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More U.S. businesses are becoming worker co-ops: Here’s why

With new tools and political policies now in place to support them, there could be a boom in employee-owned business ahead as baby boomers retire and sell their companies to their workers.

More U.S. businesses are becoming worker co-ops: Here’s why
[Image: Aleksei_Derin/iStock]

In 1982, Linda and Gregory Coles were struggling to find a sitter for their 18-month-old daughter. After a year of searching, they just decided to open their own daycare, and founded A Child’s Place in Queens, New York, in 1983. Thirty-four years later, they were ready to retire. “We were going to sell the business,” Linda says. But their broker suggested that instead of selling to new owners, they offer the business to their employees, who could then buy it and organize as a worker cooperative.

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The Coles’ hadn’t heard of worker cooperatives before, but once the broker explained how it would work, Linda knew it was the right decision for them. “The idea that we could turn our business over to our employees was one of the best things we thought we could ever do,” she says.

A Child’s Place is now in the process of reorganizing as a cooperative–one of just 300 worker-owned small businesses in the U.S. While employee-owned cooperatives are still a very underrepresented model of workplace organization, they deliver well-documented benefits to the businesses and employees they govern. According to the Democracy at Work Institute (DAWI), a nonprofit that supports the development of worker co-ops, employee-owned small businesses see an average of 4% to 5% higher productivity levels and more stability and potential for growth. In contrast to traditional businesses, worker co-ops see much lower rates of employee turnover and business closure. They’re also known to boost both profits and worker wages.

Because the people doing the work for the company are also the ones who own the company, they feel a greater sense of responsibility for and personal stake in helping the business succeed. While there’s still a lot of knowledge-sharing that needs to happen before co-ops go mainstream, recently, policymakers are taking notice of the benefits of worker cooperatives, and new legislation is on the way support their growth. And with millions of baby boomer-owned businesses set to change hands in the upcoming decades, this transition could be an opportunity to create more democratic workplaces across the country–if business owners, workers, and advocates can work together to convert these enterprises into employee-owned cooperatives.

[Image: Aleksei_Derin/iStock]

Time For Transition

Many businesses in the U.S. were founded as worker cooperatives. But a growing portion–as many as 40%–of co-ops in the U.S. are born out of traditional workplaces like A Child’s Place, whose owners decide to sell the business to their employees. As baby boomers, who own around 12 million businesses across the U.S., prepare to retire, around 70% of their companies are expected to change hands. Increasingly, children are not taking over businesses from their parents, so small business owners must look to sell or risk closing down and losing all their assets from years of investment.

But instead of selling to a private owner, there’s a real opportunity amid this “silver tsunami” to radically scale the presence of worker-owned cooperatives in the U.S. “Historically, co-ops do best when there’s a market failure,” says Melissa Hoover, founding executive director of DAWI. During the Great Depression, for instance, farmers struggling to access energy resources, set up electrical cooperatives that they collectively owned, and cooperative housing models took off in some cities. Nearly a century later, we’re living through our own version of market failure. As banks have consolidated, capital for small businesses has grown scarce. More small businesses are now closing than opening in the U.S., and jobs are consistently failing to provide livable wages to employees.

Yet, small businesses act as crucial anchors in their communities. “Rural areas, communities of color, rapidly gentrifying urban area, and small cities rely on small business as their economic base,” Hoover says. She’s seeing owners sell their businesses to large conglomerates or to private equity firms, who then liquidate the assets or fold crucial parts, like their customer list, into their operations. “This meets the needs of capitalism, but not the needs of people in the community,” Hoover says. This mode of sale also often requires the business owner to sell at a discount, and does not guarantee job security for the employees.

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Employee-owned cooperatives, on the other hand, create a stronger base from which a business can continue to exist, and even grow. The workers already have demonstrated their commitment to the company and the community in which it operates, and granting them ownership allows the business to continue to operate and the community to continue to reap the benefits. And because the sales are done in a way that’s transparent and mutually beneficial, the selling business owners also get a fairer shake.

[Image: Aleksei_Derin/iStock]

Models For Success

DAWI wants to ensure that businesses changing hands are aware of the option to sell to their employees. During the month of May (labor history month), the nonprofit is profiling three businesses, including A Child’s Place, that successfully converted to employee-owned cooperatives. The short videos on the daycare center, a Massachusetts-based landscaping company called A Yard & a Half, and Metis Construction in Seattle, are meant to inspire business owners and employees to consider reorganizing as a cooperative. In them, workers talk about how collective ownership has renewed their responsibility to the business and enthusiasm for the work they do, and how it’s helped them understand how to run a business equitably.

The organization is sharing its videos and accompanying toolkit with other local and national equitable labor organizations, like Project Equity in Oakland, that have roots in the business communities. “The aim is to see local outlets and local service providers use these resources to demonstrate that this can be done,” Hoover says. DAWI is already seeing an uptick in queries about organizing worker coops as a result of the videos.

“This is not a hard sell,” Hoover says. “What we’ve found is it makes intuitive sense to people that you would sell your business to your employees–you can tell the stories and share the successes, and people get it.” But inspiration without instruction won’t actually create change. DAWI, in addition to telling the stories of the businesses that converted to co-ops, also released a new toolkit to spell out exactly how they did it. And slowly, they’re working to change both the financing and political landscapes around worker cooperatives to build out a path for them to the mainstream.

[Image: Aleksei_Derin/iStock]

How To Cooperatize

The first step, Hoover says, is to educate business owners themselves about the idea. Generally, when the owners begin the process of selling, they either decide to research conversion to cooperatives independently, or are tipped off to the idea like the Coles’ were. DAWI’s social campaign, Hoover hopes, will get more businesses interested in the process.

Because worker coops are still so rare, it’s often difficult to find a concrete story or example to point to when advising retiring business owners like the Coles’. But this media collection will help owners and business advisors educate themselves, and, once they do,  they can then can take the models to their employees to show that this is what they’re aiming to do. The employees’ response to the idea of organizing as worker-owners is, after all, the most important deciding factor.

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From there, it gets a bit more particular. Once the owners of a business decide to sell it to their employees, they have to bring in assistance to assess how best to do it. DAWI works with a network of local affiliate organizations that help establish worker cooperatives. A Child’s Place consulted with The Working World, a New York-based nonprofit, to carry out its transition–the nonprofit helped Linda and Gregory Coles determine that this strategy for selling their business was the route they wanted to take.

The factors that determine if a business is eligible for transition to a cooperative vary by circumstance, but there are some rough criteria. Generally, coops tend to form from businesses with a minimum of 20 employees, and no more than a few hundred (though there are exceptions–Cooperative Home Care Associates in New York is the country’s largest worker-owned cooperative and employs nearly 2,000 workers). The relatively manageable size ensures that each employee can purchase a share of the company that’s large enough to be meaningful, but not so expensive as to be prohibitive. Longevity in the community is also a benefit. Businesses like A Child’s Place that have a long tenure in a specific neighborhood and meet a social and emotional need often make the most sense to organize as a cooperative, as employee ownership guarantees that company culture holds steady even in times of transition.

[Image: Aleksei_Derin/iStock]

The Capital Hurdle

Because the capital structure and incentives for investing in worker coops differ from that of traditional capitalist businesses, coops have a proportionally more difficult time accessing capital, Hoover says. “We don’t have the kind of values-aligned capital that understands how to finance conversions, understands the risks, or understands the upsides of cooperatives,” she says. It’s not that capital is entirely inaccessible to cooperatives starting up, she says–it’s just very rare and piecemeal. But it’s access to capital that ensures that workers will be able to buy the business from their owners for a price that’s both affordable and reasonable for the selling owner.

A Child’s Place, for instance, took out a loan from The Working World, a New York City-based Community Development Financial Institution (CDFI) that manages a $5 million loan fund specifically for worker-owned businesses. That loan allowed the daycare’s staff members to collectively buy the business (the transition is still in progress). Taking loans from CDFIs, which provide smaller loans to local businesses that big banks won’t reach, is also an option, but Hoover has also seen some businesses launch Direct Public Offerings, which allow community members to buy shares in the business, and some co-ops manage conversions by having individual employees take out personal loans to collectively finance the transition. “One of the issues is that there hasn’t been a standard model or tool that people looking to convert can look to,” Hoover says.

DAWI sees the greatest potential for codifying co-op conversions in loan funds like The Working World. These small CDFIs, Hoover says, understand the risks and rewards of investing in co-op transitions, and can work with local businesses to come up with a capital stack that makes sense for them. For businesses looking to transition to co-ops, organizations like DAWI can act as connectors between owners and resources like loan funds.

[Image: Aleksei_Derin/iStock]

Building Capacity

Securing capital, Hoover says, is probably the biggest hurdle potential new co-ops will face, but learning how to effectively structure and govern a collectively owned business is another. DAWI recently developed the School for Democratic Management, an in-person and online course that educates new cooperative managers and worker-owners in how to effectively run a co-op.

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Businesses looking to transition can also take a cue from A Yard & a Half landscaping, one of the featured co-ops. There, the owner long knew she intended to sell the business to her workers, and convened a group of employees five years before she retired to educate them on how the company was run. That also gave future worker-owners enough time to strategize with the rest of their fellow employees. In Seattle, Metis Construction‘s cofounder decided to stay on as a worker-owner after the business converted, and while that model conversion is rare, it’s instructive for businesses to know that they don’t have to wait for an owner to retire before cooperativizing.

What’s important to emphasize, Hoover says, is that while co-ops are facing a number of hurdles in starting up, the benefits are long-lasting and pronounced. A study from Rutgers found that converting to employee ownership boosts profits by as much as 14%, and doing so does not come at a detriment to wages. Rather, it’s the reverse.

After A Yard & a Half converted to a coop in 2014, average wages have increased from $17.02 per hour to $19.29 per hour despite adding more employees, and revenue has grown to $3.2 million from $2 million. Worker co-ops are still a business, so the employee-owners have to learn the same management and strategy skills that enable companies to grow. The main difference: It’s the workers themselves that reap the benefits of that growth.

[Image: Aleksei_Derin/iStock]

A True Alternative to Capitalism

While the businesses that DAWI is highlighting this month–and working with on the whole–are indeed small, they create stability and pathways to opportunity for their worker-owners, and benefit their communities by remaining in place.

And we’re beginning to see a response to the utility of worker co-ops in the political landscape. The U.S. Department of Agriculture runs a Business and Industry Guaranteed Loan Program meant to support the development of rural businesses, and in August 2016, the department added new capabilities that specifically support the transition to worker-owned businesses, like financing models staged over five years to support a more distributed sale. And a bill that New York Senator Kirsten Gillibrand developed to enable the Small Business Administration to make loans to intermediaries that help finance worker co-op transitions recently passed the House with bipartisan support.

“Co-ops are not whiz-bang businesses that are going to get anybody rich,” Hoover says. “They’re bread and butter types–necessary and profitable, but not sexy.” Still, communities and policymakers alike are recognizing that their shared ownership structure can provide the kind of stability that the market cannot. “We’ve seen growing interest in rapidly changing cities and in rural areas where they’re really trying to make capital investments that anchor community wealth,” Hoover says. “Business retention makes more sense than trying to attract Amazon HQ2,” she adds. “Why don’t we invest in our local ecosystem and retain what’s already here?”

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About the author

Eillie Anzilotti is an assistant editor for Fast Company's Ideas section, covering sustainability, social good, and alternative economies. Previously, she wrote for CityLab.

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