Employee ownership: A business succession strategy in challenging times

© 2020 Project Equity
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WELCOME TO
Employee Ownership
A business succession strategy in
challenging times
June 9, 2020

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Meet Project Equity
We help owners of small & medium size
businesses secure their companies’ legacies
by transitioning to employee ownership.
This process sustains high-quality jobs,
keeps businesses rooted in their local
communities, and provides selling business
owners with a fair price and a viable
succession.
Evan Edwards
Director, Strategic Partnerships
and Business Engagement
Hilary Abell
Co-founder

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Agenda
Project Equity and the work we do
Today’s challenging environment
Challenges in exit planning
Employee ownership: business benefits
Employee ownership: community benefits
Q&A
Business owner testimonial

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Employee ownership
creates stronger businesses and stronger communities
Profit margins Sales and employment
Grows 2% faster per year
National Center for Employee Ownership
8.5% higher than peers
Democracy at Work Institute

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Unique benefits of employee buyouts
Owners can achieve
a market rate sale
Median job tenure is
longer
(>50% in one study)
Employee household
net worth is higher
(almost double in same study)
Based on a 2017 study from the National Center for Employee Ownership

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Poll: Where are you with exit planning?

7© 2020 Project Equity
Today’s challenging environment

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Step 1
Support business continuity
through the crisis.
How can Employee Ownership
lead the charge to create a new economy?
Step 2
Employee Ownership financing plus
forgiven continuity loans with the
transition.

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Project Equity’s Mission
We foster economic resiliency with low-
income communities and communities of
color by demonstrating and replicating
strategies that increase worker ownership.

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● Small businesses employ 47% of the
workforce and have only 27 days of cash
available on average.
● 46% of U.S. families cannot manage a
$400 emergency expense.
● Six of 10 fastest-growing occupations pay
less than $27,000 a year.
● Due to COVID-19 experts predict long-
term high unemployment.
COVID-19
Flattening the curve for small business, too
Working people are not economically secure
Based on studies by JP Morgan Chase, 2016 and Economic Policy Institute, 2019

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USpopulation
Original image from University of Scranton Journal Fall 2016 | Data source: Older Americans 2016 Key Indicators of Well Being, agingstats.gov
90M
70M
50M
30M
10M
projectedYear
Age > 65
Age > 85
Today
Silver tsunami
Businesses are at risk as baby boomers retire

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2,500 businesses in
Long Beach are over
20 years old
They account for $12.3B
or 63% of small business
revenue
These businesses
employ 1 in 3 workers
According to a Project Equity study. Measurements indicate total businesses included in the study and do not include nonprofits, publicly traded companies, franchises,
public sector and related companies.
A local example
Need for succession planning in Long Beach, CA

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Selling a business isn’t easy
1 in 5 businesses
are at risk of closing
About 15% transition
within families
Only 20% of
businesses sell
According to US Small Business Administration 2004 study and BizBuySell.com
Employee Ownership
is a great solution

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Poll results

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? ? ?
? ? ?
Preserve legacy
Options
Market value Tax benefits Retain employees
Sell to family
members
Acquisition
Employee
ownership
Close down
operations
Understanding your succession benefits

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Transition
How will the employee-owned
business work?
STEP THREE
The Employee Ownership transition process
Brought to you by Project Equity
Explore the fit
Are you curious to learn more about Employee Ownership?
STEP ONE
Assess the feasibility
Is Employee Ownership a solution for you and your business?
STEP TWO
Thrive
How does the employee-owned
business flourish?
STEP FOUR
Close the sale
Are all the T’s crossed and I’s dotted?

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$600,000 $400,000 $130,000 $43,967 $90,000** $1,263,967
$600,000 $400,000 -0- $43,967 -0- $1,043,967
High scenario
Low scenario
*Assumes 3% interest rate and 7 year term on seller’s note.
**Assumes all $600K reinvested in a QRP and 15% Capital Gains rate.
*** Earnout calculated over 3 years at best case revenue growth scenario (3.3% per year). Seek legal and tax advice to assess this option.
Revenue: $4 Million
EBITDA: $330,000
Valuation: $1 Million
Transaction price: $1 Million
ABC company
Employee ownership transition
Initial liquidity Seller note Earnout *** Interest financing * Tax savings Total financial benefit
60% of sale price 40% of sale price

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The advantages
Market value sale - Seller receives market value
Delivers significant tax advantages - Owner and business benefit
Owner can control process - Owner drives the sale, timing and process
Supports flexible financing - A leveraged buyout allows for flexibility
Strengthens local economies - New employee-owners build equity,
preserve business legacy and keep money in the local economy

The Project Equity
CHALLENGE

Quiz question #1
TRUE OR FALSE?
Selling to employees requires
accepting a lower selling price.
FALSE!
Seller receives market value.

Quiz question #2
TRUE OR FALSE?
Employees are going to have
to “foot the bill.”
FALSE!
Employees are not obligated to
finance the transaction. Usually
it is completed through a
leveraged buyout.

Quiz question #3
TRUE OR FALSE?
Owners can remain involved in
strategic direction after they sell.
TRUE!
Selling owners have many
options to stay involved in the
business.

Quiz question #4
TRUE OR FALSE?
All employees will be managing
the business equally.
FALSE!
Management would be in place
to ensure a robust operational
structure.

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Under our Recology Recovers policy, we will still
pay employees' full salary during the shelter-in-
place time period even if we don't have enough
work for everyone, and we continue their health
benefits. We recognize that this is a unique time
and we want to support our employee-owners to
the fullest extent possible.
Recology
Recology, based in San Francisco, provides waste management services in California, Oregon and Washington and has over
3,800 employee-owners.

A Slice of New York raised wages within a year of
becoming a worker cooperative and switched their
year-end bonuses to patronage dividends, generating
an estimated 20% increase due to tax savings. This
small business has distributed more than $600,000 of
profits to its 35 employees over the past two years,
providing much-needed economic security for workers
in this high cost area.
A Slice of New York, a pair of pizza shops based in San Jose/Santa Clara and Sunnyvale, CA, transitioned from family
ownership to a worker cooperative in 2017.
A Slice of New York

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Studies show significant impact on businesses when they are
employee-owned:
● Growth, productivity, and profitability
● Survival and employee retention
● Community impact
… and positive impact on employees:
● Compensation and benefits
● Asset building
● Job security and stability
● Less race and gender inequality
The Case for Employee Ownership

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Several studies show that
employee-owners earn more:
● $2 more per hour among
cooperative employees
● 53% higher incomes among
ESOP employees
● 40-80% increases in family
income in home cleaning
coops
Better wages
Employee Ownership and wage income over time
Source: 2018 update on Employee-Owners (NCEO)

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Fewer layoffs with Employee Ownership
Source: Does Employee Ownership Improve Performance? (chart from Kruse 2016. Original data on employees at private firms is from the US General Social
Survey, adjusted for tenure, occupation, gender, age, race and education. Find this data and more at www.project-equity.org/whitepaper

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Source: Building the Assets of Low and Moderate Income Workers and their Families: The Role of Employee Ownership (Data from Table 10 in Boguslaw & Schur 2019, p. 24)
Wealth building for all

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The Black-white racial wealth gap
The median net worth of white households is
about 10 times that of Black households.
White families
$171,000
Black families
$17,600
The poverty rate for Black Americans is more than
double that of whites.
Note: Figures are for non-Hispanic whites and non-Hispanic blacks | Sources: Circle Graph, Federal Reserve Survey of Consumer Finances, 2016 | Bar Graph, US Census Bureau, 2018 | Graphics adapted from Curt Merrill,
CNN
Black
20.8%
White
8.1%
Wealth Poverty

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Your role
in supporting Employee Ownership
Government official
(elected or staff)
• Support policy efforts
• Engage small business supports for business owner education
• Tap loan and loan guarantee programs, and remove barriers
Workforce Development Board / Rapid Response
• Educate business owners
• Serve as “candidate spotters” / referral partners
• Fund EO feasibility studies for layoff aversion
Small business support organization
• Educate business owners
• Serve as “candidate spotters” / referral partners
• Provide complementary services to support business success
Investor
● Provide capital for business continuity & retooling with
incentives for EO
● Provide capital for EO transitions
Grant maker
● Support EO advocates, educators and service providers
● Fund partnerships with cities and counties
● Provide loan loss reserves for loan utilities
Business owner
● Consider EO as a way to exit the business
● Contact Project Equity for a one-on-one free consultation

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Employee Ownership
Readiness factors
Profitable company
In good financial health for the past 3+
years
10-20+ employees
Grows a strong team and expands access
to equity
Proven track record
Years of experience, not a start-up

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WE OFFER
FREE business
advisory calls!
To learn more about employee ownership visit
PROJECT-EQUITY.ORG/CA
● General info and Q&A of how it works
● Employee ownership and your goals
● Explore readiness factors for an employee
buyout

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Summary
Employee Ownership is a solution
Business owners get a fair market value exit
Employees enter a pathway to ownership
Preserving community businesses & jobs
Creating a more inclusive economy

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Questions & answers

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Video testimonial
“I sold my business to my
employees.”
Saul Rockman,
Founder, Rockman Et Al

Employee ownership: A business succession strategy in challenging times

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