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The idea that a private equity firm would buy out a company to hand it over to workers was outlandish three years ago, when Apis & Heritage Capital Partners acquired Accent Landscape Contractors and turned it over to 114 new worker-owners.
Accent’s founder, Cameron Stevens, had multiple offers from competitors and other strategic players for his El Paso, Texas-based commercial landscaping business. He suspected that the bidders had plans to maximize the company’s profitability through layoffs and flip the business.
“He didn’t want to sell to the sharks. He worried about what was going to happen to his workers, some of them who had been with him for 35 years,” A&H’s Todd Leverette told Eric Horvath and Lucas Turner-Owens on the Impact(ed), part of the ImpactAlpha Podcast Network.
“When we introduced the idea of him selling to his workers, he was floored by the opportunity.”
Accent’s employee-ownership conversion will over the years give the worker owners, most of whom have low wealth and income and identify as people of color, roughly $120,000 to pay for their kids’ college tuitions, or to pad their retirement savings.
A&H has pioneered an employee-led buyout model that functions similarly to an employee stock ownership plan, or ESOP. The model creates S-Corp ESOPs, 100% employee-owned companies that benefit from federal and state tax exemptions, including an exemption from federal income tax on earnings.
Leverette calls the strategy “exiting responsibly” and pitches it to retiring business owners who want to preserve the legacy of their businesses by selling to their longtime, loyal employees, rather than accepting the often more lucrative offers from traditional PE buyers.
“In our model, workers do not have to pay anything,” Leverette says. “They do not have to have their wages garnished.”
Employee-led buyouts
A&H has struck five such employee-led buyouts through its $58.1 million inaugural Legacy Fund. The Washington, DC-based fund manager has financed the transition to ownership by 421 low- and moderate-income workers, who have so far accumulated a combined $416,000 in their ESOP accounts.
The Legacy Fund has performed well for its limited partners, many of which are returning as investors in A&H’s second employee-led buyout fund. Catherine Toner of Gary Community Ventures, a hybrid family office and private foundation in Denver, last month shared that the organization would return as an LP in the new A&H fund.
The first private credit fund, which closed in December 2022, also received backing from Rockefeller, Ford, Skoll, Robert Wood Johnson, W. K. Kellogg, McKnight, Sorenson Impact and other large foundations and impact investors.
A&H told ImpactAlpha that major investors in fund one have re-upped in the second fund, which is seeking $250 million to create 3,000 business worker-owners over five years. At last month’s Skoll World Forum in Oxford, A&H was awarded the $2 million Skoll Foundation Award for Social Innovation, becoming the first for-profit investment fund to ever win the award.
The “silver tsunami” of baby boomers that are sitting on $10 trillion of business assets that will change hands over the next two decades creates a massive market opportunity for transitions to employee ownership. The need to finance at least part of their employees’ purchase has discouraged many business owners from pursuing such transitions. Many business owners want their exit payouts more quickly
A&H is among the firms with buyout credit strategies that help owners exit more quickly and transferring equity to employees over time.
“There is a very strong investment model for just investing debt into these companies, making them ESOPs, eliminating their tax liability,” says Leverette. “We’re really focused on an owner who’s going to sell their business to somebody, and we jump into the process to give them a better option.”
Sen. Chris Van Hollen last week led the introduction of the American Ownership and Resilience Act, a bipartisan bill that aims to create an investment facility within the US Department of Commerce to increase private financing for ESOP transactions (see, “In a polarized US Capitol, employee ownership brings lawmakers together”).
Mezzanine debt
Through its first fund, A&H has competed for deals in the lower-middle-market, targeting companies with annual earnings before interest, taxes, depreciation and amortization, or EBITDA, of $1 million to $4 million. The second private credit fund will target larger companies with $3 million to $10 million in EBITDA. By seeking larger companies to transition to employee owned, A&H aims to create more wealth for workers.
“These businesses typically have more sophisticated finance and HR infrastructures, which enable smoother transitions to employee ownership and help unlock greater value though the ESOP structure,” A&H’s Tobi Adewodu told ImpactAlpha.
In a Q&A interview published on ImpactAlpha earlier this month, Pete Stavros of KKR, which has championed employee ownership plans among large PE firms, juxtaposed payouts in an ESOP to the model of Ownership Works, which aims to create $20 billion in wealth for workers through employee ownership by 2030.
“Percentages are totally meaningless,” he said. “I could give you a 100% of a company and if I have enough leverage on it, the percentages, it doesn’t mean anything. What matters is dollars to workers.”
While a generous ESOP benefit would contribute 8% of annual wages to workers, Stavros shared that the Ownership Works model is shooting for over 50% of worker’s yearly wages.
KKR’s Pete Stavros: Employee ownership is a competitive advantage in private equity (Q&A)
Through the new fund, A&H will underwrite larger checks for mezzanine debt, which blends features of debt and equity, allowing a business to gain access to capital without diluting ownership. In the podcast, Leverette explains the mezzanine debt structure enables workers to buy the equity of the company from an existing shareholder.
The flexible hybrid structure has proven to be a competitive advantage for A&H when competing for deals in the middle market with other PE buyers.
“Oftentimes, we’re dealing with businesses that already are out on the market, and these are good companies that have a lot of options,” Leverette says. “What we do is we come along and present these owners with our buyout credit-buyout debt, which would in essence enable them to exit [and] receive competitive value for the company.”
The strategy came in handy in its bid for Accent, which has become the first company in A&H’s portfolio to pay down a portion of its debt, according to the firm’s 2024 impact report. The employee-owned business has returned 70% of the senior loan it received from Houston’s Woodforest National Bank to finance its ESOP transition.
Woodforest has offered a new loan to refinance more than half of A&H’s mezzanine debt, allowing A&H to return capital to LPs of the first Legacy Fund.
Impact(ed) is part of the ImpactAlpha Podcast Network, smart conversations by and for impact professionals.
