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Leveraged buyout funds help businesses convert to worker-ownership



ImpactAlpha, Nov. 13 – The widening wealth gap has sparked interest in worker ownership models that can build individual and community wealth. Across the U.S., about 6,000 companies have Employee Stock Ownership Plans, or ESOPs, and another 450 are worker co-ops. But the complexity involved and a lack of capital means those numbers have barely budged in recent decades. Start.coop and other accelerator programs are growing a new generation of worker-owned businesses. The real opportunity for impact at scale, however, is in converting established businesses to worker-ownership as Baby Boomer business owners retire. (Boomers own half of the 1.2 million U.S. businesses with 10 or more employees.)  

Start.coop: Accelerating co-op businesses to expand ownership for workers and customers

The solution may be leveraged buyouts, without the Gordon (“Greed is Good”) Gekko overlay. Transform Finance lays out the buy-out fund model in “Investing in Employee Ownership: Financing Conversions Through a Private Equity Fund Model.” The report includes impact considerations for scaling conversions while ensuring that workers benefit from the process. “This is an opportunity to seize the current interest on the part of investors to experiment with shared ownership models,” Transform Finance’s Andrea Armani told ImpactAlpha, “within the bounds of a form – the private equity buyout – that is relatively familiar.” New funds targeting such conversions are structuring terms to meet the needs of owners without putting undue risk on workers. Among the early movers:

Conversions

In Cleveland, Evergreen Cooperative is known for its network of employee-owned enterprises, like the Evergreen Cooperative Laundry, that create quality jobs and a path to ownership in marginalized communities. The co-op launched the Fund for Employee Ownership with $20 million in concessionary debt to acquire small and mid-sized businesses in northeast Ohio, convert them to employee ownership and bring them into the Evergreen fold. The cooperative may also raise a private equity fund. 

Evergreen Cooperatives launches fund to catalyze employee ownership

Inclusive capitalism

American Working Capital, a Chicago-based middle market merchant bank, is raising a $200 million fund to finance ESOP-based deals. The Inclusive Capitalism Fund seeks to create positive social impact while generating returns in the mid-teens. The firm helped the management of 95-year old Homeland Stores in Oklahoma City acquire the business from Associated Wholesale Grocers via an ESOP.

Temporary equity 

Since The Working World was founded in Argentina in 2004, it has helped create and finance more than 250 worker-owned businesses in mostly low-income communities. A U.S.-focused fund launched in 2012 has deployed $9 million and facilitated over 10 small business-conversions. The Working World temporarily holds equity as it converts the business to employee ownership and works to create a culture of ownership.  The Working World is raising an additional $30 to $50 million that it will invest along the U.S. east coast.

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