Tara-Lynn-GrayFrom the Advocate

By Tara Lynn Gray 

June 2023

Five Things You Need to Know About Employee Ownership

I spent last month, Small Business Month, traveling the state and listening to stories: stories about individual small business-owners, their challenges, their triumphs, their resourcefulness. Every single one sent me home inspired and honored to be their advocate.

I want to share one story in particular, a story about a family and a bakery…and a significant area of small business policy that we should all understand more about.

The San Mateo Small Business Development Center (SBDC) invited my office to a ribbon-cutting last month for Coastside Baking Company in Half Moon Bay. The event was a grand reopening under new ownership. I love those big scissors, I love SBDC success stories and I love baked goods! It was a long trip on a Saturday morning and worth every minute on the road to hear about the story of Salomon and Carmela Silva and how they took ownership of Coastside Baking and, as a result, began the journey to realizing their California Dream.

This California Dream story started in 2005. That’s when Salomon Silva moved from Santiago Apóstol in Oaxaca to California to make a better life for himself. After a brief stint as a farmworker, he landed a job at Coastside Bakery and Café in Half Moon Bay. Later, he met Carmela. Fast forward to 2023, the couple have three children and are the new owners of the same commercial bakery where Salomon first found work in 2005. Their growth plan is to expand into new markets with pan dulce recipes learned in Mexico.

 

This kind of story is why we all need to be working harder to support the fulfillment of more California Dreams by transforming more employees into owners.

The phrase “employee ownership” describes every business model that creates a full or partial ownership stake in a business for its employees. The most simple example is a buyout, like with Coastside Bakery. In this case, the previous owners split the company into two parts – a commercial bakery and a storefront café — and sold each part to separate employees.

But broad-based employee ownership includes a much bigger set of strategies that allow the full base of employees to participate in ownership, either alongside or in place of a founding owner. These include Employee Stock Ownership Plans (ESOPs), Worker Cooperatives, and Employee Ownership Trusts (EOTs). I’m not going to delve into the technicalities of these here, but see the list of resources below to learn more.

I simply want to point out five facts about employee ownership that explain why this concept is so exciting and powerful to those of us invested in reducing the racial wealth-gap through entrepreneurship.

  1. The Silver Tsunami is Hitting Small Business

We all know that a huge percentage of our workforce is about to hit retirement. This includes small business owners.

A national study conducted in 2018 by Project Equity estimates that retiring baby boomers own 2.34 million businesses with employees and collectively employ 24.7 million people nationwide. Project Equity also analyzed this trend on a regional level and found that in the nine-county San Francisco Bay Area, more than 63,000 boomer-owned businesses employ 626,000 people and generate $36.6 billion in payroll and almost $150 billion in sales. We can’t afford for these businesses to go Poof.

A shut-down is a lose-lose-lose scenario: the owners lose hard-won assets, the employees lose their jobs and their communities lose services. By planning for an employee-ownership transition as an exit, owners preserve assets and gain more control over the timeframe and employees keep their jobs and get a chance at wealth-building for themselves.

  1. Employee Ownership Preserves Minority Ownership

This Existing Boomer scenario poses an even bigger risk for minority-owned businesses, particularly black-owned businesses.

According to Project Equity’s latest report, Strategies to Advance Black Employee Ownership, nearly 12,000 black-owned businesses are currently facing some kind of near-term exit for this reason. As black-owned businesses tend to be smaller both in terms of business assets and employees and concentrated in low-margin sectors, this increases the odds of that business disappearing…or being sold to non-black owners. Even if the jobs are preserved, that still represents a loss for the community. On the flip side, this makes employee ownership an even bigger opportunity, particularly in industries where black employment is also high. The best candidates are manufacturing, transportation and warehousing and construction: all three sectors boast high levels of black workers and high-enough margins to fund the transitions.

  1. Employee Ownership Transitions are Hard Work

Traditional lenders, accountants, lawyers and other business service providers frequently don’t understand these mechanisms or have a hard time making the paperwork fit the model. A three or four-year planning period is par for the course. So this is not an exit for an owner under time pressure. Even for straight-up acquisitions like Coastside Bakery, finding the financing can be challenging and time-consuming; that deal took roughly four years and a team of advisors to get over the hump.

This scenario is what drove the passage last year of SB 1407, the California Employee Ownership Act. SB 1407 requires my office to make sure business-owners, lenders and the public in general understand the positive outcomes associated with employee ownership and to streamline and reduce barriers to achieving it.

  1. Workers Make Good Bosses

Employee ownership doesn’t just mean preserving jobs. It frequently means creating better jobs, as shown by a report from the National Center for Employee Ownership. The report states that employee-owners have 92 percent higher median household wealth, 33 percent higher income from wages and 53 percent longer median job tenure than regular workers in comparable jobs. Studies also show that employee-owned companies are more reluctant to lay off workers in times of economic distress.

  1. Employee Ownership is Equity

We talk a lot in my line of work about equity. And we should: we are compelled by our principles and by Executive Orders to do so.

But I think sometimes our rhetoric floats right over the idea that equity in the workplace is fundamentally about dollars and cents. Equity investors, for example, exchange dollars for a piece of ownership. Employee ownership is about workers participating in that kind of equity.

This idea was eloquently expressed at the Employee Ownership Equity Summit organized recently by Project Equity. St. Paul Mayor Melvin Carter gave the keynote and pointed out that in business school, equity is defined as “ownership of transferrable and appreciable assets”.

I agree that this is what it should mean in real life too, not just business school. In fact, it’s the very reason why entrepreneurship is a key to driving economic mobility.  If you were wondering, the pan dulce was delicious!

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