At the Small Business Development Center (SBDC), we have been getting a lot of questions recently about Worker Cooperatives, especially because of the successful transition of a local north country business, Ward Lumber, to a Worker Cooperative, and because COVID has accelerated many business owners’ plans to retire. Along with other resources in the area such as ANCA’s Center for Businesses In Transition, the SBDC can help business owners develop a succession and transition plan.
So what is a Worker Cooperative? First, let us define what it is not. One of the more traditional ways of passing a business to employees is for one or more employees to buy the business as the new owners, which works well if employees are able to access the funding they need to purchase the business and are willing to be sole owners. In a Worker Cooperative, a group of employees will run the business, but it is more of a democratic process with a board similar to the board of a nonprofit. It will also be a larger group of employees bearing the burden of ownership decision making, rather than just one or two people like in a more traditional ownership format.
There is also another kind of employee ownership, Employee Stock Ownership Plans (ESOPS). I’m only going to briefly mention those here as they are significantly more expensive, and require more ongoing funding and cooperating with regulation to set up. They are usually a better fit for larger businesses than we tend to work with in the North Country. Worker Cooperatives do not require quite as much initial investment and much less ongoing investment and record–keeping.
Just like regular businesses, Worker Cooperatives have business licenses, hire employees, and pay taxes. However, the oversight of the business is done by a committee of employee-owners. In a Worker Cooperative, workers can purchase a membership share to become an owner of the business, which gives them a percentage of profits, a vote for the board, and a decision-making vote in the business. The price of these shares is set based on the original planning. Employees are not required to be owners, but can apply to become employee-owners and purchase an ownership share if they meet the qualifications decided when the cooperative is formed. Profits can be distributed among the employee-owners as agreed upon in the formation contract, usually in line with how much each employee-owner contributes to the company. In the future, as new workers join the business and meet eligibility requirements, they will also have the opportunity to purchase a share and become owners.
There is no single set formula for how to set up a Worker Cooperative, this flexibility and lack of excessive regulation makes them attractive. The process to set up a Worker Cooperative includes valuing the current business, finding financing to pay for the business, creating a timeline, and figuring out/implementing training for the employees to prepare them for their new ownership role. There are no federal or state regulatory requirements for the completion of these steps. Selling owners and employees will want to have a good team in place, with an accountant and attorney who are familiar with Worker Cooperatives and how to set one up. Employees will need training in both the hard skills (book keeping, strategizing and planning, marketing, etc) that are needed to run the business, as well as the soft skills (leadership, conflict resolution, decision making, etc).
To fund the creation of the Worker Cooperative the business usually takes out a loan to purchase the shares from the current owner who is selling, and then pays off the loan with its profits. This means that workers are not expected to locate enough money to purchase the business out of their own personal finances. Most of the money to finance the transaction comes from the company’s cash flow. Usually a small portion of the purchase price is funded by the workers when they buy their membership share. It’s important to work with a bank or alternative lender who is familiar with or at least willing to lend to Worker Cooperatives.
If you would like to find out more about Worker Cooperatives and/or develop a transition plan for your business, you can meet one-on-one for free with a SBDC small business advisor. You can reach the SUNY Canton SBDC at (315) 386-7312, SUNY Canton SBDC at Clinton Community College at (518) 324-7232, or the Watertown SBDC at JCC (315) 782-9262.
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