Answers, glossary terms, podcast episodes, and research reports on employee ownership — selected for Tennessee business owners.
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.
Owners who chose a Perpetual Purpose Trust instead of ESOP
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
An ESOP might cost more than $150K to install and $50K annually. An EOT should cost $50K to install and roughly $5K annually.
A public, community-curated catalog of U.S. trust-owned businesses maintained by the Purpose Trust Ownership Network (PTON). Tracks Employee Ownership Trusts, Perpetual Purpose Trusts, Long-Term Benefit Trusts, Stewardship Trusts, and related structures across 79 entries — with company size, industry, location, and year of trust formation.
Explains Board of Directors, Management, ESOP Trustee, Plan Administrator, ESOP Committee, ESOP Communications Committee Roles
Barriers to ESOP Creation
A conversation with Zolidar co-founder Sonali Kothari on why honest, unbiased exit guidance can be meaningful. Some discussion with Loren on common questions, where to focus and how to compare every succession path (family, outside sale, key employees, private equity, ESOP, or employee ownership trust) against your own business before you're forced to decide.
Repurchase obligation forecasting is a critical practice for ESOP companies to anticipate and manage future financial liabilities tied to employee exits. Without proper forecasting, companies may face unexpected liquidity pressures that disrupt growth, delay investments, and undermine employee trust. By projecting obligations 10 to 20 years ahead, companies can prepare for large payout events, support long-term plan sustainability, and align internal stakeholders around realistic financial expectations.
A county is a primary administrative and political subdivision of a state, serving as an intermediate level of local government between the state and smaller units such as municipalities. Counties typically provide regional services including law enforcement, courts, public records, and road maintenance across both incorporated and unincorporated areas. While a municipality (such as a city, town, or village) is a self-governing local entity usually contained within a county's boundaries, the two serve different governmental functions—municipalities handle urban services for their residents, whereas counties address broader regional needs. In some cases, a city and county may consolidate into a single jurisdiction, as seen in San Francisco or Denver, but more commonly they operate as distinct layers of government with overlapping geographic territory.
**The Methodology:** When databases like PeerComps, DealStats, and BIZCOMPS record a **market comparable transaction**, the financial inputs (Revenue, EBITDA, and SDE) are based on a **1-year snapshot**. According to the data collection standards of Business Valuation Resources (BVR) and guidelines from the American Society of Appraisers (ASA), these inputs specifically reflect the most recent full fiscal year or the **Trailing Twelve Months (TTM)** prior to the sale. They do not use multi-year historical averages to baseline the deal. When pulling benchmarks from these databases, you must rely on the **median** or **harmonic mean** to prevent high outliers from distorting your data. **The Verification Risks:** Relying purely on this data without understanding its flaws will lead to massive valuation errors. Because **market comparable transactions** in the SMB space are private, there is no SEC-style regulation enforcing data accuracy. With the exception of PeerComps, which mandates SBA bank verification backed by IRS transcripts, databases rely heavily on voluntary submissions from business brokers. This lack of verification creates inconsistencies in how earnings are normalized and hides critical deal structures, making the resulting **market comparable multiple** dangerously misleading if taken at face value. **The Calibration Strategy:** Because of these data risks, valuation experts rarely rely on a **market comparable valuation** alone. Instead, a bottom-up intrinsic valuation method (such as a Discounted Cash Flow or Capitalization of Earnings) is expected to provide a more fundamentally sound baseline based on the company's actual cash-generating ability. The market comparable data is then used as a critical reality check to calibrate the intrinsic model, ensuring the mathematical value actually aligns with what a real-world buyer is willing to pay.
Companies can manage repurchase obligations strategically by forecasting early and often, designing flexible plan features, using a mix of funding methods, and clearly communicating financial realities to employees.
Common Trust provides a roadmap for building an advisory team to execute an Employee Ownership Trust transition. The guide emphasizes that while existing CPAs and corporate counsel can often stay involved, specialized expertise in purpose trusts and EOT-specific advisory is critical for long-term success. It details the roles of legal, tax, valuation, and financing partners, highlighting how an employee ownership advisor serves as the central coordinator to ensure structural alignment.
Although more than 6,000 U.S. companies have an employee stock ownership plan (ESOP), many businesspeople are not well acquainted with them. ESOPs are often confused with stock option plans, which are something else altogether. They are not stock purchase plans; employees almost never buy stock through an ESOP. They do not require that employees run the company or even elect the board unless companies want to structure themselves that way. Most people, in fact, would be well served by forgetting what they have heard or thought about ESOPs before starting to learn more about them. This book will teach you what ESOPs really are, how they work in both C and S corporations, what their uses are, what the valuation and financing issues are, what the steps to set them up are, and much more. Table of Contents 1. A Visual Introduction to ESOPs 2. An Overview of How ESOPs Work 3. Selling to an ESOP in a Closely Held Company 4. ESOPs in S Corporations 5. Understanding ESOP Valuation 6. Things to Do with an ESOP Besides Buying Out the Owner 7. Financing an ESOP 8. ESOP Distribution and Diversification Rules 9. Choosing Consultants and Trustees 10. Corporate Performance and Ownership Culture 11. ESOP Governance 12. Simpler ESOP Structures 13. Alternatives to Using an ESOP for Employee Ownership
Setting up an Employee Ownership Trust typically costs $50,000 to $80,000 one time, covering legal drafting of the trust and related documents plus deal structuring. Ongoing maintenance runs about $10,000 to $20,000 a year, paid to the trustee. These are planning ranges, not quotes, and vary with the company and the deal.
An Employee Ownership Trust is usually governed in three layers: a trustee who holds the company in trust and owes a fiduciary duty to the employee beneficiaries, the company's board of directors that runs the business, and a trust stewardship committee (often including employees) that represents employee interests and safeguards the company's mission. The exact roles and how they interact are set in the trust documents.
All three are forms of broad-based employee ownership, but they differ in cost, complexity, and mechanics. An EOT holds the company in trust for employees, who do not buy their own shares; it tends to have lower setup costs and more flexibility than an ESOP, but it does not offer the selling owner the capital-gains tax deferral an ESOP or worker cooperative can. An ESOP is a regulated retirement-benefit plan with higher setup and compliance costs. A worker cooperative is directly member-owned and governed one-member-one-vote.
Both happen, but seller financing is common in Employee Ownership Trust transitions: the trust buys the company over time out of future profits, with the owner paid through a note instead of a single up-front check. External financing (bank debt or mission-aligned lenders) can supplement or replace it to give the owner more cash at closing. The right mix depends on the company's cash flow, how much liquidity the owner needs up front, and what financing is available.
An Employee Ownership Trust is taxed differently from an ESOP. It does not give the selling owner the Section 1042 capital-gains deferral that selling to an ESOP or worker cooperative can, so the owner is generally taxed on the gain in the normal way. The company can deduct the profit-sharing it distributes, and employees are taxed on it as ordinary income, like a bonus. Confirm with a CPA or tax attorney.
Yes, an Employee Ownership Trust trustee has a fiduciary duty to act in the best interests of the employee beneficiaries. Trustees can be independent professionals, an institutional (corporate) trustee, or, in some structures, individuals connected to the company; the choice and selection process are set in the trust documents. Many companies use a professional or institutional trustee for independence and expertise, which is part of the ongoing annual cost.
Employee Ownership Trusts work for companies of essentially any size and industry. The practical floor is having enough employees (roughly 10 or more) and enough net income to comfortably cover the trustee's annual cost (on the order of $15,000 a year). Beyond that, fit is driven by the owner's goals more than the company's profile.
A company held in an Employee Ownership Trust can generally still be sold if circumstances require it, but the structure is designed to make a casual sale hard, and that permanence is much of the point. Any sale must clear the conditions set in the trust documents and satisfy the trustee's fiduciary duty to the employee beneficiaries. Those conditions vary by trust, so settle the specifics in the trust design with counsel.
In a US Employee Ownership Trust, the trust, not individual employees, is the company's legal shareholder, so employees usually do not hold personal voting rights to elect the board. Their voice is built into the trust instrument instead, typically through a stewardship committee, the board, and a trust enforcer, often with the right to nominate or elect who fills those seats. It is built this way for the asset lock: holding shares in trust for a fixed purpose keeps the company employee-owned and resistant to sale, which freely votable, sellable individual shares would undermine.
A US Employee Ownership Trust (EOT) is one of the strongest tools for protecting a company's mission long term, though "permanently" overstates it. Because shares sit in a trust rather than with individuals who can be bought out, the trust agreement can lock in the mission, restrict any future sale, and appoint roles whose legal job is to enforce that purpose. How durable that lock really is depends on the state chosen, careful drafting, and people honoring their roles. This is general education, not legal advice.
Profit-sharing is a built-in feature of an Employee Ownership Trust, balanced against the company's need to reinvest. That balance is a governance decision: the board manages the business and its capital needs, while the trust structure and any stewardship committee keep employee interests in view. The trust documents and the company's financial discipline, not a fixed formula, set how much profit is paid out versus retained for growth.
In the US there's no EOT-specific cap or floor on the sale price. Unlike an ESOP, where the Department of Labor under ERISA bars the trustee from paying more than appraised fair market value, a US Employee Ownership Trust runs under ordinary state trust law, so the seller and company set the price far more freely. The real limits are standard IRS fair-market-value rules and what the business can repay. Discounting, even partial gifting, is allowed.
No. Forming an Employee Ownership Trust does not, by itself, require becoming a C corporation. A trust can hold S-corp or C-corp stock or an LLC interest, so many companies keep their existing entity. The C-corp question really traces to ESOPs and Section 1042, whose capital-gains deferral is not available for a straight sale to an EOT. Whether your own entity should change is a facts-and-circumstances call for a CPA or attorney.
In a US Employee Ownership Trust, the trust agreement decides who fills each role, so specifics vary by company and no law dictates them. A common pattern: employees elect a stewardship committee, that committee appoints the company board, and the board selects a "directed" trustee that only handles administration. Employees can get a real say, mainly through the committee and any board seats, but how much is a design choice written into the agreement, not a legal default. This is general education, not legal or tax advice; confirm any structure with a qualified attorney and a CPA.
Yes. An Employee Ownership Trust can hold part of the company while the founder or other owners keep the rest, and you can move toward fuller employee ownership over time. Important: the trust's ownership percentage is not the same as who benefits. Selling 30% into the trust does not mean only 30% of employees participate. Who qualifies is set by the trust's terms, not by the size of the stake.
Setting up a US Employee Ownership Trust is a small-team effort. The core roster: an attorney experienced in trusts and business transitions to draft the documents, a trustee to hold shares for employees, a CPA or tax advisor engaged early (structuring drives the tax outcome), and an independent valuation firm to set a fair price. Many owners also add an employee-ownership advisor up front to assess fit and coordinate everyone. This is general education, not legal or tax advice.
Beyond a seller note and a senior bank loan, US Employee Ownership Trust buyouts are usually filled in with mission-aligned capital: community loan funds and impact lenders, dedicated employee-ownership funds, and junior layers like mezzanine (subordinated) debt and non-voting preferred equity. Because most EOT loans are repaid from future profits and no single employee can reasonably sign a personal guarantee, government loan-guarantee programs can also help. This is general education, not legal, tax, or investment advice.
A trade association, or industry association, is an organization founded and funded by businesses within a specific sector to promote collective interests, establish best practices, and represent the industry to policymakers.
There are three distinct strategies to meet ESOP repurchase obligations, each with unique effects on share allocation, corporate cash flow, and ESOP ownership.
Workforce mix rarely rules a US Employee Ownership Trust in or out. An EOT is not a retirement plan and is generally not governed by ERISA, so the coverage and nondiscrimination tests that shape who participates in an ESOP usually do not apply; the trust document can define a broad beneficiary group spanning full-time and part-time staff. Extending benefits to contractors is possible but a deliberate design choice with tax and worker-classification consequences. Unionized companies can use an EOT too, where the main task is fitting profit-sharing alongside an existing collective bargaining agreement.
In the US, an Employee Ownership Trust does not make a company tax-exempt or carry a special tax break. The company keeps paying the same federal and state income tax it would under any owner, depending on whether it is a C corporation or a pass-through. The recurring mechanic to know: profit-sharing to employees runs through payroll as deductible compensation, lowering taxable income and taxed to employees as ordinary income, like a bonus. This is general education, not tax advice.
Employee Ownership Trusts are growing because they are simpler, more flexible, and lower-cost to set up than ESOPs, while still putting ownership in employees' hands. They appeal to owners who want to preserve a company's mission, jobs, and independence, especially as a large wave of small-business owners reaches retirement without a clear successor. The numbers are still small, on the order of ten new transitions a year, but rising.
The size of an ESOP repurchase obligation is driven by a combination of plan design, workforce demographics, share value, and distribution policies.
You can form an Employee Ownership Trust in any US state. Oregon and Delaware are commonly recommended because their trust laws support perpetual (indefinite) trusts and the flexibility to amend them. The trust can be sited in a different state from where the business operates, so a company in a state that restricts perpetual trusts can still form its trust elsewhere.
Scenario analysis helps companies test the impact of different plan designs, demographic assumptions, and repurchase strategies on future obligations and liquidity needs.
The benefit level represents the total value of benefits ESOP participants receive in a year, typically measured as a percentage of eligible payroll. It guides how aggressively repurchases are funded and shares are reallocated.
Alternative Ownership Enterprises (AOEs) shift economic value and decision-making power from investors to workers and social missions. This report details over 10 models; including ESOPs, Worker Cooperatives, and Perpetual Purpose Trusts; that build wealth for marginalized groups and protect company missions in perpetuity. It provides a roadmap for mission-oriented investors to use blended capital to support business conversions during the upcoming Silver Tsunami of owner retirements.
A think tank, or policy institute, is an organization that conducts research and analysis on public policy issues, providing evidence-based recommendations to inform and influence decision-makers and public discourse.
A grantor, or grant-making organization, is an entity—such as a foundation, government agency, or corporation—that provides financial awards (grants) to individuals, organizations, or projects without expectation of repayment.
Permanent Equity makes investment decisions based on an assessment of risk and return. They seek investments that offer a return exceeding their cost of capital and operating costs, factoring in idiosyncratic risks unique to each business. The firm employs a conservative approach, often structuring deals with deferred payments contingent on achieving agreed-upon milestones, such as successful integration of a previous acquisition or growth of the core business. This strategy aims to ensure they are adequately compensated for the specific risks undertaken in each investment. As an example, Permanent Equity needs an annualized return of at least 13.3% just to break even from their investment.\\The report uses case studies to illustrate above principles. For example, it describes a 3% portfolio allocation in a company with significant growth potential but limited current return contribution. Permanent Equity justified this small investment by recognizing the company's large addressable market and high operating leverage. Conversely, the report highlights a 20% portfolio position in a company expected to generate 30% of the year's return, illustrating the strategic allocation of larger positions to achieve both immediate and long-term return objectives.
ESOPs provide a flexible, tax-advantaged alternative to traditional business sales by allowing owners to transition ownership to employees while maintaining control. This strategy uses pretax dollars to fund the buyout and offers significant capital gains deferrals for sellers.
When ESOP participants leave the company due to retirement, disability, death, or termination, the company must repurchase their shares according to the plan's distribution policy. ESOP companies should forecast the repurchase obligation and develop a plan to fund it
A capitalization table, or cap table, details a company's equity structure—shareholders, types of equity (common, preferred, options, warrants), and their ownership percentages. It's vital for companies to track changes through funding rounds and shareholders shifts.
A repurchase obligation is the legal requirement for closely held ESOP companies to buy back shares from former employee-owners at fair market value, typically upon retirement, termination, disability, or death.
A Patricia Kelso Symposium paper (Kelso Institute Europe, Procida) making the steelman case for a platform cooperative structure for The Grid — community-owned knowledge infrastructure that powers AI for employee ownership while delivering venture-scale returns.
Discounted cash flow (DCF) is a valuation method that estimates the value of an investment using its expected future cash flows. Analysts use DCF to determine the value of an investment today, based on projections of how much money that investment will generate in the future.
IRR, or internal rate of return, is a metric used in financial analysis to estimate the profitability of potential investments. IRR is a discount rate that makes the net present value (NPV) of all cash flows equal to zero in a discounted cash flow analysis.
A practical guide helping local governments integrate employee ownership into economic development and workforce strategies, particularly using American Rescue Plan Act (ARPA) recovery funds. **Three Core Strategies ("Plays"):** - **Play #1 – Legacy Business Transitions:** Help retiring Baby Boomer business owners sell to their employees instead of closing or selling to outside buyers. Start by mapping local legacy businesses, then train existing service providers to make referrals, and consider amending loan programs to support conversions. - **Play #2 – Quality Job Creation:** Launch worker cooperatives to create dignified employment for people facing barriers (immigrants, formerly incarcerated individuals, those in exploited industries like home care). Cities can serve as anchor clients to help new co-ops establish revenue. - **Play #3 – Secondary Cooperatives:** Help microbusinesses (especially in hard-hit sectors like restaurants and childcare) pool resources through shared purchasing, marketing, or administrative cooperatives to reduce costs and access larger contracts. **Key Takeaway:** Local governments don't need in-house expertise—they can convene partners, amend existing programs, and connect business owners to specialized technical assistance providers to achieve meaningful results.
While EO represents around 1% of the American workforce, the barriers to adoption are being mitigated. Historically those boundaries have included: - Limited awareness and understanding - Cost and complexity - Limited financing options - Cultural barriers
If an offer or letter of intent (LOI) falls through, you may have to: 1. restart the sale process 2. face uncertainty that damages the business and reputation 3. miss other opportunities during the wasted time and resources spent It's best to have contingency plans, and work with experienced advisors.
The IRS *requires* diversification of stock for employee owners after they reach **55** and have participated in the plan for **10 years**. ESOP's often have assets besides employer stock in the plan. ESOP's (and EOT's) are also not risky because employees typically do not pay anything in.
The following two categories of deal structures can mitigate the risk of historical cashflows being substantially lower than forecasted cashflows: 1. Create a **financial incentive** structure to align the seller's interest with continued performance of the business. E.g., earnouts, clawbacks, seller financing 2. Execute the deal at a **lower initial valuation** based on conservative projections.
Financial buyers often use a combination of debt **and** equity to finance business acquisitions, with a typical down payment of 20-25%. Financial buyers are focused on the return of investment (technically internal rate of return, or IRR).
1. Analyzing historical financials and KPI's, 2. conducting a detailed review of assets, liabilities, debt, and tax position, 3. ensuring compliance, analyzing working capital management, 4. validating revenue and cost accounting practices, and 5. benchmarking financial performance
Some risks: - A limited pool of buyers - finding synergy - Integration - Valuation - Disclosure. A strategic buyer may be able to pay the highest price.
Community Wealth Building (CWB) is an economic development model that transforms local economies based on communities having direct ownership and control of their assets. It challenges the failing approaches that have been widely accepted in American economic development for too long, and addresses wealth inequality at its core.
A non-disclosure agreement (NDA) is a legal contract that prohibits the recipient from sharing confidential information they receive from the disclosing party. NDAs protect businesses by restricting employees from disclosing trade secrets or proprietary information.
Companies can ensure a smooth ESOP valuation by developing realistic forecasts, paying close attention to drastic changes between historical and future forecasts, frequently updating the model, choosing experienced advisors, and ensuring transparent communication.
At a glance - *A once-in-a-generation wave of ownership transitions is imminent.* By 2035, about six million small and medium-size businesses (SMBs) will face ownership transitions as baby boomers retire. More than one million firms are viable candidates for sale, representing up to $5 trillion in enterprise value. - *SMBs are a cornerstone of the US economy.* Ninety-nine percent of all companies in the United States are small businesses. They employ more than 60 million workers—nearly half of the US workforce—and generate 35 percent of business revenue. Failed transitions could erase jobs and locally rooted pathways to economic mobility. - *Ownership transition risk is distributed unevenly across geographies.* Rural areas are particularly exposed. In some sparsely populated states, small businesses account for more than half of total employment, so failed transitions can stall economic mobility across entire communities. - *Participation gaps represent both a risk and a major wealth-building opportunity.* Under current patterns, only 28 percent of transferring value would accrue to women and Black and Latino individuals combined. Closing participation gaps could unlock up to $3 trillion in new household wealth, making ownership transfers one of the most powerful near-term levers to narrow geographic, gender, and race-based disparities in wealth accumulation. - *A better-functioning ownership transition market could preserve jobs and local prosperity at scale*. Effective transitions could keep up to 12 million jobs in place and protect about $250 billion in annual local spending power.
A NSO is a type of employee stock option wherein you pay ordinary income tax on the difference between the grant price and the price at which you exercise the option. They are called non-qualified because they do not meet the requirements of the IRC to be qualified as ISOs.
No. Selling a business, even to an outside buyer, means giving up some claim on future cash flow. Employee ownership allows you to receive fair market value for your business while transitioning ownership to your employees. This can also free you from the daily operations of the company. EO structures often offer flexibility in how much cash you receive upfront versus as ongoing payments.
AOE's are firms that significantly shift economic value and decision-making power toward the non-investor stakeholders they impact, such as workers, producers, consumers, community members, or even a non-financial purpose. They structurally shift away from shareholder primacy
Worker cooperatives are businesses owned and governed by their employees. Workers share profits, vote on decisions, and have a say in how the company operates.
Yes, though an EOT is typically least likely to sell. When an ESOP company receives a legitimate offer that is at a substantial premium, the board must pass the offer on to the trustee, who ultimately decides to sell, or not. In a worker co-op, the workers decide for themselves.
Multi-stakeholder cooperatives (MSCs) are co-ops that formally allow for governance by representatives of two or more “stakeholder” groups within the same organization, including consumers, producers, workers, volunteers or general community supporters
Encouraging employee ownership requires public awareness, education, and technical support for implementing models like ESOPs and co-ops. Citizens can advocate for employee ownership by contacting legislators, business chambers, and national organizations. They can also urge government agencies to include employee-owned businesses in funding opportunities and procurement programs.
An asset sale is a transaction where a buyer purchases specific assets of a business rather than the business itself. Typical assets are equipment, inventory, and accounts receivable. Asset sales do not include company liabilities, and thus are typically buyer preferred (compared to equity/entity sales).
Most EO sales occur with no down payment from the new employee owners, so EO becomes a net new benefit for those employees. There is also some risk reduction in ESOP and EOT sales by virtue of the new trustee who will watch out for the employees' interest in structuring the deal.
In 2015, UN Member States translated their vision of sustainable development into a blueprint: the 2030 Agenda for Sustainable Development. Its 17 Sustainable Development Goals -- with ambitious targets to achieve by 2030— cover the three dimensions of sustainable development
Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time. NPV is used in capital budgeting and investment planning to analyze the profitability of a projected investment or project.
The Price-to-Earnings (P/E) ratio is a fundamental metric used to assess a company's stock valuation by comparing its current share price to its earnings per share (EPS). The P/E ratio helps determine if a stock is overvalued or undervalued relative to its earnings.
Run a structured sale process to 1. find buyers, 2. talk to multiple buyers, 3. work with an experienced M&A advisor, 4. ensure the business has a strong track record, 5. diversified customers, 6. minimal capital needs, 7. prepare a professional valuation and define seller objectives beyond just price
1. Evaluating the acquisition's strategic rationale and synergies, 2. analyzing the target's competitive position and market, 3. identifying critical capabilities and personnel, 4. addressing cultural integration, 5. validating assumptions, and 6. ensuring deal structure and price are justified
Yes, unions can be mutually beneficial to EO: Unions can facilitate various paths to worker ownership. Cultural considerations are needed as union members may struggle with transcending the standard labor-management duality.
1. Establish an Employee Ownership Committee 2. Implement Open-Book Management 3. Provide Ownership Opportunities 4. Recognize and Reward Employee Contributions: 5. Foster Diversity of Viewpoints 6. Provide Ownership Education
In a typical EO sale, operations hardly changes at all as a result of the transaction process itself. It is likely that over time operations will change for the better as a true "ownership culture" develops in the company.
Suppliers typically care the most about their selling price, your reliability and expediency as a buyer, and the quality of your brand as a distributor for the supplier. A third party sale is more likely to jeopardize what suppliers care about than an employee ownership sale.
Founders should ensure SOPs clearly document 1. core workflows and processes, 2. defined roles to reduce the founder's involvement, 3. transferred responsibilities and identified a successor for a smooth transition, and 4. the operations and financials are streamlined
Before selling to a third party: 1. Organize records for due diligence 2. Clean up financials 3. Resolve open issues/risks 4. Systematize operations to reduce owner dependency 5. Develop recurring revenue streams and growth potential 6. Build relationships with advisors like M&A lawyers and accountants.
The typical timeframe to receive the first offer is between 1 and 6 months. Business listings receive 3-4 inquiries per month on average. Proactively marketing the business to a wide pool of potential buyers is important to attract that first offer in a timely manner.
Asset sale: buyer acquires some or all of the stuff of the business. Does *not* include liabilities. Equity sale: buyer purchases equity in the business and also includes the liabilities. There are different tax implications as well.
The World After Capital details humanity's shift from an age of capital scarcity to one of attention scarcity. It proposes a framework for the Knowledge Age built on economic freedom through Universal Basic Income, informational freedom through open access to knowledge, and psychological freedom through mindfulness. The book argues these shifts are necessary to solve the climate crisis and ensure that digital technology serves human progress rather than trapping attention in a vicious job loop.
An ISO gives an employee the right to buy shares of company stock at a discounted price. Generally, ISOs are awarded only to top management and highly-valued employees. ISOs are also called statutory or qualified stock options.
FMV is the price a business would sell for on the open market with the following assumptions: Buyer and seller (1) are reasonably knowledgeable about the business (2) are behaving in their own best interests (3) free of undue pressure (4) given a reasonable period for completion
A DPO, also known as a direct listing, allows companies to raise capital by selling securities directly to the public without involving traditional intermediaries like investment banks. This method appeals particularly to small companies and those with established customer bases
The Worker Ownership, Readiness, and Knowledge (WORK) Act, part of the SECURE 2.0 Act of 2022, aims to promote and support worker-owned businesses in the U.S.
Learn how EOTs work, whether one is right for your company, and how they are created, financed, and governed. Employee ownership trusts (EOTs) are an increasingly common way for sellers of closely held companies to transition out of ownership. In an EOT, the company sets up a special-purpose trust to own shares that the company (not employees) buys from the seller using their future profits to repay a note, often from the seller or a combination of the seller and a bank. The trust is designed to hold the shares in perpetuity. The employees are generally not owners but have a claim on company profits through dividends or conventional profit shares. EOTs are often chosen instead of an employee stock ownership plan (ESOP), which offers tax benefits but is much more costly and complex than an EOT. This book helps decision-makers decide whether an EOT is the right approach for their company. Chapter 1 introduces EOTs and compares them with ESOPs. Chapter 2 elaborates on how EOTs work, and chapter 3 delves into structuring them. Chapter 4 explores EOT financing, while chapter 5 discusses EOT governance. Chapter 6 discusses how EOTs can share equity rights with employees. Finally, chapter 7 provides EOT company case studies.
Broad-based employee ownership in private US companies, whether for a gradual buyout or a single transaction, is mainly created through trust-based solutions. Usually, this means an employee stock ownership plan (ESOP), with employee ownership trusts as a low-cost alternative that lacks the ESOP’s detailed rules but also lacks its tax incentives. Some companies, however, prefer direct employee ownership, where employees personally acquire and own company shares. That generally means a gradual buyout and is especially suitable for certain industries, particularly professional services such as engineering, architecture, and wealth management, and it can work well in other sectors where employees have the necessary risk tolerance and disposable income or the company provides significant contributions.
The Ownership Impact Index(R) is a targeted workforce diagnostic that does more than just assess ownership culture or mindsets - it zeroes in on actions leaders can take to transform the operational and managerial practices to ignite them.
The interest coverage ratio (ICR) assesses a company's capacity to manage its debt obligations, crucial for evaluating its financial stability. It's calculated by dividing EBIT (earnings before interest and taxes) by total interest expense.
CDFIs are federally insured and regulated depository institutions that provide credit and financial services to people and communities underserved by mainstream commercial banks and lenders.
A mini IPO, also known as Regulation A+, is a streamlined version of a traditional IPO designed for early-stage companies. This process allows companies to raise capital by offering publicly traded shares with fewer regulatory requirements compared to standard IPOs.
When preparing to meet with a banker for a loan, it's crucial to anticipate and answer questions that demonstrate your business's creditworthiness using the Five C’s of Credit: Character, Capital, Capacity, Collateral, and Conditions.
The Debt-Service Coverage Ratio (DSCR) assesses a company's ability to pay its debt using cash flow. It's calculated by dividing net operating income by total debt service, including principal and interest. This ratio shows if a company earns enough to cover its debt obligation.
The NMTC Program incentivizes community development and economic growth through the use of tax credits that attract private investment to distressed communities.
CAFE is a novel financial instrument aimed at enhancing community engagement in company success introduced by Fairmint. Developed in collaboration with legal experts, CAFE offers enhanced control for founders, equity access for stakeholders, and liquidity for investors.
The DCIF offers a compliant strategy to avoid classification as an "investment company" under the Investment Company Act of 1940, which allows flexibility in raising community capital, primarily focusing on real estate investments (at least 60% of its assets are non-securities).
Selling to a strategic buyer risks exposing sensitive business information like operations, pricing, and supplier relationships despite NDAs. There are higher chances of mismanaged expectations as they merge practices. Even if a deal falls through, they gain inside knowledge that can't be undone, potentially misusing it against the seller.
Myths about EO companies which may be held by the general public, opinion leaders, influencers, SMB owners, advisors, etc.
A SHARE is a financial instrument designed for startups seeking capital without traditional equity or debt structures. Issued by a company to an investor in exchange for a specified purchase amount, combining elements of revenue-sharing and equity ownership.
A Simple Agreement for Future Equity (SAFE) offer future equity rights without immediate valuation, making them popular for early-stage startup funding. These were introduced by Y-Combinator in 2013 and these convert into equity during funding rounds or acquisitions.
The Economic Injury Disaster Loan (EIDL) program offered by the Small Business Administration (SBA) provides crucial financial assistance to small businesses, agricultural cooperatives, and nonprofit organizations impacted by declared disasters.
A good business plan guides you through each stage of starting and managing your business. You’ll use your business plan as a roadmap for how to structure, run, and grow your new business. It’s a way to think through the key elements of your business.
An Employee Ownership Trust (EOT) is a legal structure where a trust holds company shares for employees' benefit. It gives them a stake in the company, potentially sharing profits and fostering a sense of ownership.
Harpoon Brewery faced ownership changes & explored options. Founders debunked myths about Employee Stock Ownership Plans (ESOPs) & sought expert guidance. Choosing an ESOP kept the brewery independent & employee-owned, but navigating the process required careful planning with professional help.
Private equity firms use leverage (debt) to acquire profitable businesses, with plans to improve operations, grow revenue, or cut costs to increase cash flows for servicing debt and generating returns. For employees, this could mean new opportunities, improved governance, or unsettling changes like benefit reductions or job cuts. Owners can get a lucrative exit but may have to stay involved temporarily. Private debt funds offer an alternative for transferring ownership to managers while allowing owners to cash out.
This video goes over how Bob Moore staged the sale of his company to the ESOP. Bob's Red Mill is a family business that Bob always wanted to turn over to his employees, but didn't know how to do so until he learned about EO. It was the only exit strategy that fit Bob's vision for the company, and its values.
Enterprise value (EV) represents a company's total worth, going beyond market capitalization to include debt, cash, and equivalents. It's essential for mergers, acquisitions, and investment analysis, offering a holistic view of a company's value.
Debt-to-Income (DTI) ratio is a crucial financial metric used by lenders to assess borrowers' ability to manage debt. It measures the percentage of a person’s gross monthly income that goes towards debt payments.
Shopped deals run by investment banks marketing the business to multiple PE firms generate competitive bidding, providing leverage for sellers to maximize sale price. Hiring an investment bank (2-4% fee) to represent the seller's interests and create an auction-like process is recommended to achieve a higher valuation.
Private equity firms value businesses in growing markets with strong management and defensible IP. Honestly assess your business and address weaknesses beforehand. Consider getting a quality of earnings report to avoid surprises in due diligence.
Key Performance Indicators (KPIs) are essential metrics used to evaluate a company's overall performance in strategic, financial, and operational terms. They quantify success against targets or industry benchmarks, guiding strategic decisions.
When selling to a private equity firm, sellers should expect to stay involved in the business for some time after the sale. PE firms typically want to retain existing management teams to leverage their expertise and ensure continuity. However, sellers may receive equity incentives and career advancement opportunities under new PE ownership. Post-sale responsibilities like budgeting, board meetings, and increased reporting requirements are common. Being prepared for reduced autonomy but greater resources is key.
Financial feasibility is the ability of a proposed business to generate positive cash flow and meet other financial objectives. Generally speaking, there are three types of financial feasibility analysis: financial projection, cash flow analysis, and profitability analysis.
An income statement, also known as a profit and loss statement, is a crucial financial document that summarizes a company's financial performance over a specific period. It is part of the trio of essential financial statements, alongside the balance sheet and cash flow statement.
The balance sheet is a crucial financial statement that provides a snapshot of a company's assets, liabilities, and shareholder equity at a specific point in time. It serves as a fundamental tool for investors and analysts to assess a company's financial health
Intellectual property encompasses a wide range of intangible assets legally owned and protected from unauthorized use or reproduction. IP includes trademarks, patents, copyrights, and trade secrets, and drive competitive advantage during innovation.
The multiple (e.g., 5x or 7x) indicates how risky an acquirer views a company's cash flow. It represents the number of years of normalized EBITDA the acquirer is willing to pay. Factors like customer concentration, management quality, and financials impact this risk perception.
A Decentralized Autonomous Organization (DAO) is a blockchain-based entity with no central authority, where token holders collectively make decisions. Utilizing smart contracts, DAOs automate processes and ensure transparency, with all activities recorded on a blockchain.
The Aspen Institute's Job Quality Fellowship brings together leaders from differing lines of work, in communities across the country, who are working to expand the availability of better quality jobs.
Synergy is the concept that the combined value and performance of two companies will be greater than the sum of the separate individual parts. This often to applies to both the revenue and expense side of the profit and loss statement of the new combined business.
A Special Purpose Vehicle (SPV), also known as SPE or Special Purpose Entities, is a subsidiary created by a parent company to isolate financial risk. This separate legal entity ensures that its obligations remain secure even if the parent company faces bankruptcy.
The main themes are the case study company's reasons for choosing private equity, alleviating initial fears, benefits of the partnership like added resources/expertise, increased accountability, and advice for other owners considering an exit to private equity.
A company document that forms internal "laws" that determine how a firm will be run. Ordinarily, the details about the company structure is reflected in the bylaws, which are not usually filed with state officials and are thus easier to amend.
A buyer-originated document through which the buyer expresses its intent to buy the subject business.
The typical steps in a strategic sale are: (1) Pitch and Engagement Letter, (2) Pre-Launch, (3) Marketing, (4) Bidding Rounds, and (5) Closing. The process typically takes 4-8 months and involves creating marketing materials, facilitating buyer due diligence, managing bidding rounds, and negotiating the final deal.
When selling a business, target strategic acquirers who will pay more due to synergies and value beyond just financials. Research potential acquirers early, quantify your strategic value to them, and work with experienced advisors to identify the best fit and negotiate optimal deal terms.
Jack Stack was a plant manager of a failing company when they executed an employee buyout, primarily driven by a desire to save jobs. Ultimately their commitment to financial literacy for employees turned it into a successful enterprise.
Sellers in ESOP deals might issue warrants (the right to buy stock later at a set price) alongside debt financing to get a piece of the company's future success. If the company thrives, the warrants become valuable, offering sellers a potential bonus on top of the sale price.
Selling your business requires retaining key staff. Offer a retention bonus to incentivize them to stay through the sale and beyond. Don't pay it all upfront to avoid post-sale departures. Consider splitting it: part upon sale completion, the rest after a set period (e.g., 1 year) if the employee stays.
Business owners often overlook knowledge transfer during succession planning. A trucking company successfully transitioned by training replacements for key roles over a multi-year period, ensuring a smooth handover and continued business success.
ShopBot Tools EOT Transition Story
Nina chose to transition her digital marketing and sales agency to employee ownership (ESOP) rather then selling to an outside buyer. Nina felt the company's success belonged to all the employees who helped build it, not just herself. Selling to another company wouldn't have rewarded them and might have limited her control over the exit process.
What is Private Equity? | Wall Street Simplified
M&A processes typically take between 6 and 12 months and sellers should be prepared for marketing and due diligence, evaluating different exit paths early on, but having flexibility to pivot exit strategies earlier in the process.
Synergy and Forms of Synergy
Job Quality is a Pathway to Alpha
A skeptical owner discusses with other owners that have implemented ESOPs
The key takeaway is that percentage success fees tend to be inversely related to deal size, with lower mid-market deals ($5-$50 million) commonly seeing 4-6% fees, while the largest deals over $100 million may have fees in the 1-2% range.
Why an owner chose ESOP over Private Equity
For one M&A transaction firm it was found that they could improve industry standard sales times of 18 to 24 months down to 6 months with a more tailored approach.
Wealth Through Ownership Apis & Heritage
Rising above ESOP myths and incorrect perceptions
With a strategic buyer, sellers can completely exit or stay for a transition period. Financial buyers typically require continued management role. ESOPs allow greatest flexibility in determining future tenure but need strong management team. Proper financial controls, management processes, business plan are key for successful transactions.
Financial buyers value a business based on the future rate of return on investment they expect to achieve. Choose a buyer who has a vision for the company that you believe in and consider their experience, expertise, and track record.
Winco's employee stock ownership plan (ESOP) allowed Kathy, a grocery store worker, to accumulate nearly $1 million in retirement savings over 20 years, while her twin sister's savings were typical for her age and position at a doctor's office. This benefit isn't unique to Kathy - hundreds of Winco employees have over $1 million saved for retirement because of their ESOP.
In an ESOP, both the buyer and seller should ensure sustainability of the deal valuation, cash at closing, and resulting cashflows (rather than maximizing valuation and cashflows). Moreover, it is important that the deal team has prior experience with ESOP transitions.
6 things are likely to happen when you sell to private equity: (1) You'll need to stay on during the transition (2) the firm will likely replace you within a year (3) Increased Debt (4) Performance Focus (including layoffs) (5) maximize cash flow (6) Special Distributions for themselves.
Employee Ownership in Rural Communities
Asset Sale vs Stock Sale
What is liquidity?
Why Nice Gets You More When Selling Your Business
The Strategic Buyer Fit: Tom's Acquisition Insight
Business owners considering selling to a strategic buyer should start planning early, assessing financial needs and non-financial goals. Key factors include deal structure, risk mitigation, and finding the right buyer. Strategic buyers often pay a premium due to synergies. Hiring an investment banker can streamline the process.
The case of Select Machine shows that selling the business to a worker co-op with a 1042 rollover lets owners defer capital gains taxes & get a good price. This works for small businesses willing to sell gradually & comfortable with employee ownership and governance control.
Building a Company with Transferable Value
Worker Co-op Governance Findings
Making M&A deal synergies count
An owner created their own employee-ownership structure
Beyster Institute's Martin Staubus Explains Advantages of ESOPs Over a Third-Party Sale
Private Equity's Version of Employee Ownership
A skeptic owners reasons for not doing an ESOP
A long-term EO skeptic now believes in ESOPs
How ESOP can be a solution to owner burn-out
Can I Sell My Business and Keep the Real Estate?
Investor returns could come at the expense of employee satisfaction and the authors show that employee satisfaction (compensation and culture) declines on average following LBOs. Long-tenure and lower-skill workers are most adversely affected. One-time layoffs do not fully explain the effects, but high-leverage deals are robustly correlated with them. Heightened uncertainty about job loss plays an important role in explaining the effects.
This case tells the story of a post-merger failure due to short-sighted corporate strategy. Often, prior to acquisitions, the main focus is on net present value predictions and corporate level integration. This results in risking to overlook the importance of developing a fully fledged business-level strategy for the new combination. The case study also sheds more light on how the development of an outside-in business strategy provided the key to achieving the intended synergy value.
WHAT IS SUSTAINABLE DEVELOPMENT?
A Multi-Stakeholder Cooperatives Manual
Ownership Economy Policy Brief
Worker Cooperative Definition
ESOP Terminology
An Intro to Articles of Incorporation & Bylaws
NCEO Preferred Certification Database
Risk and Lack of Diversification Under EO
HDR Building a Global EO Culture
Outlines rights & responsibilities of an ESOP company
Housing Cooperative Overview
Survival of Worker Co-ops and Barriers to Creation
WORKER COOPERATIVES: PATHWAYS TO SCALE
Intro to EO for CPAs, exit planners, SMB advisors
EO & Economic Well-Being Infographic
Why Few ESOP's in the US?
Comparison of an Asset Sale to a Stock Sale (ESOP)
Sustaining EO for the Long Term: Mature ESOP Company
FMV and DOL Standards
NCEO's comprehensive guide to ESOPs for employees
Oregon Stewardship Trust: A New Purpose Trust
Broad Based Stock Options and Corporate Performance
A Short Guide to Employee-Led Buyouts
Investing the Section 1042 Rollover
Strategic Buyer Case Study: Disney Pixar
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