Turning Float On into a Worker Owned Co-op

After thirteen years in operation, Float On will be embarking on its next great adventure: converting into a Worker Owned Cooperative, entirely managed and owned by their current staff. Graham and Ashkahn will explain what makes co-ops special, why it can be a meaningful option for transitioning out of your business, and what it takes to pull a crazy plan like this off.

Transcript

Graham Talley: Hi everyone, I'm Graham.

Ashkahn Jahromi: And I'm Ashkahn.

Graham: And we are two of the owners of a float center in Portland, Oregon called Float On. For now.

Ashkahn: And, we say for now, because we're actually currently in the middle of transitioning Float On into a fully worker-owned co-op, at which point we will no longer be the owners of Float On.

Graham: Float On will instead be owned and operated entirely by the staff who work at the shop. They'll be in charge of making all the decisions, and they'll be the ones who share in the profit of the business.

Ashkahn: But we're getting ahead of ourselves here. Obviously, it took a lot of thought and research and billable, six-minute increments with our lawyers and CPAs for us to actually get to the point where we could make this transition happen.

Graham: So we thought it would be nice to share a little bit about our journey, along with many of the things that we actually learned during these billable, six-minute increments.

Ashkahn: We started Float On in October of 2010. And just for reference, that was the same year that the first iPad was released and the year that Lady Gaga wore that meat dress. So it's been a minute since then.

Graham: Nearly 13 years and countless pairs of salt-damaged shoes later, we decided to take a step back and actually consider what the future of our shop was going to look like.

Ashkahn: We've always been big fans of alternative business structures, and things like co-ops and ESOPs, and nonprofits have been on our mind for a while. In fact, we actually turned one of our businesses into a nonprofit a couple of years ago, which I don't know if you guys are familiar with.

Graham: So we started exploring the idea of our shop transitioning into one of these structures. And as we were looking into ESOPs, which is another employee-owned business structure called "employee stock ownership plans", we kind of found they don't really seem that feasible unless you're a little bigger business than The Float Center is. And a nonprofit structure also didn't really make sense in this context. So co-ops were the thing that we were kind of the least familiar with as we were getting into this, and we buckled down and started to do some serious research into them.

Ashkahn: Now we've had some crazy ideas in the past, and it's usually during this initial research phase when we find out, usually from our lawyers, that all the reasons we are trying to do things are basically infeasible pipe dreams and that all these plans are completely crazy. But the more we actually looked into co-ops, the more everything seemed to just make sense and actually be more and more reasonable. And it was it was incredibly encouraging how everything seemed to be fitting into place.

Graham: And yeah, people weren't telling us like, "no", or "who do you guys think you are?", like, we're used to hearing from people. And, eventually we realized that for us and for Float On, a co-op structure was actually probably kind of an ideal space to move into. So let's spend some time going through what we actually learned and why this started to seem like a better and better option for us as we move forward.

Ashkahn: When we started doing research, the first thing we realized is that we didn't like 100% actually know what a co-op was.

Graham: So a co-op or cooperative is basically a business structure where the business is owned by the people who work in it and or produce the products or services the business is providing.

Ashkahn: There are a few other principles or pillars, if you prefer, that they tend to adhere to. A big one is the idea of democratic ownership. So everybody has an equal voting power in the business. But in general the idea is just that it's a business that's owned by the same people that participate in the business in some way.

Graham: And that idea actually goes back pretty far. You see the show up in ancient societies, like Egypt with mutual grain banks. There were insurance funds, a lot of which started after the Great Fire of London, back in the day. And even in medieval guilds, there's cooperative principles that are present, including the ideas of democratic control and collective benefits.

Ashkahn: But the first modern cooperatives as we know them today didn't come about until the 1800s, mainly in response to the Industrial Revolution. And the most impactful of these was something called the Rochdale Pioneers of Great Britain, which started in 1844. This group developed the co-operative principles that form the sort of basis of modern-day co-ops. And some version of these principles is actually still in use by pretty much every co-operative out there today.

Graham: Honestly, the whole history of co-ops is actually pretty interesting, and you guys should look into it. And we can actually spend the next three hours delving into it with you, but we decided to show some rare self-restraint and actually focus this talk on something that's actually pragmatic to the food industry.

Ashkahn: So we're looking at these cooperative principles and things like democratic control, autonomy and independence. These are things that we're into, right? This sounds great, but we're still a little confused on exactly how these co-ops work. We're sort of familiar with things like grocery store co-ops that we all see around there. But does that mean, like our Float customers are going to have to become members of our shop to float with us or something like that?

Graham: It turns out there are actually several different types of co-ops. Things like those grocery stores are actually what's called consumer co-ops. And this is where the owners or the members of the co-op are the consumers of the business. You're probably familiar with the most, kind of big, large scale ones of those in the US--REI.

Ashkahn: And there are worker co-ops where the owners of the business are the people who work in the business. Equal Exchange, one of the largest fair trade coffee companies in the US, is a good example of that.

Graham: And there are producer co-ops where a group of people who produce similar goods get together in order to do things like negotiate better pricing or access larger markets. And a lot of this is actually focused in the agricultural space, which actually makes up the majority of co-ops here in the US. So this is things like Ocean Spray, Organic Valley, Tillamook, near us in Oregon. These are all examples of producer co-ops.

Ashkahn: And there are lots of other types, depending on who you ask and how each state or country has sort of defined things locally: housing co-ops, purchasing co-ops, financial co-ops, and so on. And you can even combine multiple of these different structures together to form what's called a multi-stakeholder co-op.

Graham: But in all these cases the underlying idea is pretty much the same. There's a group of people getting together in order to address a shared need that they have, whether it's access to healthy and affordable foods like consumer co-ops, the ability to pool your goods together in order to better access a market like agricultural co-ops, or the ability to work in an environment where you both have a say and actually get to reap the rewards of your labor like a worker co-op.

Ashkahn: In terms of Float On, there were only a few co-op structures that really made sense for us to consider as we weren't exactly planning on starting to grow agricultural scale produce behind tank three at any point soon. So we were looking into either becoming a worker co-op, a consumer co-op, or some sort of multi-stake combination of the two.

Graham: And ultimately we decided on a worker co-op. Although, honestly, we do think that a consumer co-op is pretty cool, and there's a lot of reasons to do that. Float Centers do have a lot of really dedicated customers who come in, and floating can actually be a really meaningful experience for them, and it just seems kind of cool if they're the ones who actually get to own the business.

Ashkahn: There were a couple of things that ended up swaying us towards becoming a worker co-op. One is the fact that just a single Float Center is not really as big as something like a factory or manufacturing plant. And it just felt like the profits that a company of our size could generate would be a lot more impactful if they were shared amongst the small group of people like our staff, as opposed to a large group of people like our customers.

Graham: Yeah, and if we did start paying our distributions to our customers that would probably come with tax forms, and those tax forms that come with billable CPA time. And eventually it seemed like it would just sort of spiral out of control, and the cost and complexity seemed a little too much for our little Float Center. So, in the name of simplicity, we decided to not really head in that direction.

Ashkahn: The other reason is that Float Centers can just be pretty technical and challenging to run, which you guys may know something about. We felt that decision making for the co-op would need to rely heavily on the expertise that the employees had to run the business, and that's totally possible in a consumer co-op. But it's just sort of a lot more kind of straightforward and easy to implement in a worker co-op.

Graham: And we actually did spend quite a bit of time trying to consider some way to make the multi-stake model work; and just in order to get the best of both worlds. And in the end, mainly actually because of just law, cooperative law in Oregon, we decided that a worker co-op made the most sense and would just stop things from getting to overly complicated.

Ashkahn: But we still definitely think that like a consumer co-op or a multi-stake co-op could be totally feasible. And I think just something even like us having to be in a different state would have, could have tipped the balance in a different way.

Graham: Okay. So with the idea of becoming a worker-owned co-op in mind, we actually started to dig a little deeper into how a company like that would operate. And the first thing we found out is that almost all co-op law here in the US, as we kind of mentioned, is state based. So the exact specifics of all of this are going to vary from place to place.

Ashkahn: And even within the legal and financial requirements of each state there can be a lot of flexibility for how each co-op decides to work the specifics of their policies and their structures.

Graham: So bearing all of that in mind, here's the gist. The company is going to have a group of members, or owners, which the co-ops call members. And in the worker co-op these member-owners are going to be the employees. But becoming a member of the co-op is actually voluntary. So you can have a mix of worker-owners and people who are just workers.

Ashkahn: You can also put stipulations on what an employee needs to do to actually become an owner-member. Many co-ops have financial buy-in that's required. So an employee would need to pay something like $5,000 to kind of join the co-op as an owner. And that's essentially just there to kind of make sure they have skin in the game.

Graham: And for Float On this didn't really feel like it made as much sense. And our staff actually ended up deciding to focus more on a length of time that they'd have to work at Float On, rather than an amount of monetary contribution that they'd make to the co-op in order to become a member. So basically a new hire will need to work with us for around a year before they're able to become an owner-member if they want to.

Ashkahn: And this could be important because the owners or members of the co-op have the ability to vote on company decisions. And remember, one of the main principles of co-ops is the fact that every member gets an equal vote. So it felt sort of prudent to make sure a new employee can just come in and start sort of making decisions before they were familiar or comfortable with how the business actually operated.

Graham: And like a lot of other businesses, co-ops also have a board of directors to handle a lot of the business decisions and what the full group of members votes on versus just the board of directors kind of varies from co-op to co-op. But the full member group, at the very least, is probably going to vote on things like changing the bylaws and who gets to be on the board of directors.

Ashkahn: And pretty much just like all businesses, the co-op is also going to have an operations team that is actually running the business and sort of making the day to day decisions.

Graham: And with something like Float On these distinctions all get a little bit silly because we have such a small group of people that the people who are the members are also probably going to be on the board. And they're also, of course, going to also be on the operations team.

Ashkahn: One cool thing is that in Oregon, we're actually able to have people on the board of directors that are not members of the co-op. So we decided to set aside a couple of the board seats for customers of Float On. This allowed us to kind of incorporate some of the benefits from that consumer co-op model without the extra complexity that comes with it. And it just seemed incredibly helpful. Some of our customers have actually been around longer than any of our of our staff in the shop has, and some of them, likely have a wealth of business experience that the staff in our shop might not have.

Graham: So outside of just decision making. The other thing that being a member of a co-op gets you is the rights to the profits of the company. So how exactly this is paid out can have some flexibility, but generally at the end of the year the co-op is going to look at all the profits and first decide how much of that they should kind of keep in their coffers, for any changes or upgrades they're making. And then after that, the rest is divvied up among the members.

Ashkahn: Some states actually have legal requirements for exactly how this works, like requiring the kind of profits to be paid out just in proportion to how many hours people worked. But other states have more flexibility, and the people of the co-op can choose to do it in other ways that include things like seniority or job position or things like that.

Graham: Okay, so now we had a structure in mind and a pretty good understanding of how this would kind of work generally. The next thing we had to figure out was how to actually implement all of this. And to start the formal transition from our LLC into a worker cooperative.

Ashkahn: So the first thing we needed to do was talk to our shop staff. As you may have guessed, you can't exactly turn into a worker co-op if you don't have workers that are interested in it. For us, this turned out to be a really easy step. Our staff was really excited about the whole idea, and they were genuinely appreciative that that we were considering doing it.

Graham: And it might have helped that when we sent everyone a message about a big, exciting meeting, we made a typo and we actually said big exiting meeting. So everyone kind of thought that they were going to get fired there for a second. So I think they were pretty stoked when they found out what the meeting was actually about.

Ashkahn: So, after we knew that our staff was on board, the first official step was them actually forming a new legal entity, which is the co-op. And because the name Float On was technically taken by our existing company, they needed to come up with a temporary name, to use until the co-op could kind of transfer the rights of Float On over to itself. So our staff met and decided to call themselves the Intergalactic Float Cooperative.

Graham: So the way this works is that this new entity, the IFC, if you will, is actually going to buy all of Float On's assets from us, which will allow them to take over the business. So, we will actually get paid for this conversion of the business. We don't need to donate Float On or anything like that to make this happen.

Ashkahn: The price of the sale is agreed upon between us and the new co-op members, which is our staff, and it's similar to the price we would have gotten just selling on the open market.

Graham: And actually the transaction ends up happening a lot like the sale of any business, except that the sales to cooperatives have a few kind of cool superpowers. So let's actually take a second to talk about what would have happened had we pursued a normal business sale. So we can go back and kind of see how this co-op process differs a little bit from that.

Ashkahn: If we were trying to sell our business conventionally, the first thing we would have needed to do was find a buyer. And this can be a pretty hard step. Float On has been our baby. We put all of this love and care into it, and the idea of just handing it over to anybody is not very appealing.

Graham: And we need to find someone who seemed both passionate about it and actually capable of running it while, at the same time, trying not to be so exclusive in the process that we haven't just wiped out anyone who would be a potential candidate for a buyer.

Ashkahn: And we would have needed to actually find that person somehow. What businesses typically do to help with this is they will hire a business broker who finds and vets potential buyers.

Graham: So with the co-op we essentially just get to skip this step. We already have a buyer, which is the staff of our Float Center. And we already know they're passionate and they're capable. And those business brokers are going to keep around 10% of the business sales. So we get to kind of skip that whole chunk of cost as well in this process.

Ashkahn: Okay. So let's say we would have found a buyer. That person needs to actually be able to afford to buy the business. And with the sale of something like a Float Center, it's very likely that that person is not going to just have all the funds necessary to make this purchase sitting in their bank account. So they're going to likely need to go to the bank to get a loan. And that loan is likely going to need to be backed by the SBA. Something like that is is probably the most common outcome.

Graham: And in the co-op transition, it's actually sort of the same thing. But this is really where the magic comes in. So this entire thing can happen without our staff actually putting any money down or taking on any personal liability.

Ashkahn: So just like a hypothetical buyer, our new co-op is going to ask for a loan to cover the cost of purchasing the business. But with the normal buyer, the bank is going to ask for a down payment and they're going to ask for some personal collateral. So in other words, if a business collapses the bank is going to go after their personal assets to try to recoup their money.

Graham: With co-ops this isn't necessarily the case. So there are these organizations out there that are willing to issue loans to co-ops specifically without a down payment and without asking anyone to be a personal guarantor on the loan. And that means that if the business falls apart, the lender will recoup what they can from the business, but it stops them there. None of our staff need to put themselves at risk or kind of put their personal liability out there, risk their personal assets.

Ashkahn: And while, theoretically, any lending institution can do this, we found from our experience that going through these special organizations called Community Development Financial Institutions, or CDFIs, is sort of your best bet, at least here in the US. None of the conventional banks we talked to were [as?] willing to consider a loan without a down payment or personal guarantors, but the CDFI that we talked to was totally down. They were familiar with this. And in general, CDFIs just sort of understand and support co-op development to a much greater degree than a normal bank does.

Graham: And one of the big reasons that CDFIs are actually comfortable with this is because co-ops actually have a better track record of staying in business than normal business entities, which also means they have a lot fewer defaults on their loans when they're getting them. And ultimately having the co-op able to secure loans through a CDFI without this down payment and without personal guarantees is really what made that idea of approaching our staff and talking to them about this even possible and certainly much more approachable and realistic to us.

Ashkahn: And when it comes to us as sellers getting paid it can also be a little bit different than a normal business sale. Instead of getting all of the same price at once or the sale price at once, we will get 70% of it upfront, and the other 30% is actually going to be a seller's note. And that seller's note is going to have a similar interest rate and sort of timeline to the rest of the loan that the co-op is getting.

Graham: So basically, we're taking on 30% of the loan, kind of in volume, in case the the business goes under before the loan term is up. And in a way, this is kind of taking the place of the down payment on a typical loan. And it's also probably why they're more comfortable with that whole lack of personal guarantees thing.

Ashkahn: There is some room for negotiation with these percentages with the CDFI. But from what we can tell, this sort of 70-30 split is very, very common. And trying to get the CDFI to kind of pay more than 70% upfront is pretty unlikely.

Graham: There's this other interesting benefit that we'll mention, too, that comes with selling your business to a co-op. So there's something called the "1042 rollover", which has to do with IRS section 1042, recapture of gain of disposition of qualified replacement property, which I'm sure you're all familiar with.

Ashkahn: So essentially, here's how it works. If you sell your business to a worker-owned co-op, you can actually defer paying any of the capital gains tax that you were supposed to pay on that as long as you reinvest the money into what's called qualified replacement properties, which include things like stocks and in US companies. And if you sell that investment later on, you will then at that point have to pay the capital gains tax that you would have paid initially. But if you don't ever end up selling it and instead you pass it on in your estate, nobody ever has to pay that capital gains tax.

Graham: And this is a benefit from the IRS specifically for businesses selling to work or co-ops or ESOPs. So for the right person, it's actually a really cool perk. And also we're totally not actually tax professionals. And everything we just said could be us grossly misunderstanding tax law and what we're actually getting into here. So definitely go and talk to an actual attorney or someone who knows what they're talking about, instead of just listening to a couple jabronis up here whose previous talks include shooting t-shirt guns at the audience and reciting love poetry about spreadsheets.

Ashkahn: Anyway, the end result of all of this is that the co-op will apply for a loan with the CDFI, and then once approved, they'll use that money to buy all the assets of the company from us, and then they'll officially be the ones running the business. And from our perspective, this entire process has allowed us to sell our Float Center for a fair market value without needing to find a buyer and without our staff needing to put down any personal money or take on any personal liability.

Graham: And that's not even mentioning the most incredible part of all this, right?, which is that our shop staff now actually get to become the owners of the business that they work in, and they're going to be able to make Float On. [They'll?] take Float On, turn it into something that more directly serves their needs. And when it's doing well, they're going to get to benefit directly from the profits of the business.

Ashkahn: They'll also be one under only a thousand worker-owned co-ops in the United States, which is something that I think they can be really proud of. You know, co-ops not only have great principles, they also just seem to operate a lot more ethically and effectively in co-ops.

Graham: For example, the average wage discrepancy is way less than with your standard corporation. So co-ops have the kind of ratio between the highest and lowest paid workers, averages around 2 to 1, whereas in normal corporations that's over 300 to 1.

Ashkahn: There are also lots of studies across various countries showing that employee-owned cooperatives tend to last considerably longer and be more resilient to disruptive events. In 2020 and 2021, employee-owned businesses dropped less in revenue than their counterparts and maintained more hours for their employees.

Graham: And this next one should not actually be too surprising. But it turns out that businesses that are worker-owned also tend to have higher wages for workers and also better retirement packages as well.

Ashkahn: One of the other big things that we really like about all this is how nicely it sort of handles the concept of succession in the business. Conventional businesses can hit these weird issues when an owner wants to suddenly leave or when they retire or they die or they float so hard that they just vibrate out into a different plane of existence. And in those cases, the ownership just gets transferred to their inheritors.

Graham: And with the worker-owned co-op, whoever is working there currently is able to be an owner. So in a shop like a Float Center this means that the current worker-owners, as the current worker owners, move on to new things. New ones come in. The cast of characters changes, but the show just sort of goes on. The cooperative is able to continue through these ownership changes while maintaining its same structure and its basic philosophy, which is the workers are the ones who both make the decisions and benefit from the profits of the co-op.

Ashkahn: Float On is becoming part of a movement that's advancing equitable and sustainable business practices. And we just can't think of a more fulfilling way for us to send it off.

Graham: So we only started thinking about this whole co-op transition about a year ago. But really a lot of this started well before that.

Ashkahn: You can't really just snap your fingers and have a group of employees that's both willing and capable of taking over your business. You need to have people who--they care about their jobs because they feel valued and respected.

Graham: They need to have a real autonomy and responsibility to make business decisions.

Ashkahn: They have to have access to your finances, so they can understand how your numbers work.

Graham: And you have to have good systems in place, so that the whole thing can keep running if any one person wants to leave.

Ashkahn: Now, if you've seen any of our past conference talks, you know that these are things that we've been working on for years as part of our general business philosophies, and all that has put us in a position where the work required to transition to a co-op is mostly already done. The pieces are sort of already in place. And honestly, it feels just natural. This is kind of just the next step that our business would logically take.

Graham: But that doesn't mean that it's not possible for any business to convert into a co-op. In fact, most businesses, as you can imagine, actually have much more conventional work structures than we do before they start this whole conversion process. And the process of conversion does actually take time. So you can use that time to train up your staff and get your business ready for what you need to do to make this happen.

Ashkahn: There are also a ton of great free resources available out there. As you can imagine, the community around cooperatives is incredibly passionate and really wants to help more co-ops exist. So we won't actually delve into these right now because going through list of websites is pretty boring. But we did want to include this slide here, so that you can see some of the most useful resources that we took advantage of in this process.

Graham: And, of course, honestly, we're always personally available if you guys want to corner us in the conference or just talk to us afterwards about what we've gone through with our own co-op conversion and ask us any questions or anything like that.

Ashkahn: And if this story has struck a chord with you, but you don't think your own shop is in a place where this is an option, just know that it absolutely is.

Graham: And for the majority of you who aren't thinking about leaving your Float Centers at all right now, it can still be good to think about this stuff. Sudden illness, winning the lottery, getting sucked into Jumanji--you never really know what unexpected things life is going to throw at you. And it can be good to think about a plan before you suddenly need it.

Ashkahn: The nice thing is that even if you end up sticking with your business for the rest of your life, the things that you need to do to prepare for this, things like creating good systems and creating a happy and productive work environment--I mean, these are just things that are going to make your business better in the meantime.

Graham: So. That's it. After running Float On for all these years, it's definitely bittersweet to be on the precipice of not actually owning a Float Center anymore.

Ashkahn: We've been around through a lot of the different ages of floating, from the times when everyone would ask us if this was that thing from altered states to the times when everyone would ask us if this was that thing from the Joe Rogan Podcast, the times when everyone would ask us if this is that thing from Stranger Things.

Graham: For most of our adult lives, this has been what we've devoted ourselves to. It's been a huge part of our personalities. You know, we're the Float Envoys. But all good things come to an end, and not everyone gets to decide how they're going to wind down the most important chapters of their lives.

Ashkahn: Running Float On has been an incredibly meaningful experience for us, and we're truly honored to have shared the title of Float Center Owner with all of you.

Graham: And we just want to say thank you to everyone in this industry for being so passionate and generous and silly.

Ashkahn: And thanks for giving us this platform to share our crazy business ideas with you, and for all the help and encouragement through the years as we've worked together to build up the salty Industry.

Graham: And seriously, thank you. And Float On.

Transcript provided by the GEO Collective