New initiative to accelerate employee ownership transitions
by Bruce Dobb
Over 125,000 U.S. small manufacturing companies are owned by people on the cusp of retirement. These businesses, which include “niche” machine shops, food manufacturers and steel fabricators, represent millions of family-wage jobs that could be lost forever if the community infrastructure is not in place to support an effective transition to new owners.
When these businesses close, the community loses essential services, jobs, and a bit of its character. The loss of these businesses also undermines our nation’s supply chain and contributes to inflation.
By transitioning more of these businesses to employee ownership, the wealth building opportunity of business ownership will shift from an older, homogenous population to a younger, more racially diverse one.
To save these jobs, in communities across the United States, the Urban Manufacturing Alliance (UMA), in cooperation with Common Future, recently launched Tools for Equitable Acquisitions in Manufacturing, or TEAM, an initiative to save manufacturing jobs through employee ownership transitions.
In addition to keeping jobs local, employee ownership in manufacturing will help address our nation’s racial wealth gap. The manufacturing workforce is young and diverse, reflecting the changing demographics of the nation. The owners of privately held manufacturing firms are the exact opposite—usually white and over the age of 65. By transitioning more of these businesses to employee ownership, the wealth building opportunity of business ownership will shift from an older, homogenous population to a younger, more racially diverse one.
The TEAM Initiative
To support the transition of small manufacturers to younger, more diverse owners, the TEAM initiative is focused on increasing the number of lenders ready to finance them. TEAM is undertaking an extensive educational program for lenders designed to broaden an understanding of all forms of ownership vesting, with an emphasis on the benefits of shared ownership in terms of business longevity, employee work satisfaction, and better wages. For loans under consideration, employee ownership may take any number of forms: an Employee Stock Ownership Plan (ESOP), a worker cooperative, or more often, some form of limited partnership.
The latter is the way small manufacturers have traditionally transferred ownership. Often key employees, shop foreman, or other employees (some combinations may even include family members) buy out the original owner. This has been the most common model because often these key employees have been with the company for a long time and know the business well. This is quite different from other sectors—for example, retail—where people don’t tend to stay long with one employer. Encouraging “insider” acquisitions is key to the success of any project that seeks to keep manufacturing jobs local.
The TEAM initiative focusses on expanding the capacity of Community Development Financial Institutions (CDFIs) to support ownership transitions among small- to medium-sized manufacturers. CDFIs were selected because of their commitment to place-based economic development, their active participation in their local communities, and their commitment to social justice concerns. CDFIs work to build wealth in communities of color by offering financing alongside the technical assistance needed to create a level playing field for aspiring first-time business owners.
What makes a successful ownership transition?
To understand what it takes to effectively transition a smaller manufacturer to local ownership, TEAM commissioned a panel of experts in the field for a discussion of the issues. This panel included lenders that routinely finance business purchases, economic development officials, a lawyer, two worker-to-owner (WTO) advocates, and an investor who buys and sells companies. Panelists were from communities across the nation, with political affiliations from red to blue. At least one TEAM member had worked successfully with each panelist but none of the panel members knew each other. On Zoom, panelists engaged in a lively debate, which was expertly facilitated by Ellen Shepard of Community Allies. Here are three main take-aways:
Demand for ownership transitions is growing. Manufacturing owners are ready to sell and employees and other local stakeholders want to buy. An aging population of owners is just one aspect of this equation. Yet another is that younger workers are unable to afford homes and, therefore, cannot build long-term financial security. Among these younger workers, business ownership is recognized as an alternative path to build wealth.
When it comes to buyers, large competitors, private equity investors, and speculators and re-sellers/flippers still dominate the market. It’s tough for local buyers to compete.
Despite the pent-up demand, several barriers stand in the way of more local ownership. There are not enough bridges between buyers and sellers to encourage a broadening of the buying class. When it comes to buyers, large competitors, private equity investors, and speculators and re-sellers/flippers still dominate the market. It’s tough for local buyers to compete, even though the outcome—keeping the jobs local—is better. That’s why TEAM plans to develop and disseminate best practices for worker-to-owner transitions—because when workers buy the business, the jobs stay in the community.
CDFIs are well suited to save manufacturing jobs by offering their services to transitioning companies both before and after closing. Because the U.S. Treasury provides grants to CDFIs for a range of ownership services, they are uniquely suited to playing a dual role: financing a transaction and sustaining the transition once it has occurred. Many CDFIs—especially those associated with Small Business Development Centers (SBDCs), Community Business Enterprises or other local government-sponsored initiatives such as procurement and loan programs—offer training in financial literacy, business planning, and marketing and promotion. These skills are crucial for would-be business owners.
The financial literacy technical assistance CDFIs make available is a key ingredient for employee success in purchasing and running the company. Workers who want to be owners often need training to effectively communicate their story with numbers when they meet with their bank. Conventional banks rarely offer this service to prospective borrowers, which makes it harder for workers, who may know the business better than any other prospective buyer, to get the capital they need to become the owners.
CDFIs could increase their penetration into this market by building out their existing network, creating a fuller deal ecosystem. To do this, CDFIs need to expand their specialized knowledge in this field. To complete an ownership transition, there needs to be an owner who is looking to sell and one or more buyers with the wherewithal to buy the business. An entire ecosystem of outside experts, specialists and service providers are needed to usher a transaction through this process. These experts, along with local workforce centers, lawyers, and business brokers, usually build the “pipeline”—i.e., find the selling owners and match them with buyers. Lenders are not often in a position to build the pipeline because a deal only reaches their desk once a borrower is found.
By supporting more worker-to-owner transitions, CDFIs satisfy their core mission to keep jobs local and expand economic opportunity so that all community members can participate in ownership and building wealth.
CDFIs are different from traditional banks in this respect. Since they are publicly sponsored, they already are engaged with local economic development activities. They don’t just wait for a deal to appear; they are proactive, helping prospective borrowers become clients.
CDFIs however do have some weaknesses. Underwriting (to assure the new owners of the business can repay the loan) requires specialized credit knowledge that traditional, larger sources of capital have long cultivated. CDFIs successfully underwrite service businesses and smaller manufacturers, but they don’t often loan money to companies with more than 50 employees. They will need to develop more specialized knowledge and add training in acquisition financing to their routine credit training regime.
By supporting more worker-to-owner transitions, CDFIs satisfy their core mission to keep jobs local and expand economic opportunity so that all community members can participate in ownership and building wealth.
Next steps
Over the next few months TEAM will invite a small group of CDFIs to participate in a learning and practicum cohort. We hope to build the muscle and skills that CDFIs need to add a new lending product to their services while also building an ecosystem that will generate the deal flow necessary for success. TEAM will test the idea that CDFIs can re-tool their advisory pool to support transitions and create capital networks to be able to fully fund employee ownership business transitions. TEAM believes that if we can support these CDFIs with expert advice, training material and case studies, they in turn can support their community with innovative financial models geared to keeping ownership local through worker to owner transitions.
Eventually, TEAM hopes to grow a national network of CDFI ecosystems prepared to save manufacturing, expanding the opportunity for underrepresented would-be buyers, especially employees who want to become owners. CDFIs passionate about supporting the retention of small to mid-sized manufacturing companies in their community can learn more about this project by contacting: info@concernedcapital.info.
Bruce Dobb is senior partner at Concerned Capital, a social benefit, investment banking firm in downtown Los Angeles that specializes in saving local jobs by helping employees buy the company they work for. Concerned Capital is a TEAM member.
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