On October 5, 2016, Darren Dahl writes on Forbes:
The evidence continues to mount that employee-owned companies simply perform better than their peers. They create more jobs, generate more wealth for their employee-owners, and then give back impressive amounts to the communities they operate in.
So why doesn’t every business operate this way?
One potential barrier for any company becoming employee-owned is that, for most businesses, it involves more than just flipping a switch or filling out a lot of paperwork. Sure, the founder of a business could technically sell the company to their employees tomorrow. But what would happen next? If a founder has kept their employees in the dark about, say, the company’s finances and then, voila!, pulls up the curtain for the first time, how do you think things will turn out? Or, if the founder has made every key operational decision inside the business since its start, what happens when they hand over that responsibility to someone else out of the blue?
The point is that there are steps every business can take to better prepare their workforce, and their company culture, to make the transition to becoming employee-owned. And, in some cases, paving the way for a successful transition can take years.
Consider the path that the team at Top Value Fabrics, an international fabric supplier based in Carmel, Indiana, took to become a company that is now 100% owned by its more than 60 employees.
Two entrepreneurs founded the company back in 1974; eventually one of the partners bought out the other in 2001.
A few years later, the new owner began thinking about his long-term succession plans and, with that in mind, he more fully empowered his executive team to run the business, including additional P&L responsibility and strategic decision-making authority. He continued to progress under that mindset, reducing his presence in the office more and more as time went on even though he was still the sole owner and didn’t have a clear succession plan.
In 2010, the company’s CFO, Chris Fredericks, who is now the company’s president, asked the owner about the possibility of selling to an ESOP. After a short due diligence process, the founder sold 100% to an ESOP later that same year. Along with that transaction, a professional board was put in place and the leadership team began a new effort to increase transparency and broad based decision-making throughout the organization.
“It’s amazing to see how much more interested and engaged team members can be in an ESOP that really leverages an ownership culture,” says Fredericks. “Building an ownership culture is not easy even in an ESOP; it requires a management team willing to let go of top down thinking, which is sometimes still very prevalent in older businesses and industries.”
Most companies that are 100% owned by an ESOP also rely on a board with some, or even a majority of, independent directors, which “opens up the management of the company to a more professional approach, along with more perspectives rather than just one leader,” says Fredericks.
Fredericks also points out that ESOPs don’t have to be an all or nothing solution. He says that private businesses that are contributing in some way to employee retirement accounts – such as through a 401(k) match or profit sharing program – are already great candidates for ESOP, even if being 100% employee owned isn’t their end goal. “They just have to establish a minority ESOP and shift the retirement expense to ESOP from what they are already doing,” says Fredericks.
So how do you know if your company might be a great candidate to becoming an ESOP? Fredericks suggests asking yourself the following questions:
1. Can this business run without you on a daily basis? If not, it might be time to start building out a management team that can shoulder the load of everything from solving problems to finding new customers to setting the long term strategic direction of the business.
2. Do you share what Jack Stack, the CEO of SRC Holdings and the founder of open-book management, calls a “Stake in the Outcome?” If not, it might be a good time to explore the notion of building a bonus or profit-sharing program that explains to your team what they can win – and how they can win it.
3. Are you willing to let an “ownership culture” take hold? In other words, are you willing to empower team members to make decisions and impact the results to the fullest?
4. Are you willing to add independent board members now to help professionalize the company?
5. What do you want your legacy to be? If your goal is to sell for market value, but also for your business and its culture to live on beyond you while also rewarding the people who helped you build it, it might just be the perfect time to start laying the foundation for employee ownership in your company.
“Some company founders inadvertently limit the future success of their business by letting it become too dependent on them,” says Fredericks. “The most impressive thing to me about our founder was his ability to recognize that well in advance of his desire to actually retire. He knew the type of legacy he wanted to leave for his market-leading company, and for the employees that worked hard to help him build it. The things he did well in advance of selling to an ESOP created an organization that was extremely well prepared to transition to employee ownership.”
Gary Reber Comments:
This an excellent article on how to create employee-owned corporations.
An excellent piece making a solid business argument for why employee ownership works better than the top-down wage system. It also provides some good transitional tips for making the change to the ownership system.