Preserving Legacy Businesses
As noted earlier, Maine has the oldest workforce of any state in the nation. We are on the leading edge of the baby boomer retirement wave dubbed the “Silver Tsunami,” a status that holds equally, if not more true , for our business owners. Nationally, the largest single source of avoidable job loss is from business closings due to owner retirement, and the annual retirement rate is projected to double over the next 20 years.
In Maine, there are roughly 32,000 small businesses with employees and they employ over half of our workforce. Research shows that 75-80 percent of these business owners will want to retire in the near future, but only 20 percent of them have a concrete succession plan.
Coffee Roasting at Rock City Roasters, Rockland, which is converting to worker ownership at the end of 2016. Photo courtesy Rock City Roasters.
While some family businesses will successfully transition to the next generation, this option is becoming less and less likely. The children of business owners may be living in other regions pursuing their own careers and are less willing to return to Maine to take over the family business. Even when someone in the next generation is willing to take over, there is no guarantee of success. Research shows that only about 30 percent of those businesses succeed in the second generation, 13 percent in the third generation, and only 3 percent last into the fourth generation.
All of this adds up to a potentially devastating loss of jobs, access to goods and services, and locally rooted ownership and wealth. Our perpetually anemic and fragile economy can not handle the rapid and wholesale loss of economic activity that could come from thousands of business owners closing their doors over the next decade or so, simply because it is so difficult to sell a business here, particularly in rural Maine.
We believe conversion to employee ownership may be a Silver Bullet for addressing this Silver Tsunami—a chance to permanently bend the arc of opportunity in this state toward a sustainable, broadly shared prosperity. This strategy is a substantial win for everyone. For business owners, selling to employees can yield a better sale price, reduce their tax liability from the sale, and preserve their legacy. For employees, they have the opportunity to become cooperative entrepreneurs and build wealth through ownership. For the community, the jobs, profits and ownership stay locally rooted.
Compared to similar conventionally owned firms, employee-owned businesses create 2.5% more jobs, are one-third less likely to lay off workers in a downturn, and create 2.5 times the retirement savings for their worker-owners. Research shows they are also more productive and profitable. Today, the US has over 7,000 employee-owned firms with about 13.5 million worker-owners and $1.1 trillion in assets. In 2013, the most recent year for which figures are available, employee-owned firms distributed $92 billion dollars in profits to their owners.
The main reason employee ownership has been successful in achieving this scale and these results is because of the implementation of supportive policies and incentives at the federal level and in some states. President Ronald Reagan championed some of the most consequential laws in 1984. His administration advanced major bipartisan legislation that created substantial tax and regulatory benefits for employee-owned firms. While there was broad consensus that employee ownership was uniquely beneficial for America’s workers, communities and economy and needed to be incentivized, the spread of employee ownership, and hence the benefits, was not even across the country. The states that took greatest advantage of the new federal policies and embedded them in local programs of technical assistance, education and training, and favorable finance and tax policy, realized most of the gains.
For example, thirty years ago, Ohio established the Ohio Employee Ownership Center (OEOC) to assist businesses interested in converting to employee ownership with education and training, technical assistance, and coordination of federal and state incentives. OEOC was essentially a business development center focused on the unique needs of employee-owned businesses. Year after year, they have leveraged a small state appropriation into impressive results: they have provided technical assistance to over 700 firms considering conversion and have successfully converted over 100 of them. The 15,000 employee-owners in these converted firms were assisted at a cost of only $772 per job created or retained. For comparison, in Maine and other states, public sector job creation programs spending more than ten times that amount are considered successful and it is not uncommon for some programs to spend 100 times as much. Additionally, Ohio leveraged federal workforce development money to provide small grants to businesses considering conversion to pay for feasibility studies and technical assistance.
In recent years, other states have taken note of this successful track record and have sought to get a piece of the action. Numerous states have funded the startup of employee ownership centers with grants to nonprofits, colleges and universities. The Treasurers of Indiana and Ohio, both Republicans, invested millions of the states’ deposits to leverage private sector investment in financing employee buyouts. Iowa Governor Terry Branstad campaigned on a promise to expand employee ownership and, once elected, created a fund to pay 50 percent of the cost of feasibility studies for business owners considering conversion and created a major tax incentive for selling to employees. Democrats and Republicans in the New Jersey legislature are pushing ahead to eliminate the capital gains tax on the sale of any small business to the employees. At the municipal level, New York City, Madison, Wisconsin, and other cities have put millions of dollars into employee ownership programs.
By encouraging and supporting business owners considering retirement to sell to their employees–whether as worker cooperatives or Employee Stock Ownership Plans–Maine could achieve numerous economic and social policy goals simultaneously, and do it in a way that appeals to people from across the political spectrum.