Succession Planning: Opportunities and Benefits of Employee Ownership

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Succession Planning: Opportuni3es and Benefits of

Employee Ownership

August 12, 2015

© Project Equity 2014

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Project Equity: Alison Lingane Agenda

1.  Intro to employee ownership 2.  Succession planning opportunity 3.  Worker coop business conversions

4.  How can I learn more? 5.  Coopera3ve Business Incubator

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1. INTRO TO EMPLOYEE OWNERSHIP

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Employee ownership brings significant benefits

All cita3ons are in Worker Coopera*ves: Pathways to Scale

TO WORKERS ü  BeNer pay and benefits ü  Assets (business ownership) ü  A voice in key decisions

TO BUSINESSES ü  Higher produc3vity and growth ü  Lower employee turnover ü  Improved business longevity

TO SOCIETY ü  Local spending mul3plier ü  Higher vo3ng levels ü  Correla3on with other social benefits


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Employee ownership can take many forms

Employee Ownership

Worker-‐ Owned Coops

ESOPs

Stock grants


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Today we will focus on ESOPs and worker-‐owned coops

Employee Ownership


ESOPs

Stock grants


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CooperaXves—businesses owned and controlled by their members—also take many forms

Employee Ownership CooperaXves

Housing Coops

Consumer Coops

Producer Coops



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What are Worker-‐Owned CooperaXves?

CooperaXves Employee Ownership


Businesses that are owned and controlled

by their workers


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2. SUCCESSION PLANNING OPPORTUNITY

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Lack of succession planning is the #1 preventable cause of job loss

According to the Ohio Employee Ownership Center

•  Only 15% of family businesses succeed to the 2nd genera3on

•  Only 5% succeed to the 3rd genera3on •  Those that don’t close are sold to out-‐of-‐state buyers or

private equity firms that oZen relocate jobs or the en3re business

What if, instead, these businesses were sold to their workers?

hNp://www.oeockent.org/exit-‐planning/


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“Trillions of dollars of business value are going to change hands in the next 10 to 20 years.”

Image: BreN Ryder, The Economist Quote: Bob Balaban, Headwaters MB, a Denver-‐based investment bank


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3. WORKER COOP BUSINESS CONVERSIONS

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TacXcally, what is a business “conversion” to a worker-‐owned cooperaXve?

(1) The crea3on of a new business en3ty that is a worker-‐owned coopera3ve

(2) A sales transac3on to sell the exis3ng business to the worker coop, typically financed by an outside lender, by the selling owner or by issuing non-‐vo3ng equity shares

(3) A transi3on of roles and culture among new worker-‐owners to take on the ownership responsibility of the new en3ty and run it under democra3c governance


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Is it a fit for your business? COOP CONVERSION BUSINESS READINESS FACTORS

PREREQUISITES •  Commitment to transi3on •  Business is in strong financial health

FACTORS TO DEVELOP ALONG THE WAY •  Par3cipatory culture •  Advising, training and support for owners and employees •  Effec3ve financing

OTHER HELPFUL FACTORS •  Owner ac3vely involved during transi3on •  Phased buy-‐out •  Third party financial valua3on


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First, a business decides if a worker coop is the right fit and they want to pursue

Explore Assess Prepare Convert Support

Ini3al proponent poses idea, gathers informa3on, gets people interested

Assessment team forms, conducts current state and gap analysis, educates employees and owner(s), defines decision process, draZs 3meline

Conversion team forms, secures valua3on, iden3fies financing op3ons, draZs management & decision-‐making frameworks for new coop, draZs by-‐laws, commits to sale; employee and owner educa3on

Conversion team finalizes bylaws, executes management & governance structures; Buyers & sellers execute financing op3on and complete sale transac3on

Consultants or internal team provide training & support for new worker-‐owners, support governance, management & decision-‐making processes, help owner with exit or evolving role

CULTURAL TRANSFORMATON

DECISION TO ASSESS

DECISION TO PURSUE

FORMAL COMMITMENT

CONVERSION TRANSACTION


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Then comes the work to prepare for the transacXon and support the new worker-‐owners

Explore Assess Prepare Convert Support

Ini3al proponent poses idea, gathers informa3on, gets people interested

Assessment team forms, conducts current state and gap analysis, educates employees and owner(s), defines decision process, draZs 3meline

Conversion team forms, secures valua3on, iden3fies financing op3ons, draZs management & decision-‐making frameworks for new coop, draZs by-‐laws, commits to sale; employee and owner educa3on

Conversion team finalizes bylaws, executes management & governance structures; Buyers & sellers execute financing op3on and complete sale transac3on

Consultants or internal team provide training & support for new worker-‐owners, support governance, management & decision-‐making processes, help owner with exit or evolving role

CULTURAL TRANSFORMATON

DECISION TO ASSESS

DECISION TO PURSUE

FORMAL COMMITMENT

CONVERSION TRANSACTION

© Project Equity 2015 © Project Equity 2015

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4. HOW CAN I LEARN MORE?

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How can I learn more? CONVERSION CASE STUDIES PUBLISHED BY PROJECT EQUITY

•  A dozen case studies of business conversion to worker coopera3ves

•  Business mo3va3ons

•  Typology of conversions •  Readiness Factors

Available for download at www.project-‐equity.org/case-‐studies-‐business-‐conversions/


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How can I learn more? SCHEDULE A 30-‐MINUTE PHONE CONSULTATION

•  We welcome businesses that want to learn more about worker coops to get their key ques3ons answered

•  Sign up on Project Equity’s website


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5. PROJECT EQUITY COOPERATIVE BUSINESS INCUBATOR

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ü  Cohort training ü  Business coaching ü  TA (legal, accoun3ng, financing) ü  Access to capital ü  Hands on advisors ü  Peer learning ü  Employee training

Project Equity CooperaXve Business Incubator LAUNCHING FALL 2015


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Project Equity CooperaXve Incubator

•  Any U.S. privately-‐held business is welcome to apply –  Oakland-‐based, virtual par3cipa3on + some in-‐person

•  ~ 12 month custom-‐designed program –  Sliding-‐scale monthly fee

•  We priori3ze businesses that meet these criteria –  Have decided they want to transi3on to a worker coop –  20+ employees with poten3al and aspira3on for con3nued growth –  Owner and at least 2 employees will ac3vely par3cipate –  Preference given to companies with lower-‐income workforces

•  Applica3ons accepted on a rolling basis www.project-‐equity.org/cooperaXve-‐incubator


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CooperaXve Development InsXtute Business Ownership SoluXons Rob Brown

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CooperaXve Development InsXtute Business Ownership SoluXons

BOS promotes worker ownership in Maine and works with owners and employees to convert a business to worker-‐owned coopera3ve.

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STONINGTON, MAINE: THE LOBSTER CAPITAL OF THE WORLD

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Island Employee CooperaXve

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Conversion Partners and Advisors

•  CDI •  Independent Retailers Shared Services Coopera3ve

•  Specialized Accoun3ng Services •  CEI •  Coopera3ve Fund of New England •  Na3onal Coopera3ve Bank •  Associated Grocers of New England

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SOME starXng understanding of what a cooperaXve is:

• Stonington Lobster Co-‐op • Associated Grocers of New England • Blue Hill Co-‐op • Independent Retailers Shared Services Coopera3ve

Also, New England-‐style town governance

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Some InnovaXons

• Commitment to buy Class A and Class B shares over 3me considered as equity by lenders • Loan covenants requiring substan3al TA contracts into the future as added “loan insurance” • IRS 1042 Rollover – benefit to seller • Training grants from Eastern Maine Community College

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Some InnovaXons

• Founders’ Shares • $1000 Class A share – the worker-‐owner share • $1000 Class B share – non-‐vo3ng equity share

• Employees bought 1 Class A and 6 Class B shares • Future members will pay $7000 for 1 Class A share, no Class B shares available

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Some Challenges

• Limited entrepreneurial experience • Exis3ng “Boss Culture” • Complexity and variety of businesses • Immediate exit of owner on short 3meline • No up-‐front employee equity • No models to look to • Building the culture aZer the conversion • Hours of opera3on

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Organizing the CooperaXve Steering Commilee for a Business Conversion

•  Work with TA provider to:

–  Coordinate the learning process for employees

–  Develop the legal, finance, organiza3onal, and

management structures

–  Execute due diligence and nego3ate P&S

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CreaXng good jobs Building wealth through ownership SupporXng the community

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Some Guidelines for Success

•  Start with strong, commiNed member leadership •  Set realis3c goals and focus on them •  Understand that you are facilita3ng a business transac3on •  Base decisions on market research and business planning

rather than opinions and ideology •  Invest in member educa3on and keep members informed and

involved •  Use technical assistance from co-‐op developers and industry

experts

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NaXonal Center for Employee Ownership Tim Garbinsky

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Agenda

•  A brief history of ESOPs

•  What types of companies have ESOPs?

•  How do ESOPs work?

•  What are the benefits of an ESOP?

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A brief history of ESOPs

•  The first ESOP was created by economist Louis Kelso in 1956, using a profit-‐sharing plan to borrow money to buy out a re3ring owner.

•  ESOPs were incen3vized by the federal government in order to encourage broad-‐based employee ownership –  Championed by Senator Russell Long, head of the Senate

Finance CommiNee –  Passed as part of the Employee Re3rement Income Security

Act (ERISA) –  Governed by ERISA and the Internal Revenue Code

•  Legisla3on passed in 1998 expanded incen3ves for S corpora3on ESOPs

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What types of companies have ESOPs? •  All types….

–  Both public and private (but majority are private) –  All over the United States –  No such thing as the “wrong industry” –  From under 50 employees to over 5,000

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What types of companies have ESOPs? Common Industries Breakdown of sizes

GORE-‐TEX® Lifetouch King Arthur Flour New Belgium Brewing Cramer Products Clif Bar

W.W. Norton & Co. Southwest Airlines Johnny's Selected Seeds Eileen Fisher Hobbico Hot Dog on a S3ck

Examples of Employee-‐Owned Companies

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How do ESOPs work? Business owners sell some or all of their shares to an ESOP trust, which owns those shares on behalf of employees.

Usually the transac3on involves a loan (leveraged ESOP). The company can take out the loan and then reloan funds to the trust. The company makes contribu3ons to the trust, which the trust uses to repay the loan. Some3mes the seller provides financing.

As the loan is repaid, shares become available to allocate to employee accounts. The alloca3ons are made on a non-‐discriminatory basis (payscale).

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How do ESOPs work? (ConXnued) Ves3ng, distribu3on of benefits, diversifica3on, vo3ng rights, and other rules are governed by federal regula3ons (IRC and ERISA).

ESOPs oZen have ownership cultures that encourage employees to think and act like owners.

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What are the benefits of an ESOP?

Sellers can define their role in the company moving forward. You can sell the business gradually or all at once. There are numerous tax benefits (con3ngent on whether the company is a C or S corpora3on). Employees receive a significant re3rement benefit. Research shows that companies that combine employee ownership with an ownership culture outperform comparable companies without employee ownership.

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Employee Ownership Shared Capitalism Case Study

Ken Baker CEO

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•  3 Manufacturing divisions –  NewAge – plas3c tubing, hose and fizngs –  AdvantaPure – high purity tubing, hose and fizngs – single use system for the manufacturing of pharmaceu3cals and biologics – Clean room

–  Verigenics – RFID (Radio Frequency Iden3fica3on) systems for track and trace of assets on manufacture plant floor and in medical devices

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Headquarters Southampton PA

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•  112 Employees •  2014 sales -‐ $37 Million •  60 years in business •  Family Business – Ken B. 2nd genera3on •  Never had unprofitable year •  Start businesses from scratch – “Green Field” •  20% of sales are exported to 54 countries •  ESOP – Employee Stock Ownership Plan – 40%

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“Our employees are truly worried about their long term future -‐ how do we as leaders provide some comfort and at the same 3me get a more commiNed employee?”

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•  Final step of TQM (Total Quality Management) training started 20 years ago

•  Gives the team member the feel of “ownership” •  Good fit for our corporate culture •  A reward for our long term team members – create long term wealth

•  Keep our excellent team together •  It differen3ates us from our compe3tors •  Ken B. was able to take some NewAge share money “off the table”

Why NewAge established an ESOP

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By selling a series of share tranches over 3me to the ESOP, founder/CEO possibly could receive the same total share value as a strategic buyer

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The secret sauce of Sub S Corpora3on ESOPs

The tax dollars which would have been paid to the IRS is paid to the ESOP trust and then is used to pay back the bank loan.

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100% S Corpora3on ESOP can use the tax benefit as an acquisi3on strategy of a non-‐ESOP company

The tax payment of the acquired company is used to pay down the loan

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What are the NewAge Industries case study results ?

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Share Price up 508%

0

50

100

150

200

250

Start 2007 2009 2011 2013

Share Price

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2014 ESOP Total Value $17,198,071

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Average Years of Employment with NewAge Industries

•  Management – 17 years •  Office – 11 years •  Manufacturing – 6 years •  Total company – 9 years

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Allocated Shares

Unallocated Shares

401(k) Profit Sharing Plan 5.00% 2.00% 2.00%401(k) Match 6.00% 0.00% 1.00% 1.00%ESOP 0.00% 3.00% 13.02% 11.78% 8.86% 36.66%TOTAL 6.00% 5.00% 6.00% 13.02% 11.78% 8.86% 39.66%

Retirement PlanIndustry Average

DividendsAppreciation on Shares Issued

Cash Contributed Total

Newage ESOP - % of compensation - comparison

ContributionCash Contributed

Pre-ESOP Plan - recasted NewAge year 2013

39.66% of Salary in reXrement benefits

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What would happen to the legacy of Ray Baker if NewAge was sold to a compeXtor or mulX-‐naXonal?

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•  Good marke3ng tool for prospects and customers – desirable to work with an ESOP

•  ANractor for new employees •  Contrast to some of our compe3tors who grow though acquisi3on

•  Maintain our independence – not being bought by a compe3tor

•  The CEO (who did not leave the company) is part of the ESOP and hence is earning shares back

What are some of the benefits NewAge has golen because of being an ESOP?

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Employee Ownership is part of the basic idea of American Democracy

The founding fathers set out an idea of broad based property (capital) ownership – hence gezng away from the English feudal system

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QuesXons?

Alison Lingane alison@project-‐equity.org www.project-‐equity.org

Rob Brown [email protected] www.cdi.coop

Timothy Garbinsky [email protected] www.nceo.org

Succession Planning: Opportunities and Benefits of Employee Ownership

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