Are you considering a business transition?
VEOC Executive Director Matt Cropp shares thoughts on employee ownership and announces 20th annual conference
When Vermont’s small business owners are at the crossroads of a transition, there are a myriad of options to consider. In a family-owned business, the next step may result in passing the business on to the next generation. An alternate scenario may be a negotiation with a local or out-of-state buyer.
Another viable option to consider is selling the business to the employees. This may happen at any point in the life cycle of the business, from start up to sale. At the Vermont Small Business Development Center (VtSBDC), business advisors have observed an uptick in business transitions throughout the state, and the team is helping many clients assess their options before making these important decisions.
According to the Vermont Employee Ownership Center (VEOC), more than 40 Vermont-based companies are at least partially employee-owned, with the vast majority of those 40 being 100% owned by their staff. These companies currently employ more than 3,000 people. VtSBDC’s State Director, Linda Rossi, is a member of the VEOC board of directors, and sees the synergy between VtSBDC and VEOC.
To provide more education on employee-owned businesses in Vermont, The Starting Point went right to the source. The VEOC is a statewide non-profit whose mission is to promote and foster employee ownership to broaden capital ownership, deepen employee participation, retain jobs, increase living standards for working families, and stabilize communities.
VEOC Executive Director Matt Cropp explains that the VEOC provides information and resources to owners interested in selling their business to their employees, employee groups interested in purchasing a business, and entrepreneurs who wish to start up a company with broadly shared ownership. The organization is funded through government and foundation grants, and contributions from individuals and businesses. The VEOC is a tax-exempt non-profit educational organization.
“At VEOC, we have had the opportunity to talk to hundreds of business owners considering their exit plan,” Matt explains. “Employee ownership can be a powerful tool for meeting needs and goals that address diverse reasons including legacy, timing, finance, and/or ethics.”
Matt has been with VEOC since 2014, where he has developed deep expertise in employee ownership models. In addition to his leadership role, he is responsible for marketing the organization, coordinating with a national network of employee ownership practitioners, and a variety of other activities advancing the VEOC’s mission. Matt received his MA in History from UVM in 2011, where he studied economic history and the origins of cooperative finance.
There are several business models for broad-based employee ownership. Examples Employee Stock Ownership Plans (ESOP) and Employee Stock Owner Trusts and Worker Cooperatives. The Starting Point had a conversation with Matt to learn more about the Worker Cooperative model, a good fit for Vermont businesses with as few as four to five employees.
The Starting Point: What is a Worker Cooperative?
Cooperatives generally are member-owned companies in which governance control is on a one person/one vote basis. You may be familiar with consumer-oriented cooperatives like a food co-op or a credit union, for example, where members are the customers. In a worker cooperative, only those who work in the business are eligible to become members. Cooperatives are typically set up as corporations, and in Vermont, there is a Worker Cooperative Corporation statute. Workers who are members are equal owners, elect the board, and vote on major company decisions on a one-person/one-vote basis. Members receive a share of any annual net income, usually distributed based on hours worked or W-2 income. Management can be conventional though some cooperatives choose to use high participation approaches.
The Starting Point: How Does a Cooperative Work?
Usually, employees become eligible for membership after working for the business for a period specified in the bylaws. After the employee has been accepted for membership, they purchase a membership share which, in most cases, has a fixed value. Most cooperatives establish an internal account for each member to which their share of net income is allocated, in proportion to hours worked or some other equitable measurement of their contribution. This share of income is deductible to the company, but taxable to the employee. When employees leave, the co-op buys back their membership share and pays out their account balances.
The Starting Point: What are the Benefits of Worker Cooperatives?
Worker cooperatives typically offer lower set-up costs than other forms of employee ownership. In some cases, persons who sell at least 30% of the shares in a business to a worker cooperative are exempt from capital gains taxes if the gain is reinvested in U.S. securities. Finally, worker cooperatives allow members to build equity and participate in the governance of their workplace.
“Here in Vermont, we are fortunate to have a strong and long-standing community of companies happy to collaborate with business owners as they begin the journey to employee ownership,” Matt adds.
Matt explains that in most cases, all models of employee ownership benefit owners of businesses, employees, and communities. How?
- Provide an exit strategy for owners. In almost every small business, the owner or owners will eventually want to leave. Selling the business to employees can be a way to provide continuity and preserve the culture of the business.
- Attract and retain good employees. Using employee ownership as an employee benefit can be a positive way to address this timely issue.
- Preserve jobs and local ownership. Rather than closing up shop or selling to a competitor, small business owners can sell to their employees. This keeps businesses and jobs in Vermont.
- Improve performance. On average, employee-owned firms perform substantially better than non-employee-owned firms when ownership is combined with employee participation in decisions affecting their work.
- Improve wages and benefits. Employee-owned businesses tend to pay higher wages and provide better benefits.
- Provide tax benefits. Certain employee ownership structures qualify for tax benefits.
“The benefits of employee ownership are significant for all parties involved including the owners, the workers and the communities they live in,” Matt concludes. “At VEOC we welcome exploratory conversations to see if this approach is appropriate for your business and if so, the best path to get there.”
Three Things Business Owners can do next to learn more:
- Attend the 20th Annual Vermont Employee Ownership Conference on June 9 at the UVM Davis Center
The 20th Annual Vermont Employee Ownership Conference will take place June 9 at the Dudley H. Davis Center at the University of Vermont in Burlington. The conference will feature a keynote speech by Jennifer Briggs followed by four rounds of workshops covering a range of topics in employee ownership.
See the full conference agenda: VEOC Conference 2022 | Vermont Employee Ownership Center
2. Schedule a free consultation with VEOC.
3. Visit VtSBDC’s website with guidance on transitioning your business.
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