S2E7 Sustainable Small Businesses and Employee Ownership

On this episode, we will be offering data and strategies from Rob Brown, the director of Business Ownership Solutions at the Cooperative Development Institute based in Northampton, Massachusetts. Business Ownership Solutions works throughout the Northeast states with business owners to think through whether conversion to a cooperative could meet their needs. They also work with employees or community members to execute the co-op conversion. 

You can find Rob Brown's article here: https://digitalcommons.library.umaine.edu/cgi/viewcontent.cgi?article=1905&context=mpr

Transcript

Today, we will be offering data and strategies from Rob Brown, the director of Business Ownership Solutions at the Cooperative Development Institute based in Northampton, Massachusetts. Business Ownership Solutions works throughout the Northeast states with business owners to think through whether conversion to a cooperative could meet their needs. They also work with employees or community members to execute the co-op conversion.

This is the Maine Policy Matters podcast from the Margaret Chase Smith Policy Center. I am Eric Miller, research associate at the Center.

On each episode of Maine Policy Matters, we discuss public policy issues relevant to the state of Maine. Today, we will be covering an article by Rob Brown, the director of Business Ownership Solutions at the Cooperative Development Institute. Brown gives us an inside perspective on how we can build back our economy in his article entitled  “How to Save Jobs and Build Back Better: Employee Ownership Transitions as a Key to an Equitable Economic Recovery.” This article was published in volume 30, number 2, of Maine Policy Review, a peer-reviewed academic journal published by the Margaret Chase Smith Policy Center. For all citations for data provided in this episode, please refer to Rob Brown’s article in Maine Policy Review.

What are small business owners to do in the midst of a pandemic as they approach retirement age? How can small businesses and their employees successfully stay afloat once the owner decides to retire? Rob Brown has some answers.

Before the COVID-19 pandemic, Maine was already on the leading edge of what is called the “silver tsunami.” This term refers to the large oncoming wave of baby boomer business owners looking to exit and retire, many of whom do not have a plan and don't understand the process and options.

Nationally, the average age of business owners is over 50 years old. In rural Maine, almost half of business owners are over 60.

Maine has 12,790 small businesses where the owner wants to retire in the next several years. These retirements would affect 108,000 workers across the state.

And yet, less than one in five business owners have a documented exit plan for what will happen to their businesses–and their employees–once they retire.

What options do business owners facing retirement have?

Having their children take over the business is risky, as business transitions to second generations are only successful 19% of the time.

Well, what about retirement age owners selling their businesses?

This is also often not a good option either, as only 20% of commercial listings for businesses actually sell.

If retirement-age owners are closing their businesses, what happens to their employees? What are they to do when their jobs close down with the business?

Brown paints a picture of how such retirements impact employees and the community: “Too often, the default option ends up being liquidation and closure, and the smaller and more rural the business, the greater the likelihood of that outcome. As a result, business closure due to owner retirement is the largest single source of avoidable job loss over time.”

Workers affected by business closures had a harder time reentering the workforce.

In response, Brown argues that helping businesses transition to employee ownership can address some of these problems.

How can employee ownership save small businesses, and how has the “silver tsunami” been impacted by COVID-19?

Let’s take a look at a few small businesses in Maine that were saved by an employee ownership transition.

Rock City Cafe and Coffee Roasters is a great example. Maine’s first ever espresso bar and bookstore combo was opened in Rockland in 1992. After receiving community support, the business grew and added a coffee-roasting business. This allowed them to move to larger locations and become Rock City Cafe and Coffee Roasters. By 2010, Rockland had become a national model for downtown rejuvenation and Rock City Cafe and Coffee Roasters was an anchor business on Maine Street. At this point, the owner was considering retiring and it was time for her to consider her options. Because she was deeply committed to her 35 mostly young employees, she decided to transition her business to a worker-owned cooperative. This decision preserved her legacy, rewarded her employees who helped her build the business, and helped her secure a good retirement income for herself. But most importantly, this decision helped her business survive the COVID-19 pandemic better than other food and tourist-oriented businesses.

Three retail businesses on Deer Isle offer another example of a successful employee ownership transition. Burnt Cove Market, the Galley Markey, and V&S Variety employees heard that the owners of these businesses were thinking of selling the stores and retiring. So what did they do? They worked with a group of advisors to create the Island Employee Cooperative and bought the stores. Now the employee-owned Island Cooperative is one of Deer Isle's largest year-round employers, the largest worker cooperative in Maine, and second largest in all of New England.

As Brown argues, these examples suggest that employee ownership transitions are a good option for building back better, especially since the pandemic has impacted small businesses.

What are the benefits of employee ownership transitions?

First, these transitions are more profitable and productive. They create more jobs in the good times and lay off fewer workers in downturns, and invest more in workforce training. They also have lower rates of bankruptcy, closure, and loan default.

For workers, this means increased wages, benefits, and job stability and security. The benefits are even greater for low-income, non college-educated, minority, women, and young workers.

A big concern in Maine has been attracting and retaining young workers. One study that tracked 9,000 young workers from ages 18 to 35 highlights the benefits of working for an employee-owned company. These workers saw 33 percent higher wages, 92 percent higher household wealth, and 53 percent longer job tenure. These impacts held true regardless of race, gender, or geography.

Formerly incarcerated workers were also shown to have a lower rate of reoffending, had 25% higher annual income, and worked 9% more hours than formerly incarcerated workers in nonemployee owned companies.

Even though some businesses were able to survive through employee ownership transitions, others did not or were not able to make this change and as a result, were not so lucky.

Permanent business closures between March 2020 and February 2021 increased between one-third and one-half of what was expected before the pandemic.  Even though business closures were not as bad as the pre-pandemic predictions, Brown writes, “Saying ‘It could’ve been worse’ is cold comfort for business owners who lost their life’s work and the millions of workers who lost their jobs.”

Factors such as no exit plans and the type of business contributed to many business closures.  For example, businesses offering personal services and food service closed more frequently than businesses like construction and home improvement stores.

Even businesses that survived the pandemic are still struggling. In October 2021, Census data confirmed that nearly 60 percent of Maine’s businesses are still facing moderate to severe negative impacts from the pandemic. Many businesses are still behind on at least one bill, such as rent, loan, and supplier bills.

Because of this, Brown and others who work with businesses have seen an increase in retiring business owners looking to make an exit plan.

Here is Brown’s perspective, “In my work throughout the Northeast providing introductory exit planning education for business owners and consulting on transitions to employee ownership, I have seen a tripling of requests for assistance and attendance at workshops. Lawyers, accountants, and others who communicate directly with businesses, have told me that they are seeing the same thing—older business owners, already thinking about how to retire before the pandemic, want to develop a plan now.”

Rob Brown argues that, “If anything, the pandemic’s impact on job security and stability and its acceleration of income and wealth inequality has strengthened the argument for promoting and supporting employee ownership transitions. Helping business owners sell to employees could be a key to an equitable economic recovery.”

What could this transition look like for businesses on a national scale?

Brown offers a prediction: “An article in the Harvard Business Review calculated that if 30 percent business ownership were extended to all workers through employee-ownership models, household wealth would more than quadruple for the bottom 50 percent of workers, for all Black workers, and for all workers with only a high school degree.”

This kind of large-scale action cannot happen without the help of public policy. What have public policy officials been doing to help businesses shift to employee owned businesses?

Public policy like President Biden’s American Rescue Plan and the Mills administration’s 10-year economic development strategy could provide benefits for local business owners seeking retirement.

These benefits include things like exit planning outreach; education and technical assistance for business owners; expert financial advice for employee ownership transition; assistance in designing and executing a transition; and education and training for employee groups in business management, finances, and strategy so they can succeed.

Many states are also offering or considering tax and other incentives for selling a business to the employees. Around 18 states have employee ownership centers to provide education, training, and technical assistance for businesses considering employee ownership.

In the past, Maine offered a tax credit to encourage private citizens to contribute to Family Development Accounts programs, so matching funds are available to support low-income workers’ savings, but this incentive was eliminated by the previous administration. Restoring this funding could leverage substantial additional private funding. These funds would be helpful to employees saving to build equity for a worker cooperative transition.

These policy examples are a sampling of ideas and resources that could be part of a larger project that is effective in the short and long term. In the short term, these policies can help by preserving small businesses and jobs while building wealth for communities and individuals in the long term.

Rob Brown concludes with a hopeful message:

“From a public policy perspective, it is oftentimes much cheaper to save existing businesses and jobs than to replace them once they’re gone. Throughout Maine, there are grocery stores, cafés, coffee roasters, construction companies, energy companies, farm businesses, manufacturers, insurance agencies, and many other types of businesses that are owned by their workers. They are a model for how an economy, even in the face of unprecedented threats, can be made to work for working people and their communities”

What you just heard was Rob Brown’s perspective on how employee ownership transitions can be an answer to saving retirement age business owners from having to sell or close down theirr businesses. Maine Policy Review is a peer-reviewed academic journal published by the Margaret Chase Smith Policy Center.

The editorial team for Maine Policy Review is made up of Joyce Rumery, Linda Silka, and Barbara Harrity. Jonathan Rubin directs the Policy Center. A thank you to Jayson Heim and Kathryn Swacha, scriptwriters for Maine Policy Matters, and to Daniel Soucier, our production consultant.

In two weeks, we will be covering Frank O’Hara’s piece entitled, “The Great London Plague of 1665 and the US COVID-19 Pandemic Experience Compared.”

We would like to thank you for listening to Maine Policy Matters from the Margaret Chase Smith Policy Center at the University of Maine. You can find us online by searching Maine Policy Matters on your web browser. If you enjoyed this episode, please follow us on your preferred social media platform to stay updated on new episode releases.

I am Eric Miller–thanks for listening and please join us next time on Maine Policy Matters.