Re: EOpriv: Financing successful employee-owned companies

["David Wheatcroft" <dwheatcroft@lineone.net>]

Dan

A device used in the UK to try to prevent asset stripping of Public Assets
(particularly if there has been discounted sale) is the Clawback clause.

This states that any profit made on the selling on of assets would all be
returned to the vendor in the first year, this would be reduced by 10% per
year

Regards dave
----- Original Message -----
From: Dan Bell <dbell@kent.edu>
To: <eopriv@cog.kent.edu>
Sent: Thursday, September 21, 2000 12:53 AM
Subject: EOpriv: Financing successful employee-owned companies


> Here is the final section for comments from the privatization paper.
>
> The entire new draft of the paper should be available by Thursday or
> Friday of this week (September 21 or 22) at:
> http://cog.kent.edu/lib/privitization.htm
>
> I have already received several valuable comments and additional
> ideas from participants like Dave Wheatcroft, David Ellerman,
> Don Ward and Joseph Doggett. I hope to incorporate some of these
> ideas in a third draft next week.
>
> 5.7 Financing successful employee-owned companies
>
> Financing the acquisition, working capital and development of a
> newly-privatized employee-owned enterprise faces several challenges. These
> funds can come from a variety of sources including the seller (the
> government); traditional private lenders; regional, national and
> international development banks; equity partners and the employees
themselves.
>
> The government should consider seller financing of an acquisition by
> employees. If the enterprise was a drain on the state budget before,
taking
> a note does not put the state in a worse position. If it was a contributor
> to the state budget, as long as the debt service and income taxes paid
match
> the previous contribution, it is also not in a worse position. Of course
> this assumes that the buyer will preserve and enhance the value of the
> assets. It the buyer intends to strip the assets, the state could find
> itself holding a note with nothing to back it. Where the workers control
the
> enterprise operations and effective oversight of management is in place,
> asset stripping is less likely to occur.
>
> Where a portion of the ownership is sold to an outside investor, again the
> state would be no worse off lending the funds back to the employees of the
> enterprise for working capital or capital investments. Alternatively, the
> state could accept a note from the employees for the acquisition and the
> outside investor could provide the funds for working capital and capital
> investments in exchange for a portion of the ownership of the new
enterprise.
>
> Payments on the note could be adjusted to the profitability of the
> enterprise. During the early years, payments would be minimal or deferred,
> and increased once the business is stabilized. Extending loan terms for
long
> periods would have a significant impact, as 30 year mortgages have been
made
> home ownership a reality for millions in the United States.
>
> One viewpoint is that in exchange for the state assistance, the employee
> owned firm should relinquish rights to any excess profits. Defining excess
> profits may be problematic. Also, such an agreement could be a
disincentive
> to operating the business profitably. Perhaps the most effective way to
> carry out such an arrangement would be to give the state stock options at
a
> reasonable future target price.
>
> Where it is realistic, workers should be required to contribute to the
> necessary financing of their company. Such a contribution can establish a
> sense of commitment to the endeavor and be a major step towards the
> transition to a culture of ownership. While the ability to contribute is
an
> asset, the lack of such ability should not be used as a barrier.
>
> In some countries, workers have accumulated retirement assets which can be
> used. Risking diversified retirement assets to purchase shares in a newly
> privatized company is a serious matter and is justifiably seen as a means
of
> last resort; however, dedicating a percentage such as 20% is not
> unreasonable. Where wages and benefits are sufficiently above a
comfortable
> standard of living, the use of a reduction in compensation to be used to
> service additional debt is another possibility. In some cases, workers may
> take on personal liability to borrow a portion of the necessary funds, and
> then apply future profits to the repayment of this debt. This personal
> liability should only cover that portion of the funding which cannot be
> collateralized with the enterprise's own assets.
>
> Another source of funds is an equity partner. Sharing control with an
> outside investor may be preferable to taking on personal liability and has
> the potential to bring in needed expertise. At the same time, the pure
> interests of the workers will be subject to compromise. Side agreements to
> define the future disposition of the outsider's shares can enhance the
> workers control over the future evolution of ownership.
>
> Where there are no reasonable methods for financing worker acquisition of
a
> controlling ownership share, non-monetary shares with defined voting
rights
> may also give the workers a level of protection where an outside investor
> acquires the controlling interest. At a minimum the workers would have the
> right to veto negative practices such as asset stripping.
>
>