Why the Time is Now to Support Employee Ownership

By:

Kyle Funk
Zen Trenholm

May 18, 2021 - (6 min read)

As the pandemic subsides and the U.S. economy begins to open, two things are clear: First, businesses need new models to enable them to better respond to and endure emergencies; and second, inequalities need to be addressed so that when unforeseen crises occur, the impact is felt more evenly across various income groups. Employee ownership stands as a policy tool that can address both issues and cultivate more resilient, equitable economies.

Employee ownership is a broad concept for companies that include employees as direct beneficiaries of a company’s profits. Employee-owned corporations tend to offer higher wages, allow workers to build assets, create quality jobs, and provide greater job security and stability. All these benefits make employee ownership an appropriate tool for building inclusive racial equity in a community, as Black, Indigenous and People of Color (BIPOC) workers often face barriers to starting their own businesses and have traditionally been locked out of asset-building opportunities.

Why Now?

Due to the COVID-19 pandemic, small businesses are closing their doors at rapid rates and many may never reopen. With small businesses employing nearly half of the private U.S. workforce, this poses a distinct challenge to municipalities, along with directly impacting workers who may become unemployed as a result — a disproportionate share of whom are BIPOC workers. Recent studies have shown that more than 40 percent of Black business owners have closed shop for good and of the 140,000 U.S. jobs lost in December 2020, 100 percent were held by women, with Black and Latina women accounting for the vast majority.

Additionally, the majority of small business owners in the country are a part of the baby boomer generation and, with each passing year, more approach retirement age. When these owners retire, there are frequently few local buyers to turn to for purchasing and running the business, which can significantly destabilize the local workforce. In the face of the pandemic, many business owners are eager to sell but lack a viable buyer, which could trigger additional businesses to shutter. The jobs offered by these small business prior to closure are generally unlikely to be replaced by those of a similar type and quality, particularly for BIPOC workers. For small cities and towns across the country, and especially in BIPOC neighborhoods, the loss of a single business can have widespread, devastating impacts.

What Can Cities Do?

To stabilize workers and businesses, municipalities can begin investing in tools and policies that foster employee ownership. One way to do this is by supporting employee ownership conversions, and particularly legacy business transitions to employee ownership: While legacy businesses play a central role in the history, identity and economy of a neighborhood or community, legacy business owners often lack adequate options for retirement in the form of a clear successor or interested buyer. Transitioning to employee ownership offers a retirement plan to the owner — along with the potential to continue their legacy and its local economic impact — while also creating significant opportunities for wealth-building and stable employment for the worker-owners. However, workers who would be potential buyers of the business may not have access to the traditional forms of capital often required to purchase a business, largely due to systemic issues in the financial system or a lack of equity to offset a loan.

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To learn more about shared equity or to participate in quarterly webinars throughout 2021, please visit the Shared Equity in Economic Development webpage.

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To combat these barriers, municipalities can step in and help these legacy businesses become employee-owned by expanding revolving loan funds to cover transitions, or by tapping into the Workforce Innovation and Opportunity Act (WIOA) dollars to rapidly respond to potential business closures by assisting workers in purchasing the business from their employer.

Beyond legacy business transitions, employee ownership support from cities can also play a critical role in spurring local startups or secondary worker cooperatives.

What Federal Support is Available for Supporting Transitions to Employee Ownership?

Municipalities are not on their own in deploying employee ownership as a useful and inclusive economic development tool. The Mainstreet Employee Ownership Act passed in 2018 makes it possible for firms to use Small Business Administration loans to finance employee stock ownership plans (ESOPs). ESOPs can help transfer the ownership of a company to employees who may otherwise lack the upfront capital to buy the business, rather than having to find an alternative buyer or pass it on to a family member who may not want the company. One of the largest and most well-known ESOPs in the country is Publix Super Markets.

Along with the Mainstreet Employee Ownership Act, the American Rescue Plan Act (ARPA) and CARES Act passed by Congress in response to COVID-19 provide opportunities for municipalities to invest in developing employee ownership at the local level: With both the ARPA and CARES, municipalities should seek to leverage the fact that federal support for “small business assistance” is inclusive of worker ownership. ARPA funds can be transferred to a private nonprofit organization for the provision of business technical assistance and outreach in support of developing employee ownership tools locally. A local or regional chamber of commerce may be a great asset for utilizing this tool as they are often well connected with local business owners.

The U.S. Economic Development Administration’s Economic Adjustment Assistance Grants can also be used to capitalize or recapitalize revolving small business loan funds. These loan funds can be used to assist the financing of ownership transitions. The City of Berkeley, California notably amended its EDA-funded revolving loan program in 2019 to remove obstacles for worker-owned businesses, a step that can serve as a model and precedent for other municipalities.

More Resources:

For cities looking to explore employee ownership tools that can be used to stabilize businesses and further equitable economies, National League of Cities and The Democracy at Work Institute (DAWI) recently released a joint report, Economic Recovery and Employee Ownership.

The report offers details on what employee ownership is, why local governments should support employee ownership, and most importantly, the different ways municipalities can utilize employee ownership to drive more inclusive economies. The report also highlights several case studies, such as the City of Durham, North Carolina’s program to build a legacy business registry and its plans to use this to support the city’s minority-owned businesses.

This report is just the start of the work NLC and DAWI are doing together this year. Over the past few years, the organizations have collaborated on the Shared Equity in Economic Development (SEED) program. Normally this program works with a small cohort of cities, but due to COVID-19, NLC and DAWI have decided to put the in-person, in-depth program on hold, and instead continue our SEED work online in a way that allows anyone interested in joining to participate.