As 2020 year-end comes into focus, small businesses are running out of options. By December, a meaningful segment of business owners is likely to seek a way out, resulting in a flood of businesses being put up for sale with no clear buyers and even more shutting down for good. Regrettably, many of the businesses that will close are viable high-quality firms that would have recovered post-crisis. They were simply victims of a global crisis that froze demand and stalled cash flow.
Retail and service sector businesses — which are the lifeblood of commercial corridors and often a toehold for new Americans and other entrepreneurs of necessity — have been hit the hardest, with effects concentrated on younger workers and workers of color.
Amid ongoing uncertainty and their own budget constraints, cities are asking: how can we craft effective and equitable small business recovery plans?
The response should aim first to preserve existing business assets and the value they have built. Any recovery strategy should position businesses and their workers with the cash reserves needed to survive this downturn – and prepare them to re-open at full capacity when the time comes.
For businesses looking to sell, the best — and sometimes the only — buyers are their employees. At the same time, laid-off workers are using shared ownership forms to start new enterprises together. Employee ownership can be a powerful tool to accomplish equitable business development and retention goals. Employee-owned firms provide their employees with stable incomes and jobs. They also give employees the opportunity to build wealth that increases alongside business growth.
There are 6,000 U.S. companies utilizing the most common form of employee ownership, the Employee Stock Ownership Plan (ESOP) and around 500 companies organized as worker-owned cooperatives. ESOPs range from community-based small businesses to large corporations including Publix Supermarkets, the nation’s largest ESOP with more than 200,000 employee-owners. Worker cooperatives tend to be smaller and concentrated in the retail and service sectors, including Cooperative Home Care Associates, the nation’s largest worker cooperative which employs almost 2,000 home health aides in New York City.
The ESOP form came into existence in the 1970s and cooperatives have been around for over a century, but since 2008 there has been a surge of interest in this way of doing business. The federal Main Street Employee Ownership Act of 2018, supported by a bipartisan coalition of lawmakers, calls on the SBA to make loans and technical assistance resources available to employee-owned businesses. Local Small Business Development Centers are building their capacity to offer support, and a growing number of local investment funds are focusing on financing these transitions. A wave of investment from foundations and capital investors has helped catalyze substantial growth in the ecosystem of support for employee-owned businesses. The Institute for the Study of Employee Ownership and Profit Sharing at Rutgers University is studying the impact of employee ownership.
Across the country, city governments are tapping into the growing employee ownership field, educating themselves about the business form and using the tools of local government to support its growth. New York City, which has invested over $15 million since 2015 to catalyze a tenfold increase in cooperative businesses, (over 90% of whom are people of color), has recently focused on employee ownership strategies for its industrial business sector and is eyeing employee ownership for its recovery plans. Berkeley, Boston, Miami, Minneapolis, and Philadelphia have funded technical assistance. Los Angeles is partnering with local providers to use workforce development funds for feasibility studies to save jobs. Community wealth-building groups from Cleveland to Rochester are designing systems-level interventions that include employee ownership.
The Democracy at Work Institute has been focusing our work to support cities using employee ownership strategies. We are the national think-and-do tank working to ensure that employee ownership reaches communities locked out of good jobs and business ownership opportunities. In partnership with the National League of Cities we run the Shared Equity in Economic Development (SEED) Fellowship, which convenes and equips city leaders with tools, resources, and expertise to build equitable economies using employee ownership of business. This year-long program has worked with eight teams of city leaders to date — from Atlanta, Durham, Louisville, Miami, Philadelphia, Richmond (VA), San Francisco, and Washington, DC — providing peer-to-peer learning opportunities and strategy design support to explore how their cities could implement employee ownership.
Though they make up a small fraction of the U.S. economy, employee-owned businesses punch above their weight in terms of impact, particularly for low-wage workers and workers of color.
- They offer higher wages: On average employee-owners making less than $30,000 have 17% greater median household net worth and 22% higher median income from wages than their non-owner peers.
- They build assets: In a 2018 survey of employee-owned firms, workers nearing retirement had on average $147,522 of retirement savings from their ownership stakes. In contrast, more than one-third of all workers nearing retirement have neither retirement savings nor a defined benefit pension.
- They create quality jobs: Employee-owned and -operated Cooperative Home Care Associates, which is dedicated to “Quality Care through Quality Jobs” retains workers four to five times longer than the average home-care agency in a high turnover industry struggling with uneven job quality.
Employee-owners hold shares in their business – shares that become more valuable as the business grows. These shares represent down payments for homes, tuition for a child or grandchild, additional healthcare coverage or an enjoyable retirement – in short, they represent a piece of the American dream. For workers of color, relatively few of whom are employed in high paying industries that lend themselves to long term wealth attainment, employee ownership represents a countervailing force to the steady erosion of asset ownership.
The business, economic and human case for an expansion of employee ownership, specifically for black and brown workers, is hard to overstate. When targeted towards workers of color, it has the potential to expand the middle class, narrow the racial wealth gap and strengthen the economy.
For cities, employee ownership offers a private sector-driven strategy to preserve businesses and create jobs that does not rely on city coffers. But cities will need to dig into their toolboxes to promote this solution for maximum equity impacts. Business owners in crisis have little capacity for intensive research; cities can proactively get the word out through hotlines and campaigns that make the employee buyout option easy to learn about and technical assistance easy to access. We know that the “essential workers” keeping the nation moving today don’t have the savings to cover even a small emergency, much less to buy a business; cities can connect employee buyer groups to the growing number of capital sources dedicated to investing in employee buyouts, like The Working World, the Legacy Business Investment Fund, Cincinnati’s Business Legacy Fund, and Main Street Phoenix Project; they could even explore public funds to match. Finally, businesses are running out of time; local government can help stabilize paused small businesses by using everything from eviction moratoriums to capital access programs to BID outreach and “early warning” approaches to forestall closures while transitions can be planned.
There is a qualified and passionate field of advocates and supporters of employee ownership out there already helping business owners sell to their employees as appropriate. These organizations are ready and willing to work with local governments to preserve local businesses.
As cities look to a long recovery, and to rebuild in ways that remedy racism and produce equity, they can and should work with the diverse and expanding world of employee-ownership practitioners to scale this solution and make it broadly available. They can make use of their considerable infrastructure to help amplify its reach. Now is the time to transform businesses, workers and communities toward a more equitable – and more resilient – economy where everyone has the opportunity to prosper.
This blog post is part of Building Equitable Communities, a series from the National League of Cities and Citi. This series will explore how community land trusts create lasting affordability in housing and how worker cooperatives can build wealth and create quality jobs. Sign up for the upcoming webinar here.
About the Authors
Melissa Hoover is the Executive Director of the Democracy at Work Institute.
Todd Leverette is the Legacy Business Program Manager for A&H Capital.
Philip Reeves is the Legacy Business Program Consultant for A&H Capital.