Are you a business owner thinking about succession planning? Or are you wanting to support locally-owned businesses to stay in their communities? Project Equity and the National Center for Employee Ownership offer this webinar to share essential information on important succession planning options available to business owners through employee ownership. We will review the main features of employee stock ownership plans (ESOPs) and worker-owned cooperatives, and will discuss the benefits and distinctions of each, including resources for how to learn more, and how to get support. Rob Brown from Cooperative Development Institute shares a case study of a business that sold to its employees to a worker-owned cooperative. For business owners who want to see their businesses remain in their communities, want their employees to be well taken care of when they retire or sell their business, and who want their mission and the core strengths of their business to remain intact, employee ownership is a great fit.

1. 1
1
Succession
Planning:
Opportuni3es
and
Benefits
of
Employee
Ownership
August
12,
2015
©
Project
Equity
2014

2. 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
3
1.
INTRO
TO
EMPLOYEE
OWNERSHIP

4. 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
5
Employee
ownership
can
take
many
forms
Employee
Ownership
Worker-­‐
Owned
Coops
ESOPs
Stock
grants
©
Project
Equity
2015

6. 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
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
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
9
2.
SUCCESSION
PLANNING
OPPORTUNITY

10. 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
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
12
3.
WORKER
COOP
BUSINESS
CONVERSIONS

13. 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
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
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
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
17
4.
HOW
CAN
I
LEARN
MORE?

18. 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
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
20
5.
PROJECT
EQUITY
COOPERATIVE
BUSINESS
INCUBATOR

21. 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
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
23
CooperaXve
Development
InsXtute
Business
Ownership
SoluXons
Rob
Brown

24. 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
25
STONINGTON, MAINE: THE LOBSTER CAPITAL OF THE WORLD

26. 26
26
Island
Employee
CooperaXve

27. 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
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
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
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
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
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
33
CreaXng
good
jobs
Building
wealth
through
ownership
SupporXng
the
community

34. 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
35
NaXonal
Center
for
Employee
Ownership
Tim
Garbinsky

36. 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
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
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
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
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
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
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
43
Employee
Ownership
Shared
Capitalism
Case
Study
Ken
Baker
CEO

44. 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
45

46. 46
46
Headquarters
Southampton
PA

47. 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
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
49

50. 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
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
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
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
54
What
are
the
NewAge
Industries
case
study
results
?

55. 55
55
Share
Price
up
508%
0
50
100
150
200
250
Start 2007 2009 2011 2013
Share Price

56. 56
56
2014
ESOP
Total
Value
$17,198,071

57. 57
57
Average
Years
of
Employment
with
NewAge
Industries
• Management
–
17
years
• Office
–
11
years
• Manufacturing
–
6
years
• Total
company
–
9
years

58. 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 Plan
Industry
Average
Dividends
Appreciation
on Shares
Issued
Cash
Contributed Total
Newage ESOP - %of compensation - comparison
Contribution
Cash
Contributed
Pre-ESOP
Plan -
recasted NewAge year 2013
39.66%
of
Salary
in
reXrement
benefits

59. 59
59
What
would
happen
to
the
legacy
of
Ray
Baker
if
NewAge
was
sold
to
a
compeXtor
or
mulX-­‐naXonal?

60. 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
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
62
QuesXons?
Alison
Lingane
alison@project-­‐equity.org
www.project-­‐equity.org
Rob
Brown
rbrown@cdi.coop
www.cdi.coop
Timothy
Garbinsky
tgarbinsky@nceo.org
www.nceo.org