Re: Fw: Worker co-ops as a structure for buy-outs

[John Logue <jlogue@kent.edu>]

Dear Don,

Here's my take on why there are so many retiring owner ESOPs and so few
co-ops.

1) We have yet to find an example of a 1042 rollover sale to a co-op --
although the law provides the same tax break for a co-op as for an ESOP.
Peter Pitegoff didn't know of any either, when we last talked to him.  We
need an example of how it is done to publicize.  

Do you have one in Vermont?  Or elsewhere??

2) Some owners are concerned about co-ops being too radical.  We had one in
a company with 5 employees insist on doing an ESOP instead for that reason.
 It made no economic sense whatsoever.

3) There's a disconnect between employee ownership and the traditional
cooperative movement.  If we bridge that -- which I see as one of the prime
political necessities for employee ownership to develop more quickly in the
US -- we might well see more worker co-ops.

4) As for financing, you are right.  In the concrete situation, try the
National Cooperative Bank or its development corporation.  More generally,
we need local credit unions that do business lending to co-ops.

Another possibility is to get a mutual insurance company to join in financing.

I seem to be getting back to the need for an alliance with the traditional
cooperative organizations.

5) Can the credit union you met with do business lending?

6) Carla Dickstein, across the way in Maine at Coastal Enterprises, may
have some good ideas.  She's in this discussion group.

Good luck with promoting the idea of co-ops among retiring owners!

John 


Greetings!  At the suggestion of Dan Bell, I am forwarding the following
message.  Any thoughts would be much appreciated.
  
-----Original Message-----
From: Don Jamison <donjam@together.net>
To: Cooperative business list <cooperative-bus@relay.doit.wisc.edu>; worker
co-op list <workers-net@lists.services.wisc.edu>; Northwest Cooperative
Federation <nwcf@seanet.com>
Date: Friday, May 19, 2000 11:33 AM
Subject: Worker co-ops as a structure for buy-outs

Hello, all --
  
     Do any of you have experience with using the worker co-op structure in
employee buyouts?  Have any of you promoted the worker co-op an option for
ownership succession?
  
     Employee Stock Ownership Plans are the primary means bringing about
worker ownership these days.  But, besides the fact that ESOPs are not
inherently democratic (though they can be made so), they are not suitable
for smaller businesses because of the costs of maintaining them.  I've
heard mentioned several thresholds for ESOP affordability (some say roughly
a dozen employees, a local lawyer who has done a bunch of ESOPs says the
business needs to have a value of roughly $750,000) -- all are well over
the heads of many of the businesses that are being sold here in Vermont,
and everywhere else too...
     A 1988 book by Daniel Bell of the Ohio Employee Ownership Center
called Bringing Your Employees Into The Business is mostly about ESOPs, but
also has a chapter on using the worker co-op structure for smaller
businesses.  It points out that, just as with a sale to an ESOP, an owner
selling to a worker co-op can defer taxes by rolling over proceeds from the
sale into eligible securities (stocks and bonds), and that it would appear
to be possible to sell over an extended period of time (the tax deferment
kicks in when the business is 30% owned by the co-op -- again, just as with
an ESOP). 
     Why hasn't this mechanism been used very much?  Why couldn't the
worker co-op structure be used to make employee ownership as common an
option for very small businesses as it is becoming -- through ESOPs -- for
larger businesses?  
     I've heard two explanations.  First, it is said that turning a
business into a worker co-op requires much more of a cultural shift than
does an ESOP.  But I wonder -- if an owner planned for a sale to employees
in a timely way, and allowed for an adequate transition period (either
before the sale, or after -- with the former owner sticking around as a
consultant), why couldn't an "ownership culture" be created in plenty of
time -- with outside help, of course.  Second, the financing mechanism for
an ESOP allows for a lot of leverage.  There is nothing comparable for the
worker co-op.  In most of the cases I know of where an owner has sold to a
co-op, owner financing has been part of the deal.  What would it take on
the financing side to make sales to worker co-ops more common?  An equity
fund dedicated to the purpose?  A willingness on the part of some CDFI to
make loans for member share purchases?  What else?
     These are not just idle questions.  I know of several business owners
who would be interested in selling to a co-op if we could figure these
things out -- and we haven't done much in the way of outreach.  I'll soon
be meeting with a local credit union and a community loan fund, and could
use your ideas! [This meeting was last week, and all are enthused!]
  
Regards from --
  
Don Jamison
New Leaf Cooperative Enterprise Program
Burlington (VT) Community Land Trust
donjam@together.net
802-660-0640



John Logue
Ohio Employee Ownership Center
Kent State University
Kent, OH 44242
(330) 672-3028
(330) 672-4063 fax
jlogue@kent.edu
http://www.kent.edu/oeoc/