To grow employee ownership, impact investors, foundations, and other agencies must consider business life cycle
by Tom Strong
at their new development property.
There’s a lot of excitement nowadays about employee ownership conversions – turning established businesses into worker cooperatives or other kinds of employee-owned businesses. It’s a powerful strategy for creating good jobs, building community wealth, keeping businesses in the places they were created, and fostering more democratic businesses. For these reasons, foundations and impact investors are looking at ways to increase the total number of employee-ownership conversions.
When any business is sold, the buyer and the seller need to agree what the company is worth.
It is important to understand, however, that at the core of any such “conversion” is a sale. For a company to become a co-op, its current owners must sell the business to the future worker-owners and change its corporate structure. This is a complex transaction, involving many moving parts. Converting a company to a co-op can be profitable, although rarely as profitable as selling to a competitor or private equity firm. Examining the reasons for this can also shed some light on how to make these transactions attractive to more business owners.
North Wind Renewable Energy Considers Cooperative Conversion
To do that, let’s look at the company North Wind Renewable Energy in Amherst, WI, which became a worker cooperative in 2017. North Wind was originally founded by Joshua Stolzenburg in 2007. He was soon joined by Karl Schwingel, Craig Buttke and Jethro Fluegel, who became co-owners of the company in 2008-2009. Their early projects were focused on wind power and solar heating, and soon expanded to solar electricity as well.
By 2015 North Wind had been through some ups and downs, but had turned a corner and had started to gain considerable traction in the solar energy market. It was then that the founders started considering restructuring their company as a worker cooperative. Stolzenburg and Buttke had previously worked at a co-op together and were drawn to that more democratic way of doing business. Stolzenburg also felt that a co-op structure would help the company strengthen its approach to governance. To become a co-op, though, they’d have to get everyone on board. They’d also have to figure out how to manage the sale.
What Is the Business Worth?
When any business is sold, the buyer and the seller need to agree what the company is worth. When the employees are the buyer, that conversation is usually more complicated, because in our increasingly unequal society employees rarely have the cash to buy a company outright. This means a loan to the new cooperative is often necessary to buy the former owners out. But if the loan is too large for the co-op to bear, it could endanger the business and the futures of the new worker-owners.
A loan to the new cooperative is often necessary, but if the loan is too large, it could endanger the business.
In the process of becoming a worker co-op, North Wind’s founders grappled with this question. They discussed it with their CPA, who pointed out that the company had enjoyed three strong years after two poor ones. The two down years had occurred in 2012-13, when the Scott Walker administration had suspended a statewide incentive program for solar installations. Since then, North Wind had rebounded nicely.
Companies are often valued based on a five-year assessment of their profitability, with recent years being weighted more heavily than the past. What this means is that when a company has a few good years in a row, its market value can shoot up quickly – because the more recent years are assigned greater value, and because lower-performing years in the past may no longer be counted.
North Wind’s CPA performed two valuations for them, in 2015 and 2016. In 2015, the company was valued around $300,000. But in 2016, on the strength of one more year of more than $140,000 in profits, the value shot up to well over $800,000 – and that was still including the effect of the two years with losses. It became very clear that, as those two years rolled out of the valuation, North Wind’s market value would skyrocket.
| Year | NWRE Revenue | NWRE Net Income | Fair Market Valuation |
| 2016 | $2,079,887 | $146,033 | $839,109 |
| 2015 | $2,006,598 | $144,844 | $301,406 |
| 2014 | $1,262,013 | $24,540 | —— |
| 2013 | $1,034,009 | ($16,674) | —— |
| 2012 | $857,185 | ($23,794) | —— |
| 2011 | $1,512,382 | $109,205 | —— |
Timing is Everything
Most business owners, of course, would see that as a great thing. But for a prospective worker co-op like North Wind, the calculation was more complex. “Once we got to the point of wanting to do a transition,” Stolzenburg said, “we realized it had to be now. Otherwise, the company’s value would inflate to the point that it would be a significant burden to the new ownership to incur that sort of debt.”
North Wind’s founding owners had to weigh the value of maximizing their personal financial benefit, versus the social value they wanted to create.
This meant that North Wind’s founding owners also had to weigh the value of maximizing their personal financial benefit from the sale, versus the social value they wanted to create in reforming the company as a co-op. Ultimately, while the selling owners received a solid return on their investment, they chose to have that social impact and the pride of creating a worker cooperative poised for future success. After pitching the idea to their colleagues, they made the decision to go ahead in the summer of 2016, and finalized the transition in April 2017.
“If we had maintained that initial ownership, we would have made considerably more money on the sale than we did,” said Buttke. “But we wanted the co-op ownership structure, for the business to continue with us all invested in it.”
Cooperative Continues to Prosper and Grow
Of course, most of the selling owners became co-op members themselves, and their investment has continued to prosper. Member share value has steadily increased since the conversion. And last year, North Wind saw its best-ever profit margin on $2.3 million of revenues, all from solar. True to its co-op ideals, North Wind reinvested a substantial portion of those profits into its people, establishing a new and improved wage scale, and expanding its team. It also recently made one other significant new investment – purchasing property in Amherst Office Park, which will become the site of its future headquarters.
North Wind’s story illustrates how important it is to consider the life cycle of businesses that may be good prospects for employee ownership. Their cooperative transition has been so successful in part because of the founders’ vision and the engagement of their team. But it also worked out because it was timely. Had the founders learned of the worker co-op option even a year or two later, they may not have been able to pull it off. As impact investors, foundations, and other agencies seek to grow employee ownership, there will be an increased need for this kind of life cycle analysis.
Tom Strong is the principal of Open Book People, LLC and a certified coach with The Great Game of Business. He is also a co-founder of the Georgia Center for Employee Ownership. Jenny Riggenbach, executive director of Central Rivers Farmshed, also contributed to this article.
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