Black and brown ownership matters in rebuilding a more just, equitable and resilient economy.
The murder of George Floyd and the heroic actions of movement organizers have once again exposed the social fragility created by this nation’s racist underpinnings. In an almost-poetic economic parallel, the Coronavirus pandemic has exposed decades of economic policy and investment practice that have left American workers, especially workers of color, with stagnant wages, declining wealth and little to no economic security.
As the government struggles to find a response, the philanthropic and impact investing communities have an opportunity to help rebuild our economy on principles of entrepreneurship, democracy, racial equity and shared prosperity. Now is the time to leverage our country’s various employee ownership models as time-tested solutions that can both save viable small businesses and contribute to closing the racial wealth gap. Employee ownership, an often ignored option for business transition and entrepreneurial opportunity, may be exactly the thing that saves us from this current economic crisis.
While employee-owned businesses make up a small fraction of the U.S. economy – there are 6,000 companies utilizing the most common form of employee ownership, the Employee Stock Ownership Plan (ESOP) and around 460 companies organized as worker coops – the business, economic and human case for an expansion of employee ownership, specifically for black and brown workers, is hard to overstate. Examples of 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.
U.S. ESOPs currently hold nearly $1.4 trillion in pre-COVID plan assets with an average employee ownership stake worth $130,000. When looking at the most marginalized worker groups, the impact of employee ownership is profound, according to independent research by the National Center of Employee Ownership and the Rutgers School of Management and Labor relations. 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.
From essential to owners
Back to the present moment – businesses with dwindling cash reserves are running out of options. The longer the COVID-19 crisis goes on, the more firms we stand to lose. Even with the stimulus package, many owners are still struggling to meet their immediate cash needs. Businesses that are able to survive this initial shock will be staring a recession in the face. The story for workers, specifically workers of color, is even bleaker. According to the US Department of Labor, less than half of Black workers were employed in April. As the old maxim states, when America gets the cold, Black America gets the flu.
If history is any guide, the combination of coronavirus, a recession, and the associated psychological toll is likely to cause a meaningful segment of business owners to seek a way out, resulting in a flood of businesses being put up for sale and even more shutting down for good. Regrettably, many of the businesses that will close are inherently high-quality firms that would have recovered post-crisis. They were simply victims of a global crisis that froze demand and stalled cash flow.
The ideal solution to this expedited closure crisis is one that provides an owner with a dignified offramp, captures the underlying value of their business and positions that business and its workers with the cash reserves needed to survive the upcoming downturn – saving jobs in the process. Employee ownership accomplishes all of these goals and more.
While there are a number of Employee Ownership structures, the ESOP is an especially powerful form that has existed for more than 40 years. ESOPs allow owners to transition their businesses to employees with a time-tested framework. While ESOPs are highly regulated and complex, there are key benefits to using them as a business succession tool that are critical for this moment.
- Valuations – ESOPs require third party valuation experts to establish a value for a business. This ensures that employees aren’t inheriting lemons, but also gives an owner fair value for their assets, not distressed pricing for good businesses.
- Cash flow – A firm that is 100% owned by employees in an ESOP does not pay federal taxes, creating immediate cash flow that can build reserves or be reinvested for growth.
- Succession – Few small business owners have a proper succession plan, but employee-owners are good candidates to take over and the additional cash on the balance sheet can be used to hire-in or train-up a replacement for the exiting founder.
For smaller and micro-enterprises for which an ESOP is not the right fit, cooperatives and employee ownership trusts are venerable shared-ownership forms that are increasingly used to retain community-serving businesses.
It’s important to know that employee-owned businesses with democratic practices, while still competing in the free market, are driven by fundamentally different forces than their peers. As employees enhance the business through their own efforts, they create the kind of incremental value that builds sustainable competitive advantages and enduring enterprises.
This not only preserves jobs, it creates wealth. Employees that work in an ESOP own shares in the business – shares that become more valuable as the business grows. These shares are held in a retirement-like account and when an employee leaves or retires, they are able to sell their shares to the business and receive a cash payout.
For workers generally, these shares represent downpayments 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, the value of this opportunity cannot be overstated. Relatively few minority workers are employed in high paying industries that lend themselves to long term wealth attainment. Yet, many of these workers are, in fact, the same “essential workers” keeping the nation moving today. Employee ownership, when targeted towards workers of color, expands the middle class, closes the racial wealth gap and strengthens the economy.
As the impact investing community looks to build institutions that remedy racism and produce equity, impact investors can and should work with the diverse and expanding world of employee-ownership start-up and buy-out practitioners to scale this solution and make it broadly available. 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.
Philip Reeves and Todd Leverette are partners at Apis & Heritage Capital, an investment firm focused on facilitating employee-led buyouts with workforces of color, and team members at Democracy at Work Institute, a national think tank focused on the expansion of employee ownership to improve workplaces and close the racial wealth gap.