How to Transition to Employee Ownership If your exit plan involves your employees taking over, these smart tips will help ensure that they're ready when you walk out the door.
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The following excerpt is from the Staff of Entrepreneur Media's book Finance Your Business. Buy it now from Amazon | Barnes & Noble | iTunes
Kim Jordan and Jeff Lebesch wanted to run a more democratic business. Rather than shoulder all the tough decisions themselves, the founders of New Belgium Brewing Company sought their employees' input early on. This meant cultivating what Jordan calls a "high-involvement culture" of engaged, enthusiastic workers and transparency with staff about all sorts of matters, including company finances.
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But employee enthusiasm goes only so far, so in 1996, the pair created a phantom deferred compensation plan, at no cost to the staff of their Fort Collins, Colorado–based craft brewing company. Later, when they started an employee stock ownership plan (ESOP), they honored the original plan until all account-holders' ESOP balances were larger than their phantom balances.
When Lebesch left New Belgium in 2009, Jordan and the company bought him out, bringing employee-owned shares to 41 percent. After mulling succession plans, Jordan opted for full employee ownership. By early 2013 more than 500 New Belgium employees -- Jordan refers to them as "co-workers" -- assumed 100 percent ownership of the company. (Shares are awarded based on the recipient's percentage of the total wage pool.)
The benefits have been plentiful. "We have great retention," says Jordan, CEO. "Our turnover is under 5 percent."
The employee-owners are not only happy at work, she says, but are also a regular source of bright ideas. Business is hopping, too. New Belgium, maker of Fat Tire ale, is the third-largest craft brewer in the U.S. and the eighth-largest brewer overall.
New Belgium isn't the only business thriving under employee ownership. "If you look at the numbers, on average, ESOPs improve performance," says Loren Rodgers, executive director of the National Center for Employee Ownership (NCEO), a nonprofit organization with more than 3,000 members. Three decades of research show that ESOP companies enjoy higher sales growth, higher employee productivity, more job creation and fewer layoffs, he adds.
If you're interested in running a more egalitarian company, here are four steps you need to consider.
1. Plan with employee succession in mind
It's never too soon to ponder who you want running your company five, 10 or 20 years out. "You're not going to own your company forever," says Alex Moss, founder and president of Philadelphia-based Praxis Consulting Group, which helps employee-owned companies improve corporate leadership, culture and strategy. "You're going to either sell it or you're going to die owning it."
Contemplating who will take the reins when the time comes -- and ensuring that all founders are in agreement -- can save future headaches and heartache. You don't want to be forced to sell your baby to an investor or a competitor because you haven't thought ahead, Moss says. Instead, employee ownership offers a way for the company you built to remain independent and your corporate mission to stay intact.
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If employee succession appeals to you, it's important to start running a more democratic ship now. Yes, transitioning to an ESOP or a worker co-op takes time and legal help. But a move to either structure also affects who you hire, how you manage staff and which investors you partner with. The sooner you adjust your recruitment, management and fundraising tactics, the easier the leap will be.
2. Open the books
Although corporate transparency isn't a requirement for ESOP success, it certainly helps. "Our most successful members started treating employees like owners before they actually made them owners," NCEO's Rodgers says.
Jordan concurs. "I think people lose the power of feeling like an owner if they don't know what goes on behind the scenes," she notes.
That's why all New Belgium employees can access the corporate intranet "and look at the financials to see where the money goes," Jordan says. It's also why New Belgium managers share sales and financial performance figures with employees at monthly staff meetings and give progress and spending reports on big corporate initiatives, such as opening the Asheville brewery.
But you can't expect all new hires to know their way around budgets and forecasts from day one. That's why the brewery -- whose staff includes production workers, microbiologists, chemists and salespeople -- incorporates financial literacy training into its mandatory employee orientation and devotes a portion of each monthly staff meeting to educating the team on accounting ratios, cash flow and other financial topics.
"It's a commitment," Jordan explains. "You have to say, "We're going to dive into a lot with people. We're going to teach them to really get the benefit out of it.'"
3. Hire with future partners in mind
Embracing a more democratic culture involves rethinking the hiring process. "We're not interviewing to hire an employee," says Blake Jones, president of Namasté Solar, a solar-installation company in Boulder, Colorado, that became an employee-owned cooperative in 2011. "We're interviewing to hire a potential business partner."
The co-op's lengthy screening process starts with one meeting to assess a candidate's job skills, followed by another to determine whether the candidate would be appropriate for ownership.
"We don't want someone to come to work for us just because we're a great place to work," Jones explains. "We want people to be excited specifically about our company model." In this context, the old interview chestnut "Where do you see yourself in five years?" is more relevant than ever.
Also imperative: involving as many employees as possible in the hiring process. Besides helping to sort out the square pegs, this gives workers another layer of responsibility. "Not only do they feel like they are insiders and decision-makers... but they also feel some responsibility for making sure the new hires work out," NCEO's Rodgers says.
4. Cultivate a culture of democracy
Rather than shield employees from the big decisions, the most successful employee-owned businesses encourage staff to help make them. This isn't good just for employee morale; it's good for the company overall.
"When the people making the decisions bear the consequences and responsibility for those decisions and share the rewards, better decisions happen," Abrams explains. After all, frontline workers often see operational problems and business opportunities -- and have ideas for fixes or new initiatives -- that might not occur to management.
Contributing ideas may not come naturally to all employees. "You can't just take an employee who doesn't know a lot about business and expect them to be a good co-owner," says Jones, whose company has 60 owners. "You've got to coach them."
To that end, Namasté Solar's employees go through a one-year orientation period before they can buy stock in the company. During that time, potential owners (called candidates) are paired with veterans and encouraged to learn about the business and get more involved. Guided by their mentors, newbies must complete a 12-item curriculum, from understanding the corporate bylaws to meeting with the director of finance for training in reading financial statements.
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Jones says the time spent grooming future co-owners is well worth it. "The investment pays off tremendously in the form of engaged, passionate, empowered co-owners who will think and act like an owner the way that you do," he explains. "The secret to our success is that we've got [60 times] the entrepreneurial spirit [and] creative, passionate motivation that a sole proprietor would have."
