The retirement of the baby-boom generation will have major economic effects. One of these will be turnover in ownership, or closure, of many small businesses. When the present owners wish to retire, the most readily available buyers are local or regional competitors. Yet, many of them may close the competing businesses they acquire. The closure outcome is often avoided with succession planning for new owners such as the employees. The challenge of sustaining small, mostly family-owned, businesses, is confronting many countries in addition to the U.S.
Canadian cooperative organizations hosted a conference on business succession and employee ownership last October in Quebec City. This conference proved to be extraordinary both in its international scope and in the expertise that speakers and audience brought to the discussion of issues in transitioning ownership to employees. Quebec City is an appropriate location for such a conference. The Canadian province of Quebec is exemplary for cooperative development, as noted in the March/April 2001 issue of Rural Cooperatives. Quebec has over 2,700 cooperatives, and has pioneered the development of the multi-stakeholder model. The credit union, Desjardins, has almost 40,000 employees and more than 5.8 million members and is a leading financier of cooperative development projects in the province. Canada has about 615 worker cooperatives, of which 394 are located in Quebec.
Canadian Research Findings
The Ministry of Economic Development, Innovation and Exporting has done survey research on succession of small business in Quebec. About 55,000 Quebec business owners are projected to retire from 2010 to 2018, 50 percent of whom have an inadequate or non-existent plan for the succession of their businesses. An important factor researchers identified in successful transfers is the age structure of employees. Cases of successful transfers frequently have a core group of employees between the ages of 40-55. When the bulk of employees are over 55, there is an insufficient time horizon to finance ownership transfers. A transfer of ownership in businesses with a large percentage of employees in the 25-35 age range can also be difficult, due to the lack of commitment and limited work experience often found in that group. However, people in their twenties are very active in start-ups of worker cooperatives, especially in businesses that appeal to a younger demographic group, such as bicycle shops.
The Canadian Worker Co-operative Federation, a co-host of the conference, is actively involved in the development of cooperatives and is also focusing on saving businesses through succession planning (http://www.canadianworker.coop). Conference speakers cited a study for Canada that reports an estimated 200,000 small businesses (not self-employed entities) will be up for sale by 2020. Several Canadian government and trade association officials voiced their concern over the impending decline of many rural communities from closures of small businesses.
Farms and ranches have a similar process of succession planning, although in contrast to small businesses, they stay in production either with new owners or in rental contracts. Nevertheless, retirements of both business owners and farmers are depopulating many rural communities. The negative impacts on local economies from business and population decline are a problem that both Canada and the United States confront.
Speakers from other countries gave presentations, including the U.S., Italy, France, and Argentina. Worker ownership in the U.S. is frequently organized as an Employee Stock Ownership Plan (ESOP), which is a distinctive business model in the international context. Don Jamison of the Vermont Employee Ownership Center gave a presentation about ESOPs. The tax advantages for ESOPs have contributed to over 11,000 U.S. businesses operating with employee owners.
The application of the worker cooperative model for ownership succession in the U.S. was described in a case study by Roy Messing, director of a Rural Cooperative Development Center that is affiliated with the Ohio Employee Ownership Center. He also gave a presentation on organizational steps and resources for transitioning closely-held businesses to employee ownership, pointing out the key roles for business owners’ trusted advisors in making such transitions feasible. According to Messing, the target audience for how to plan business successions to workers should not only be retiring owners but ought to include the accountants and lawyers who serve as trusted advisors to small businesses. By informing such advisors about the process of transitioning businesses to employee ownership and the benefits to the community of sustaining the operations of companies after their primary owners have retired, more transitions will be facilitated.
Cooperatives of all types are a major presence in Italy’s Emilia Romagna, and in the country as a whole, there are about 20,000 worker cooperatives having a membership of about 700,000 workers. Most of the worker cooperatives were organized as start-up businesses, whereas the U.S. experience with employee ownership has to a large extent served as a strategy to keep businesses in operation. Alberto Zevi, President of the Legacoop Education Center, gave a couple presentations about worker cooperatives, including a case study of succession of a family business to employee ownership.
Zevi emphasized the lack of succession planning as a major cause of closures of small businesses in Italy. He advocates for the adoption of “employee share ownership plans”, which are similar to employee stock purchase plans in the U.S. Such plans start a gradual process of ownership transfer and reduce the burden of financing a buy-out all at once.
The perspective from France was presented by Patrick Lenancker, President, Confederation générale des sociétés coopératives et participatives. Similar to the case study presented by Roy Messing, the French have examples of forming worker cooperatives that for a few years include the soon-to-retire owners as members with their workers. Although these are one-member-one vote co-ops, there are covenants that protect original owner’s rights until they receive total payment for their ownership shares and then retire. Lenancker emphasized the differing mentalities between business owners and their employees, so that in addition to the legal and financial steps, there is a critical process for all participants to reorient themselves to new roles and responsibilities. His organization has developed programs for mentoring workers and helping the original owners adjust to a new role of teaching the new owners how to operate these businesses successfully.
Argentina is a special case of rapid and widespread conversion of businesses to worker ownership after the country defaulted on its international debt in 2001. When Jose Orbaiceta, President, Federation of Worker Co-ops of Argentina, opened his address by thanking the host country for providing him with political asylum 27 years ago, the audience could anticipate that his presentation would cover some dramatic events. As credit dried up in Argentina most of its manufacturing industries closed with no indications of when they might reopen. Out of desperation, workers from many of these factories eventually returned to “recuperate” these businesses, which involved more than just doing their previous jobs but also everything from procuring inputs to selling products. Worker cooperatives became the model for “recuperating” many of the businesses that closed in 2001.
The legal and policy issues that ensued from “recuperation” are too lengthy to describe in this article, but Orbaiceta discussed some of the conflicts that ensued when owners of these factories initiated lockouts. In addition, some of the factories owners had equipment moved out during the night for sale to competing companies in neighbouring countries, such as Chile. In response to these conditions, the government modified its bankruptcy laws to give workers standing. Workers who lost their employment would have to be indemnified, and under some circumstances the government oversaw legal and financial transfers of ownership to worker cooperatives.
Currently there are about 6,000 worker cooperatives in Argentina that provide about 300,000 jobs and produce about 10 percent of the nation’s GDP. Although the developments in Argentina are unique, its experience with worker ownership highlights a point that is applicable to all countries. Workers who either re-occupy or buy closed businesses is not a new event. There is a long history in many countries of transferring ownership of businesses to the workers when the equipment and facilities are worn-out or obsolete. The Argentine experience involved many factories in good condition, which is the basis for the sustained success of its worker co-ops.
A conference of this type offers more “takeaways” than can be succinctly described in a magazine article. Furthermore, many of the workshops were simultaneous and were therefore not attended by this author.
There are many key points to understand about making a transfer of business ownership to employees, but a selected few are highlighted from the above summary of the presentations.
- Small business owners can improve their opportunities and options for transferring ownership in the future if they get an early-start on succession planning. ESOPs provide a way for employees to gradually buy portions of a business prior to the event of the initial owner’s retirement. In other cases, owners may convert from a sole proprietorship to alternative forms so that employees may purchase shares of a business with small deductions from wages, which eases the financial burden as compared to a one-time complete transfer to a worker cooperative. The key is to get an early-start on planning.
- The relationship of an owner with employees needs to be sufficiently congenial that adjustments in attitudes and orientations of both parties can be made to form a cooperative that can complete a transfer of ownership shares, responsibilities, and know-how in a timely manner.
- Businesses should have a core group of employees with several years of experience and be in the age group of 40-55 years old. If employees are predominantly of an age nearing retirement the time horizon is too limited for transferring both ownership and managerial responsibilities to the new owners. When employees are mostly under 35 years old, and the business lacks youthful appeal, there is likely to be an inadequate commitment to ownership.
- Businesses that are suitable for ownership transfers need to be examined in terms of their future prospects. At a minimum, such businesses must have an established market of repeat customers and be positioned with physical capital that is in good running order and not in need of immediate replacement.
- A target audience for conveying information on succession planning for employee ownership is the trusted advisors or estate planners. They are typically local accountants and lawyers. Over time each such advisor is likely to help numerous owners plan their retirements and the sale of their businesses.
The above points do not cover the many steps and actions that have to be taken to transfer businesses to employees. These points are a sampling of insights that international experts shared with their audience at the Business Succession and Employee Ownership Conference in Quebec City last October.