How Employee Ownership Breaks The Poverty Cycle
Updated: Dec 18, 2021
Why fix what isn’t broken? The answer: because you can improve it. Traditional business structures have survived for decades, but there will always be ways to improve. One innovation is employee ownership—employee-owned businesses do better on average than their standard counterparts.
Employee ownership isn’t a well-known structure, but it’s starting to catch attention as executives try to find ways to keep their employees aligned and engaged with the enterprise.
Alison Lingane joins us in the Her CEO Journey™ episode on Steward Ownership: Exiting Your Business with Employee Ownership where she provided insights into the benefits of employee-owned companies. She also discusses ways to get into employee ownership, its financing structure, and the financial institutions to support the transition. Alise explained the relevance of financial record keeping, financial forecasting, and transition planning to various ownership structures.
If you’re interested to know how your business can engage more employees and create a positive impact in the community, read on!
Here are three reasons why you should continue reading:
Discover how employee ownership creates positive change in society.
Learn the three common forms of employee ownership.
Find out how an employee can become a business owner.
Visit Christina Sjahli's website for more insights on designing an ownership structure that aligns with your company vision on the Her CEO Journey™ podcast series!
Chat with Christina and set up a time here!
Download the Forecasting Guide so that you can create a better and improved financial forecast for your business!
Connect with Alison at LinkedIn
Visit Project Equity
Take part in the Global Social Venture Competition!
Learn more about the CDFI Fund
Alison’s Journey in Project Equity
Alison started her career in community-based work. She provided job training programs for the urban youth. As she learned more about the field, Alison wondered if there were similar programs for adults.
Aspiring to break the cycle of poverty, Alison decided to do more than just create jobs—she wanted to give people opportunities.
Building a Program for the Urban Youth
Alison launched a program where young people could design and lead micro-enterprises. It aimed to promote its beneficiaries from entry-level job training into the micro-enterprise development program.
Leading a program is different from working for an organization because you are involved in all aspects of the enterprise.
Getting Her MBA at UC Berkeley
Alison enrolled at UC Berkeley Haas School of Business to learn more about scaling programs and leveraging enterprises. After getting her MBA, she held executive roles at mission-driven businesses. They are designed to create career development opportunities in their communities.
She later met Hilary Abell, her co-founder in Project Equity, who first introduced her to the concept of employee ownership.
Alison Working for an Employee-Owned Company
After learning about employee ownership, she decided to work for an organization with the same business model. This career shift gave her the opportunity for a high-quality job with better wages and benefits.
An employee-owned company could break the chain of intergenerational poverty through asset-building. There are also plenty of professional development opportunities. Members of the enterprise could even run to be part of the Board of Directors.
About Project Equity
Business schools don't typically include employee ownership in their curriculums.
As a result, most people aren't aware of it. Data shows employee-owned companies outperform their peers and are better for workers and businesses.
Project Equity aims to normalize employee ownership. It is a win-win model for businesses, workers, and communities.
"[Employee ownership] is the preferred business model because again, all of the data backs up that this is a business model that truly is a win-win for the business, for the workers, for communities, and for the founders as well."
Why Business Schools Don't Teach Employee Ownership
In the US, the company’s founder is the hero of the story. Business schools mostly talk about capital and entrepreneurship. Universities rarely discuss establishing self-sustaining enterprises that help the community.
Baby boomers are an entrepreneurial generation. They own one out of two locally-owned businesses. However, members of the baby boomer generation are at retirement age. Their enterprises need new owners.
The Global Social Venture Competition
During a Berkeley Business Plan competition, Alison heard someone ask if there was a way for companies to do something good for communities while creating revenue. In 1999, Alison founded The Global Social Venture Competition. It was the first business plan competition that required a social return on investment. Successful businesses create profit and bring positive changes to the world.
“ … the leading reason for you doing the business is to create positive change in the world.”
Christina also shared her personal experience on how business schools don’t teach social entrepreneurship. Listen to the full episode to hear her story!
Employee Ownership Increases Enterprise Value
"Employee ownership is doing good in the world, and it's actually increasing your enterprise value and your shareholder value at the same time."
Employee-owned businesses do not reduce shareholder value. They do positive changes in communities while increasing enterprise and shareholder value at the same time. If you engage your stakeholders and take care of them, your business will be successful.
“Business exists — yes, because we need to make money and support ourselves and our families. We need to do good by our employees and our customers and our vendors, and, you know, we could also create some positive change in the world on top of that. That's what success looks like. And frankly, I think that's how success should be defined in business.”
Different Forms of Employee Ownership
Project Equity supports businesses in all broad-based employee ownership. The three common forms of employee ownership are ESOP, worker cooperative, and trust structure. Listen to the full episode to learn more about them!
Congress created ESOP in the late '70s to encourage employee ownership. It promised tax benefits for businesses. A worker cooperative is owned and governed by and for the benefit of its members.
In a trust structure, shares of the company are held in perpetuity. As a result, the business cannot be sold.
Finding the Right Form
Business owners must first understand their enterprise's goals before determining the appropriate ownership structure for it. Afterward, begin a plan that focuses on building the culture of ownership.
“You always want to start with the goals, and then you map the goals. It's not always about just one of the structures.”
Finding a goal and creating a plan prepares you for an employee-owned business. Put together your exit timeline while the company transitions to social entrepreneurship. You can utilize different elements of employee ownership to fit your goals.
Difference Between ESOP and Worker Co-Op
Employees govern the worker co-op. The board of directors is composed of the majority of employee-owners. ESOP is a retirement plan where shares of the company exist in this trust. Employees can access them once they retire or leave the company.
You can still perform profit-sharing in an ESOP. It increases employee engagement and benefits. Despite their differences, aspects from an ESOP and a worker co-op can co-exist as long as you’ve set your business goals.
The Financing Process
If a business is interested in starting employee ownership, they need external financing sources. Conduct a debt capacity analysis to determine if the business can request a loan. A company can get financing if they are capable of paying back the debt.
The money owed could be repaid over time through the business's profits. The employees work hard, and the profit their hard work generates enables them to become owners.
"The employees are working hard at the business, and the profit that hard work generates is what's enabling them to become owners."
How Employees Become an Owner
An employee can become an owner based on the structure of the social enterprise. Tune in to the full episode to hear Alison on how to transition to employee ownership!
Some become owners immediately, while others transition from partial to full ownership.
Transitioning to Employee Ownership
Companies need transaction financing and working capital loan when transitioning to employee ownership. The last thing you want is to establish a business that can’t pay back its debts.
It's ideal to have the right amount of debt. It gives liquidity to the business, gets some cash flowing, and increases employee engagement.
"What you want to be doing is setting up the right amount of debt, so that you can take this opportunity for the owner to get some liquidity from the business, to get some cash out…and then that increased employee engagement."
Bringing Capital to Your Business
Businesses can bring in more capital through combining transactions with working capital loans or increasing profit. Employee-owned businesses grew two percent more, compounding each year, than their non-employee-owned peers.
“You're creating your own capital through your increased profit in order to invest in the business.”
As the profit of an employee-owned business increases, so does their capital for investing into it.
People are not fully aware of the different types of financial institutions. On the other hand, lending institutions are not familiar with employee ownership. Lending institutions require a personal guarantee to receive their loans. The issue of this lies in maintaining the personal financial situation of a business.
However, there are financial institutions that specialize in providing capital for employee-owned businesses. Project Equity partnered with CDFI Fund. The partnership enabled them to borrow money for their transactions and working capital.
“Just know and be confident that there is capital out there to be able to finance your transition. If you work with an organization that is in this space, they'll be able to help you make those connections.”
The Community Development Financial Institution (CDFI)
CDFI is a federally regulated lending institution that supports positive community impact. Some CDFIs specialize in small business lending and employee ownership funds. They can also help you connect with other organizations that could support your transition to an employee-owned business.
Does Credit Score Matter?
The relevance of credit score depends on who is doing the loan for the company. The approach of a CDFI is different from traditional business loans. Lending institutions look at whether a business can repay the loan and who is leading the company.
The financial forecast and historical data are vital to the process. If you are interested to know more about employee ownership, sign up at the Project Equity website and get a free consultation.
Engaging Employees During COVID-19
It’s a struggle to hire, rehire, and maintain workers during the pandemic. Businesses could only succeed if the employees are aligned and engaged. Employee ownership is a powerful tool that can keep the workforce engaged and build your business faster.
“We all know that the business can only succeed if the employees are aligned and engaged.”
Alison Lingane is the co-founder and Chief Strategy and Innovation Officer of Project Equity—the leading organization promoting employee ownership.
She started her career by joining community-based organizations where she mostly helped urban youths design and lead their micro-enterprise programs. Alison has a passion for helping businesses thrive and creating a positive impact on society. She took her MBA at UC Berkeley and co-founded the Global Social Venture Competition.
She also held executive roles at various mission-driven businesses such as Benetech, GreatSchools, and InsideTrack. Her professional experiences gave her an overview of how to turn businesses into change agents. She now applies all these lessons in leading Project Equity.
You can connect with Alison through LinkedIn.
Enjoy the Her CEO Journey™ Podcast?
As a mission-driven female entrepreneur, deciding on an ownership structure can be difficult. But if you explore your options, you might find the perfect one to keep your business successful while becoming a change driver in society. If you enjoyed today's episode of Her CEO Journey Podcast, hit subscribe and share it with your friends!
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