As the B Corp movement celebrates its 18 th year and mission-driven businesses have become a key part of the corporate landscape, many founders are now faced with a conundrum: how to exit the businesses that they built while preserving the business’s core social and environmental aims, which often include a deep commitment to their employees’ welfare.
When Selling to Private Equity is Not an Option
For a founder of a mission-driven business—whether a B Corp, a public benefit corporation, or a traditional company committed to social or environmental values—selling to private equity or even to a strategic buyer may be unappealing, as these types of acquirors may be unwilling to commit to the preservation of the company’s unique mission. Such a sale could subject employees to new management that does not value them beyond their capacity to generate profits; unsettle customers, suppliers and other stakeholders who fear that the business will abandon its social mission; and leave the former owners ultimately regretting their decision to sell.
Employee Ownership Transitions are Increasingly Attractive
These concerns have led to rapid growth in employee ownership transitions in which the owners sell their business to the employees whose hard work has made the company a success. These transactions can take various forms, but three transaction structures are most common: (i) worker co-operatives, (ii) employee stock ownership plans (ESOPs), and (iii) employee ownership trusts (EOTs). ESOPs are the most common form of employee ownership in the United States; worker co-ops are a growing segment (especially in industries like agriculture); and EOTs are relatively new in this country but are a long-standing part of the corporate landscape in the United Kingdom. While other, more customized options are feasible, these three types of exits offer a high degree of market recognition and flexibility, allowing owners to realize the equity value that they have built while preserving their mission.
Choosing the Right Structure for Your Business
If employee ownership seems like the right fit for a company, the choice of structure will depend on various factors specific to the business and the owners’ financial needs. Relevant factors include the company’s culture, size, financial stability and profit potential; the availability of outside financing; whether a partial or complete exit is planned (and whether in one or several stages); the willingness and ability of the employees to take on management and oversight roles; the timeframe on which the owners wish to exit and receive payment for the sale of the business; and the type of corporate governance framework that best suits the company’s mission, industry, and identity. In some cases, tax considerations, transaction costs, and complexity may make one structure more attractive than others.
Common Aspects of Employee Ownership Transitions
All three structures mentioned above share some common traits: an employee-owned business will typically (1) repay the selling owner over time for their stock, (2) be governed by a board of directors with at least some employee representation, and (3) maintain elements of democratic decision-making and mission-driven purpose in its core identity. All share the overarching goal of elevating workers’ economic and governance rights while ensuring the continued pursuit of the company’s mission.
Watch This Space
In upcoming posts, we will explore worker co-ops, ESOPs and EOTs, as well as other options, in more detail. Regardless of which avenue is most appropriate for an individual company, exiting to employee ownership is an appealing option for many mission-driven companies and offers a unique opportunity to realize the value of the founder’s creation while locking in the company’s commitments to employees, customers, other stakeholders, and the broader community.
