Succession Planning: Opportunities and Benefits of Employee Ownership
-
Upload
project-equity -
Category
Business
-
view
160 -
download
1
Transcript of Succession Planning: Opportunities and Benefits of Employee Ownership
1 1
Succession Planning: Opportuni3es and Benefits of
Employee Ownership
August 12, 2015
© Project Equity 2014
2 2
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
3 3
1. INTRO TO EMPLOYEE OWNERSHIP
4 4
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
© Project Equity 2015
5 5
Employee ownership can take many forms
Employee Ownership
Worker-‐ Owned Coops
ESOPs
Stock grants
© Project Equity 2015
6 6
Today we will focus on ESOPs and worker-‐owned coops
Employee Ownership
Worker-‐ Owned Coops
ESOPs
Stock grants
© Project Equity 2015
7 7
CooperaXves—businesses owned and controlled by their members—also take many forms
Employee Ownership CooperaXves
Housing Coops
Consumer Coops
Producer Coops
Worker-‐ Owned Coops
© Project Equity 2015
8 8
What are Worker-‐Owned CooperaXves?
CooperaXves Employee Ownership
Worker-‐ Owned Coops
Businesses that are owned and controlled
by their workers
© Project Equity 2015
9 9
2. SUCCESSION PLANNING OPPORTUNITY
10 10
xf
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/
© Project Equity 2015
11 11
“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
© Project Equity 2015
12 12
3. WORKER COOP BUSINESS CONVERSIONS
13 13
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
© Project Equity 2015
14 14
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
© Project Equity 2015
15 15
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
© Project Equity 2015
16 16
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
17 17
4. HOW CAN I LEARN MORE?
18 18
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/
© Project Equity 2015
19 19
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
© Project Equity 2015
20 20
5. PROJECT EQUITY COOPERATIVE BUSINESS INCUBATOR
21 21
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
© Project Equity 2015
22 22
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
© Project Equity 2015
23 23
CooperaXve Development InsXtute Business Ownership SoluXons Rob Brown
24 24
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.
25 25
STONINGTON, MAINE: THE LOBSTER CAPITAL OF THE WORLD
26 26
Island Employee CooperaXve
27 27
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
28 28
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
29 29
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
30 30
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
31 31
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
32 32
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
33 33
CreaXng good jobs Building wealth through ownership SupporXng the community
34 34
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
35 35
NaXonal Center for Employee Ownership Tim Garbinsky
36 36
Agenda
• A brief history of ESOPs
• What types of companies have ESOPs?
• How do ESOPs work?
• What are the benefits of an ESOP?
37 37
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
38 38
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
39 39
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
40 40
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).
41 41
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.
42 42
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.
43 43
Employee Ownership Shared Capitalism Case Study
Ken Baker CEO
44 44
• 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
45 45
46 46
Headquarters Southampton PA
47 47
• 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%
48 48
“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?”
49 49
50 50
• 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
51 51
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
52 52
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.
53 53
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
54 54
What are the NewAge Industries case study results ?
55 55
Share Price up 508%
0
50
100
150
200
250
Start 2007 2009 2011 2013
Share Price
56 56
2014 ESOP Total Value $17,198,071
57 57
Average Years of Employment with NewAge Industries
• Management – 17 years • Office – 11 years • Manufacturing – 6 years • Total company – 9 years
58 58
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
59 59
What would happen to the legacy of Ray Baker if NewAge was sold to a compeXtor or mulX-‐naXonal?
60 60
• 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?
61 61
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
62 62
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