it. So that was his plan. He did not want to run this company, even though he was expected to as a matter of his family.
Another example is a landscaping company, Earth Designs Cooperative, in the Hudson River Valley. Again, mid-stage entrepreneur, young woman started this company. Single mom, you know, within a number of years, had 15, 16 employees. She continued to be the landscape architect for every job, the foreman on every job, the sole point of contact of every client. Totally unsustainable at the level that she built a business. So this was her plan - or their plan - was vesting these employees for growth, vesting these employees with ownership so they could grow more sustainably. So just another example. There's about 20 or so employees here.
And then that brings us to Dean's Beans. So there's a handful of examples. Different sectors, different sizes, etc.. But now I want you to hear from folks at Dean's Beans about their story.
Elena Kuhn: Hi. I my name is Elena. I have worked at Dean's Beans for three years just had my three year anniversary - workiversary - and I'm going to be talking from the perspective of someone who was on the steering committee during the transition process. And Tyler is going to be talking from the perspective of someone who was just witnessing, like outside of the steering committee and putting his trust in us.
And I guess to start off, I want to give a little history of the company. So Dean Cycon, the founder, he was an environmental and indigenous rights activist before he got into the coffee business. In 1998, he co-founded a nonprofit called Coffee Kids, where he managed a lot of the development work. And after about five years there, he decided to found what would become Dean's Beans, and really put into practice some of the values he felt had to be implemented at a structural level. So the core principles behind this business were environmental stewardship, long term relationships with farmers, and really meaningful and sustainable support systems for farmers, built into how his business worked.
Tyler Sweeney: And so that's part of where the co-op thing came to be so important. It's such a good fit for us is that Dean was fielding offers from giant companies for his business, but none of them could promise that stewardship of the legacy that he had made, that they were going to, you know, turn it into another cog in their bigger machine. And that commitment to the community, to the farmers and the environment that was so important to him, wasn't going to be carried on by those buyers, right? And so when he realized that people who did care about the farmers, who did care about the environment, who did care about the investment in the community, where the people who were running his business - you know, us, the workers.
Elena Kuhn: Yeah, and 30 years in, he was like, "I'm ready to retire. I'm ready to be a grandfather." And it just kind of it made the most sense, I think, with his ethos in general. And I do think that the way that he built the company really lended itself to low turnover. So some people had been working here for over 20 years by the time the transition happened. And I think that we were in a uniquely solid position for a smoother transition for that reason.
So, yeah, just want to talk about some of the things that went really well, during the transition. I had only been working there for a year when the idea of us transitioning into a worker on cooperative was floated by Dean, and when we started working with CDI. And it was intimidating, but I think that's the point of organizations like CDI. Like, there was necessary handholding during the processes of learning about creating bylaws and learning about the financial history of the company, seeing what would actually be feasible for us to take over, or if it would be feasible for us to take over, and what that would look like on a practical level. And I think one of the things that was really kind of inspiring to me and other people on the steering committee - and also not on the steering committee - was just there was necessary commitment and buy-in, and people kind of stepped up to the plate when necessary. And a lot of it has to do with sort of assuming that people have the best intentions, really trusting yourself, trusting your coworkers, trusting your workers that they really want to carry the business forward in the most sustainable way, and just providing them with the structural support, with help from people like Rob.
Tyler Sweeney: And I think that was the thing that at looking at the steering committee from the outside, knowing that they were my coworkers that I had known for years, and people that I had faith in to do their job and to be stewards of the company. But, the main thing that I was just absolutely floored by was while they were being coached by CCI and being helped by CDI, they were doing hard work and the work that they were doing was not only helping the actual transition happen, but it was also making them better at doing their job as workers. It was making them better fit to be an owner of that business, and to see that in them was kind of a kind of a green light to everybody else. They were like, "Oh, no, this is for real. We can really do this. You know, we've been running the business now let's own it."
Elena Kuhn: Yeah, and the other thing that was really crucial to the success of this transition was Dean's buy-in. You know, I think a lot of companies are not exactly in the position that we were in when this transition was a possibility. Dean built the business in a way that it was sort of low risk, slow growth, slow and very steady growth. Never for the explicit reason of growth just for growth, its growth with the intention of putting as much money back into the farming communities that he wanted to maintain those long term relationship relationships with. And so the way that he built the business meant that it was a lower risk transaction, quite frankly, for us to take on. And, I think some of the more difficult things during the transition were soliciting input from all of the people that we were going to become owners with. I think workers kind of become used to not having input, not having a say in how things go, and not being asked what their thoughts are. So it just was kind of a process pulling information out of people a little bit, getting people to really share their honest thoughts and feelings. But once people would come around to the idea of, you know, communal responsibility and ownership, it's really cool to see what ideas people had.
Tyler Sweeney: Yeah, I think the other thing, too, that inspired some of us was that we were looking at a landscape around us where there's insane consolidation. In every industry you're seeing big companies buy other companies that you thought were big companies. And the idea of that kind of consolidation, that we could avoid that for a company that was a pillar in our community, a company that we put our actual sweat and tears into, that we could spare one more little fish from the big fishes, was inspiring. And I think that in the next couple of years we're going to see more of these conversions, and I think that's a great thing. I can't emphasize that enough. I also can't emphasize enough the amount of support that you get when you're working with CDI and working with these people who understand how this works. Because that support is going to equip you in such a meaningful way, where you're going to these workers that you might be looking at your workforce right now and having a hard time imagining them owning your business, but you'd be surprised, when you give someone a runway how far they're willing to go.
Elena Kuhn: Yeah.
[indicipherable]
Elena Kuhn: Employees - we had 100% buy-in, so all workers who were there at the time became worker-owners. And that was 16. At the time of the sale - we just had this conversation with someone during lunch, and we both realized that we forgot how many people were there at the time of the transaction. Yeah, it was 16. Okay, great. It's switched around a little bit, but yeah.
Tyler Sweeney: Yeah, we're coming up on our one year anniversary of being a co-op, and the things that we've seen from all of our coworkers, not to speak disparagingly of any of my coworkers, just I've seen guys that I've seen play beer pong that are now the president of a board, you know, and that's not just something that happened overnight. It was about like Dean said, I believe in these guys and gals and thems, and everybody took that as a vote of confidence, and that vote of confidence, along with the leadership and coaching from CDI, turned into things that we never knew we were capable of. And I think that's pretty dang cool.
Elena Kuhn: I quite agree, yeah. And Dean was also, I think similarly to some of the companies that Rob was talking about before, Dean was on his way out. Like this was a slightly gradual transition, just in terms of his retirement, so he was often not in the office - like he was taking trips - and the majority of us were used to working - like going through many workdays without relying on him being there in person. So we had experience under our belt with that aspect of the transition.
Tyler Sweeney: And actually, that was the other thing I want to say about it is that, I know a lot of you guys are coming from the owner perspective. But from the worker perspective, the idea of buying a business, well, that's kind of intimidating. But the idea of buying a business that you're so familiar with and has such a proven track record is - it's a horse of a different color. It's a whole different story. And it was something that seemed scary, started to come into focus really quickly when we realized that, "oh, we do know what we're doing. We've been working here for a while now." Yeah.
Elena Kuhn: Yeah. I personally don't have an entrepreneurial bone in my body. And I never thought I would own a business, or own part of a business, just didn't consider it at all. But this was - it was almost a no-brainer. Feeling how robust the support was for this prior to the transaction, and seeing how many- I mean, all of us were just like, "yeah, we're willing to do this."
Tyler Sweeney: Almost as robust as a smooth cup of Dean's Beans organic coffee.
Rob Brown: That's great. But Elena, I think the point you're making is really important. It's like the success doesn't rely on one person anymore. Like being that charismatic mega-entrepreneur, right? Like, you bring your strengths, Tyler brings his strengths, other people bring their strengths. And the strengths of everyone put together, they can make a really successful, resilient, robust enterprise. As I like to say, "more people with eyes on the road, the less like you like you are to hit something, even if still only one person has their hands on the wheel," which gets to the governance and management decision. But no, they're a great example. Can you talk for a second about the communication aspect, particularly during that steering committee process, because I think you did it really well.
Elena Kuhn: Absolutely. So we made it a point on the steering committee - we would have meetings every week, right? every week. And the structure of our workday is we have a morning meeting every day at 10:30, and we made it a point to share any new information that came up during the steering committee meeting. Beforehand, we encouraged people to attend, made sure that people knew that this wasn't a secretive process. It wasn't like we're trying to make decisions for them. It's just like it all has to do with very clear communication throughout the entire process, and making sure that people are getting it every step of the way. And the team on the steering committee, there were five, I think. [indistinguishable question from audience member]
Elena Kuhn: At the time of the sale it was 16.
Tyler Sweeney: And now we are we are at 15 owners, still 16 employees. But yeah, the next morning, hearing back from the steering committee once a week, and having all the documents that they were going over made available to us. It was important not only for the whole process to happen, but for the people that weren't on the steering committee. It let them know that like, oh, we're serious. Like we mean business. And this is for real, you know, which really helped with the buy in from the non steering committee members.
Unidentified: [indistinguishable questions from audience member]
Elena Kuhn: There was a short period of time where we weren't sure what the total buy-in would be. But surprisingly, I think everyone was in once it came down to the time to decide. I don't think that would be the case with all companies. I was even I was surprised, and we did have someone who was going to buy-in and then quit before this, like didn't work at the company anymore. But that wasn't even really a hiccup. So as far as I know, it was really just like, we're all gathering information and making an informed decision, but yeah.
Tyler Sweeney: Yeah, like a huge part of it for us was we had the first initial meeting with Rob. He came and told us, you know, about what this means and everything. And I kind of looked around because we had our team building exercises that we do - spoiler: it's mostly like cornhole and eating pizza - but we were going to be doing that afterwards and I kind of got together with everybody afterwards, and I was like, "is this awesome? Because it seems awesome." And having that open dialog right after you get presented, this big thing that could be really scary, having the time for the team to meet with each other, kind of on their own terms and everything, allowed us to all kind of share our concerns with each other and talk ourselves into it - talk ourselves into believing in ourselves. So yeah, communication, not just among the current owner and the possible worker owners, but among the worker owners themselves is so important.
Unidentified: [indecipherable question]
Elena Kuhn: So, I don't think any of us entered this thinking, "yeah, I'm going to get really rich." Because that's not really how equal ownership works, or like, we all have the same stake you know, all of our shares are the exact same size. So I don't know how that would work in a company that did ownership differently.
Elena Kuhn: And as far as, like, the big business decisions; as far as, like "oh, why don't we just stop doing Fairtrade coffee and just crank out a bunch of low quality stuff?" That's such a big change that, like, we have the board - that would have to go through the board and would have to have a buy-in, like a really big buy-in. So there are kind of safeguards for that. And the other cool thing right now is Dean, the owner - founder rather, is serving on our board. So he's still has a finger on the steering wheel, if not a hand on it. And can advise us when it comes to those things that could help, that would make us lose sight of the heart of the mission, as it were. I think you had a question.
Unidentified: [indecipherable question]
Unidentified: Yeah, I think for us the answer is that our customers believe in that mission. So if we give up on that mission, our customers would give up on us. And so I think that's part of it for us. And the other part of it is we're lucky to have that continuity, where some of these people have worked at Dean's Beans for 20 years, or 15, 20 years and stuff, so they were friends with Dean, you know, they know and they believe the same things. But yeah, obviously, as this co-op continues and goes on and on, things will change over time, and we can only hope that the people that become workers after us when, we retire and stuff, share that same that core value.
Elena Kuhn: Yeah.
Rob Brown: I we are a time. I do want to point out, to the question: part of the steering committee process was, really workshopping and articulating and generating buy-in to an explicit vision, mission and values that became part of the business plan, literally. This wasn't just navel-gazing, this was like, "how do we create guardrails around where this company could go?" So 100% of the employees bought into those guardrails, bought into the idea that this is the vision that we have; this is the mission that we're going to stick to; these are the values by which we're going to do it. This is the brand, frankly. Right? You generally don't want to mess with your brand, if it's successful.
So there was work that was done. So a lot of what gets said can feel kind of fuzzy. It can feel kind of, touchy-feely, but they put in serious work. And all the different examples, they put in serious work to really work through those things and to articulate the vision, the mission, the values, the business plan, their demonstration of the financial performance of the company; all to become, as I said at the outset, that credible, bankable buyer of a business that can go get financing, that can frankly win the the confidence and trust of the seller. At the end of the day that seller has a right not to sell em.
Tyler Sweeney: And lenders.
Rob Brown: And lenders, yeah, the seller and lenders. I'm here through the afternoon, as are they. So ask more questions if you want. But, thanks. Thanks for coming, everyone.
This transcript has been lightly edited for readability. Transcript by GEO Collective.
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