Published September 2024

Why employee ownership

The Ownership Capital Lab focuses on employee ownership because it is an underutilized business structure that creates stronger businesses and delivers outsized impact returns.There’s a big opportunity to create stronger businesses and local economies as well as financially secure workers and families by investing in employee ownership’s growth.

Broad-based employee ownership (EO) is a powerful solution that preserves and strengthens local businesses and creates quality jobs and wealth for ALL workers, from the C-suite to the front line, and everyone in between. High engagement workforces create virtuous cycles: higher profits and faster growth enable better pay and benefits and more professional opportunity, which deepens employee engagement.

Because employee ownership is one of those rare win-win-win solutions (good for the business owner, good for the business, good for the workforce, good for the local economy), it is a viable and non-partisan solution and the federal government has provided tax breaks to encourage EO since the 1970s.

Most people don’t know what employee ownership is, much less the different ways it can be structured. The reality is that there is more than one way to structure EO to deliver these positive benefits, which means that there are options for the selling owner or the fund that may be driving the transaction. The main forms are ESOPs (Employee Stock Ownership Plans), worker cooperatives and EOTs (Employee Ownership Trusts). If you want to dig in deeper, here are a couple of great resources: Project Equity, Transform Finance.

Which form is the right one is all about fit with the goals of the selling owner and the business (or the fund), but they all share these characteristics:

• Access to ownership by all employees*;
• Employee voice in the workplace, increasing engagement and associated positive business outcomes;
• Quality jobs with better pay, benefits, and workplace culture; and
• Wealth building through one or more of profit sharing, stock ownership, and retirement plans.

Other tools to get ownership or ownership-like benefits to employees include broad-based equity grants, or phantom stock, like what is being utilized by some middle market private equity firms.

It’s critical to know a few things about how employee ownership works:

• EO is created through a sale of the business. This isn’t charity. The founder or current owner is getting market value for what is often their life’s work.
• The employees do not bring the financing. The business takes out financing (these are typically debt-financed, similar to leveraged buy-outs), which is paid back out of the profit the employees’ labor creates.
• The ownership stake is typically a benefit of employment. The worker coop is the only form that has a financial buy-in paid by the employee, the cost of which is set to be within reach by all, including the lowest paid employee.

Employee ownership can be life changing for workers from a financial perspective, both due to profit sharing (which puts more money in people’s pockets today) and through longer-term retirement or asset building.

“In my own work, I have seen frontline workers—even in low margin industries (like bakeries, restaurants, housecleaning)—earn individual profit sharing in their first years of being employee-owners in the $10-20,000 ranges, which can effectively increase annual hourly earnings by 30% or more.”
– Alison Lingane, Founder

EO can generate hundreds of thousands of dollars in retirement accounts for employee-owners, in both ESOP accounts and 401(k)s, with employee-owners having household net worth of nearly twice as high as their peers in similar non-EO companies.

Employee-owned companies are stronger businesses. They grow faster year over year, have higher sales per employees and outlast their competitors in business cycle downturns.

With these outsized benefits, employee ownership is ideal for investors looking for impact. Let us know what your experience has been as an investor. We’d love to hear from you!