Nearly 50 percent of private companies nationwide are owned by baby boomers, a generation that’s aging toward retirement. As they exits the workforce, a number of businesses will be looking to sell to new owners, a shift that has been referred to as the “Silver Tsunami.”
“We’re expecting in the next 20 years a very large number of successions, companies looking to sell,” said Bill Castellano, executive director at the NY/NJ Center for Employee Ownership at the Rutgers School of Management and Labor Relations, a new initiative by the university to provide businesses in New Jersey with an alternative way to sell their companies.
Typically, owners can sell their business to private equity firms or a competitor in the industry. Ownership changes hands and the company’s workers are subject to new leadership that potentially can change the foundations of the business.
Rutgers’ center advocates for business owners selling their companies to their employees. Instead of shareholders investing in a business, the employees become the stakeholders of their own employment.
Employee ownership isn’t a new concept. The first ESOP was made in 1956 and is advocated on a national level by the National Center for Employee Ownership (NECO) based out of Oakland, Calif.
According to the NJ/NYCEO, there are 115 employee-owned companies in New Jersey, and more than 6,000 across the country. The number of owners adopting this approach has increased steadily since the first ESOP in 1956.
Castellano explained there are multiple forms of employee ownership, but the most popular is called an employee stock ownership plan (ESOP). A company creates an ESOP trust, which holds shares of a company’s stock on behalf of the employees. The company contributes money to the trust, or borrows it from a bank, and uses that money to buy the company’s shares from the owners.
The ESOP trust allocates shares to the retirement accounts of employees. ESOPs are regulated by federal law to distribute shares based on employees’ relative pay or a similar formula that creates an equal distribution. As employees leave the company, they are cashed out based on the accumulated amount of their shares.
Employee ownership is different than providing equity stake, a common benefit for some companies. ESOPs are intended to raise all employees’ investment in a company whereas equity stake is typically reserved for executive-level employees and only offers ownership in a small portion of the company’s stock.
The National Center for Employee Ownership surveyed workers in employee-owned companies and found their financial status was considerably better than workers in non-employee-owned companies. Employee-owned workers had 92 percent higher median household net worth, 33 percent higher median wages and 53 percent higher job tenure length.
According to NCEO’s Executive Director Loren Rodgers, there’s no inherent connection between how a company is owned and managed, but employee-ownership does democratize some management decisions.
For example, companies are more likely to do team-based hiring for new positions and many are more thoughtful of what decisions are made by what individuals in the company, said Rodgers.
Rutgers has done studies that show workers are more engaged in their work and committed to the success of the company when they have an ownership share.
There are limitations to employee ownership. Larger companies tend to require swifter movement from executives.
“For larger companies, it’d be difficult from them to be 100 percent employee-owned,” said Castellano.
However, there are instances across the U.S. where large companies are employee-owned. Publix Supermarkets, located in the southeastern U.S., has over 170,000 participants in their ESOP. The average employee-owned company has 200 employees, according to data compiled by NCEO.
For smaller companies, the benefits of employee ownership are evident but the barrier to introducing businesses is more about creating a personal connection with owners unfamiliar with the concept, something the Rutgers’ center hopes to address.
“We’re a starting point for companies that want to do this,” said Castellano. “You don’t really know where to go. This is a place to start.”
Rutgers’ center wants to create new connections with businesses in New Jersey.
“We’re trying to reach out to the communities and businesses who may be interested in employee ownership,” said Jim Terez, associate director for Rutgers’ Center for Employee Ownership. “This is an application-orientated center.”
Rutgers is the leading university for employee-ownership information and that the personal connection is vital to success, according to Rodgers.
“Nobody can talk to a business owner like another business owner,” he said, adding owners tend to pursue employee-ownership after hearing stories from peers. “It’s not easy or automatic, but it’s more likely they’ll feel good about the sale.”