Across the United States, communities face a looming crisis: As millions of owners of small and midsized businesses prepare to retire or step back, the businesses that anchor local economies—and the jobs and wealth they create—are at risk of disappearing. These businesses are often sold to outside buyers, gobbled up by private equity, or simply shut down, leaving communities without vital services and workers without stable jobs.
As Nancy Forster-Holt, a University of Rhode Island business professor, observed, people who are “61 to 79 years old…own about 2.3 million businesses…and employ almost 25 million people.”
This is not a small problem. While many nonprofits focus on combating the ripple effects of the loss of businesses like these, what if there were a more proactive strategy?
Turns out there is—and it involves having employees buy the businesses.
Worker purchases [of businesses]…are not common enough.
Such sales or “conversions” are far from rare. Today, over 6,500 US businesses are owned in whole or part by employee stock ownership plans (ESOPs)—employee shares in ESOPs as of 2022 were valued at over $1.8 trillion. And there are other worker ownership options, such as worker cooperatives and employee ownership trusts.
Ownership matters. A 2019 report from Rutgers University found that “the median wealth of Latinx ESOP employees…is nearly 12 times the wealth of the national median for Latinx households. Black ESOP employees have approximately three times the wealth of Black households nationally.”
Sadly, while worker purchases are not rare, they are not common enough. Many opportunities are missed. And many gaps in field knowledge remain. For example, the article by Forster-Holt on business succession cited above does not even suggest selling to employees as a possible option. This is not an uncommon omission.
Workers do not have to have all of the cash on hand to buy their business….But that doesn’t mean it’s all easy.
Employee Ownership as an Exit Strategy
In an employee-owned business, ownership and control are shared among employees rather than concentrated in the hands of a single individual or small group. Research shows that they are less likely to lay off their workers during periods of economic turmoil (the COVID-19 pandemic, for instance) and tend to outperform their peers in productivity, profitability, and employee retention.
Although some businesses (especially cooperatives) may start as worker owned, many businesses become worker owned through leveraged buyouts.
Leveraged buyout? That sounds scary. But all it means is that workers’ purchase of the business is financed in part by committing a share of future profits to repay the loan. In other words, workers do not have to have all of the cash on hand to buy their business. This is good and makes it possible for workers to more easily buy their place of employment. But that doesn’t mean it’s all easy.
Fortunately, there is a lot of experience in the field. Here are some pointers for both what to do and what not to do to assist workers to buy their place of employment and thereby (hopefully) secure their jobs.
Lesson 1: Build Trust with Selling Owners
For workers to buy their place of employment, the retiring business owner must be a willing seller.
A business owner will likely sell a business only once in their life. It’s a scary road. That’s why it’s important to begin the process with trust, transparency, and honesty. The best approach is to come with an open perspective to find a solution that works for all the key stakeholders. Educating retiring business owners about what a sale to employees involves is important.
There are other factors: Selling a business involves core facets of personal identity—such as the business owner’s personal notions about leadership, giving up power, and money. It’s not surprising, for example, that many business owners overestimate the value of their business. Setting realistic expectations is critical.
I work for a nonprofit that specializes in facilitating business sales to employees, but what role can nonprofits and foundations play that are not employee ownership specialists? Quite a large one, actually. Nonprofits are often trusted messengers and can help connect business owners to appropriate technical assistance providers when the time is right.
Lesson 2: Workers Can and Do Step Up
After a business is sold to employees, business management often stays the same, but employees can have the opportunity to become members of a board in worker-owned cooperatives and employee ownership trusts, and sometimes ESOPs as well. And when this occurs, you may see something amazing happen.
Often, workers are only hired to do one thing. But when a worker becomes a board member, they can branch out and bring skills and talents to the table that aren’t in their normal workweek. I can’t tell you how many times I’ve seen employee-owners take on new roles and responsibilities on the board or an employee ownership committee and had the existing management or selling owners be surprised by how quickly they adapt and thrive.
Lesson 3: An Ownership Culture Shifts Workers’ Mindsets
An ownership culture is one of the most unique and exciting aspects of an employee-owned company. It empowers workers to step up, solve problems, and lead with confidence. It ties worker contributions to the company’s growth and rewards them with a real stake in its success.
Ownership cultures don’t develop overnight or automatically. Training, coaching, and consulting throughout the transition process can support this culture shift.
Becoming a worker-owner can give employees a new lens on their work. It also has the potential to be a powerful tool for fostering leadership development, peer learning, and democratic decision-making.
Lesson 4: There Is No Magic
If an industry is failing, a conversion to employee ownership will not make the business succeed. This is actually one of the most common misperceptions about employee ownership—and has historically been a major source of disappointment.
In short, the fundamentals matter—a lot. A business that is a good candidate for employee purchase should have minimal debt, strong financial performance over the past five years, and a positive future business forecast.
Lesson 5: The Deal Must Work for Both Parties
For a sale to employees to take hold and be successful, both the selling owner and the employees who are buying it need to be on board.
For example, sometimes selling business owners are motivated by a sense of legacy. Employee ownership is a way for a business owner to support the people who have worked for them for years, while keeping a key pillar of the community—namely, the business itself—in place. Sometimes selling to employees is also the way for the exiting owner to make the most money, but certainly not always. If a selling owner is primarily focused on financial gain, then the sale may not work.
As for the employees, employee ownership is usually a fit when employees are motivated by benefits, voice, and high-quality, secure jobs. That’s usually the case when turnover is low. If, on the other hand, most employees are not interested in staying at the company for a long period of time, then employee ownership—which relies on building value in the company over time—is not necessarily a good fit.
Lesson 6: The Need for the “Secret Sauce”
I recall one time when a team from our nonprofit met with a restaurant that was beloved for its pastries, cookies, and other desserts.
We asked ourselves: “Do the employees have the insights to make these creative foods that the community has come to love, expect, and long for?” In other words, what is the “secret sauce” of a business, and do employees understand it? Can they make or replicate it?
Employee ownership is more than a technical ownership model; it is a vital wealth-building strategy—both for communities and individuals.
One of the pitfalls of a company is that if you have one person who is bringing all of the innovation, sales, and creativity—especially the selling owner—and that knowledge is not transferable or shared, then worker ownership may not work.
It all goes back to the viability of the future business. Even if you have eager, talented workers, if what makes the business work disappears when one key person leaves, the business may not succeed.
To solve this problem, it’s important to identify how to transfer the “secret sauce” to future employee-owners. Often this works out great, but each situation is unique, and sometimes the “secret sauce” simply cannot be transferred.
A Call to Action
Employee ownership is more than a technical ownership model; it is a vital wealth-building strategy—both for communities and individuals.
When businesses convert to worker ownership, they not only preserve jobs and legacies, but they build pathways for workers—often in low-wage industries—to accumulate assets and participate in decision-making.
We are at a pivotal moment: As private equity and owners retire in droves, there is a limited window to keep wealth in communities. Without intervention, too many of these enterprises will be lost.
The good news is that nonprofits, philanthropy, and civic leaders can ensure that small and midsized businesses don’t just survive but thrive—by supporting education, financing, and policy advocacy for employee ownership. In so doing, nonprofits and their allies can help preserve community businesses while helping the next generation of workers not just earn a paycheck but own their future.
