Curated articles, guides, and insights selected by Tennessee Center for Employee Ownership.
Succession planners often recommend planning begin 5 years in advance of the anticipated exit. However, there is **no** hard rule for this, and a successful exit can occur within a year, sometimes less.
The optimal time to sell a business is when it is 1. performing strongly, 2. has a capable management team in place, and 3. the founder is prepared to transition out - ideally with a 12-month runway to execute the sale process effectively.
Most advisors and succession planners are either unaware of EO or misunderstand it. Sometimes supporting owners to pursue other exit-paths better aligns with their incentives. However this is changing and there are many ongoing efforts to raise awareness of EO.
Employee ownership comes in many varieties including equity compensation, direct share ownership, Employee Stock Ownership Plans (ESOP's) (often for larger companies), worker co-ops and Employee Ownership Trusts (EOT's) (often either works with smaller companies).
Strategic buyers are motivated by synergies and long-term strategic benefits, while financial buyers are primarily focused on the financial performance and investment returns of the target company.
Research shows that financial buyers are more likely to lay off employees post-acquisition than strategic buyers.
**~ 75%** of business founders who sold their company to a third party end up regretting that decision within a year, because of unrealistic expectations about the sale price or not finding the right buyer who was a good fit for the business and could take it to the next level
EO can enhance company performance, as it creates a closer tie between employee performance and rewards. Employees are effectively “working for themselves,” productivity-reducing conflict is minimized and productivity-enhancing cooperation and innovation encouraged.
A professional business valuation is a crucial document in any negotiated sale, and should be commissioned *just before* negotiations are likely to begin in earnest, whether with an internal (e.g, employees) or external (e.g., strategic or financial) buyer.
Employee ownership sales are typically financed by a combination of the following options: 1. External lenders 2. Seller financing 3. Employee contributions (In most worker co-op EO sales the employees will put up some equity in the form of a buy-in).
Key factors: 1. Identify and develop a qualified internal team, 2. establishing clear career development programs, 3. robust systems to reduce founder dependence, 4. providing transparency and decision-making opportunities to the team, 5. gradually transitioning responsibilities from founder
In some firms, the family retains partial ownership alongside the EO to allow for liquidity while still maintaining involvement. Evaluating factors like 1. cash flow, 2. existing debt, 3. management continuity, and 4. getting a professional valuation are all important when considering EO
ESOP's are *required* by regulation (ERISA) to be broad-based For worker co-ops, there is typically a probationary period before which a new hire has the opportunity to apply to become a worker-owner In an EOT, the trustee is a fiduciary agent on behalf of all employees.
- Observe and document employees’ skills, leadership qualities, and daily activities to identify potential successors. - Share your company vision and goals so potential successors understand the big picture and you can gauge their commitment. - Draft future leadership role descriptions to clarify needed skills and guide development efforts. - Seek employee feedback on career aspirations and refine your plan accordingly. - Involve more team members in decision-making and create incentives (bonuses, profit-sharing, equity) to foster commitment and continuity.
EO is a flexible option with any current ownership structure, and allows selling only a portion of the company to employees over time, maintaining the business's legacy and culture while transitioning ownership gradually.
Staying with the company post-sale depends on 1. How long you want to remain active 2. How long you expect to continue financially benefiting 3. how critical you are to the day-to-day operation of the business, both in terms of knowledge and/or holding key relationships.
Employee ownership creates transformative wealth for workers. Research shows ESOP participants accumulate a median of $164,000 vs. $17,000 for typical households. Women of color see 160x-1,435x wealth increases. Employee-owned businesses are 21% more likely to survive, grow 2-3% faster, and have <0.3% loan default rates. With 2.9 million businesses facing succession and only 6% of small businesses aware of EO options, expanding employee ownership represents a major opportunity for worker wealth building and community resilience.
Why EO Companies Better Building Worker Wealth
Owners Journey of Learning about Employee Ownership
Why Owners Choose EO and What it Offers
Why an owner chose Worker Cooperative over an outside buyer
Three employee ownership models for better jobs
Long time ESOP skeptic Jay Goltz attended an ESOP seminar that initially caused him anxiety, but ultimately led to clarity that an ESOP is right for his business. He believes an ESOP provides stability and helps employees retire well, without some of the risks that come with selling to an outside buyer. Jay and Shawn discuss whether employees are really "owners" in an ESOP and conclude the messaging should focus more on the benefits of stability and retirement savings. They also note that many accountants and lawyers don't fully appreciate the non-financial reasons entrepreneurs choose ESOPs.
Psychology of Ownership and EO Participant Productivity
Butler Till demonstrates how a 100 percent employee owned ESOP model drives client tenure to 8.9 years compared to the 3 year industry average. By empowering staff to think like owners, the agency improved efficiency by 4600 hours and reduced turnover to 11 percent. This ownership mentality creates a relentless focus on client growth and operational innovation.
Transitioning to an Employee Owned Business
What is Demutualization?
The Case for Employee Ownership
EO and ESOP Recent Research
