3 Reasons Why Our Employee Ownership Center Will Fail

Several years ago I read about Jack Dorsey’s strategy for pitching his new startup Square. Although he had already founded Twitter, a unicorn social media app, Square was a fintech company and Dorsey had no background in finance. It was an issue that potential funders raised repeatedly. In response to this opposition, Dorsey explained “We sat down..and just wrote out all the reasons why this thing would fail. One of them was ‘we know nothing about finance’.” They eventually came up with 140 reasons and included the list in their pitches. They identified the most important reasons and addressed each of them before investors had the opportunity to raise those issues.

As Wacif, DAWI, Apis & Heritage, the Employee Ownership Expansion Network and other partners move forward with planning the Greater Washington Employee Ownership Center, I decided to explore reasons why it may not be successful. This isn’t an exhaustive list, but here are three reasons why our employee ownership center will fail.

  1. So far, we have converted zero businesses to employee ownership.

Conversions are a numbers game. Wacif has engaged more than 150 business owners through workshops on exit planning and employee ownership. Of those, 4 have completed a conversion feasibility assessment. The creation of an employee ownership center will help us increase our deal flow and connect with more business owners in order to complete our first conversion.

In the fall of 2018, Wacif launched the DC Employee Ownership Initiative to preserve legacy businesses and build community wealth. More than 30 years ago in 1987, Wacif’s very first loan was to the Pasadena Housing Cooperative. We have a track record of financing more than $34 million in loans to both cooperative housing and traditional businesses. The DC Employee Ownership Initiative is a return to our cooperative roots. We have the infrastructure and capacity to provide up to $250,000 in financing to conversions. Apis & Heritage Capital Partners sources deals and provides mezzanine financing. The Employee Ownership Expansion Network, an offshoot of the National Center for Employee Ownership, brings years of ESOP conversion expertise to the table. Our partner, the Democracy at Work Institute, is a leader in worker-owned cooperative conversions.

In 2019, we solidified a network of partners that can walk a business through every stage of the conversion process from feasibility analysis to valuation to financing to post-conversion employee training and support. Through the Shared Equity in Economic Development (SEED) Fellowship, we worked with government leaders from the DC Department of Small and Local Business Development (DSLBD), Office of Planning, and Department of Employment Services (DOES) to identify local barriers to employee ownership. We’ve engaged in peer learning with the Cooperative Fund of New England and the Shared Capital Cooperative to expand our knowledge of cooperative finance. We’re members of the Workers to Owners Collaborative, a national network of organizations that support employee ownership conversions.

In the first year and a half of the DC Employee Ownership Initiative our intentional focus on field-building, partnership development, capital and program design have helped create the foundation for us to complete 3-5 employee ownership conversions in the next two years.

  1. The workers won’t be able to run the business effectively when the owner exits.

During the process of conversion, a management transition plan is created to ensure the continued success of the business after the sale. For cooperative conversions, the selling owner often participates in the process of identifying workers who can take on management functions, or helps train workers to fulfill these roles. In some cases, workers democratically elect new management. There are many options, and the conversion team works with all stakeholders to find a model that best suits the business.

In addition to conversions, the Greater Washington Employee Ownership Center will provide exit planning support to selling owners.

  1. More than one large scale cooperative project in the area has failed. The model doesn’t work here.

In 2012, several DC area funders came together to explore the creation of a worker-owned cooperative modeled after the Evergreen Cooperatives in Cleveland, Ohio. In the summer of 2015, after completing a feasibility study and a business plan, they created the Community Clean Water Management Group (CWMG). In October 2015, the business permanently shut down.

The funders later produced a report documenting the lessons learned from the venture. There have also been housing cooperatives in the area that have undergone the process of demutualization, raising doubt about the long-term success of the model. These experiences offer valuable insight. They aren’t, however, representative of the diverse ecosystem of ESOPS and cooperatives that have long existed in the DC region. The GLUT Food Cooperative in Mount Rainier recently celebrated their 50th anniversary. Four of the largest ESOPs in America are in the DC region. Wacif and Capital Impact Partners recently awarded $40,000 in grants to seven cooperative businesses led by people of color. It is a model that has worked here in the past and continues to work here in the present.


Can you think of other reasons why an employee ownership center may fail? From your vantage point as a funder, impact investor, business owner or community leader – what reservations do you have about employee ownership conversions?

 

 

 

 

Published by Jennifer Bryant

Jennifer is a global citizen currently living in DC. She loves the color yellow and strawberry cheesecake ice cream. She leads the DC Employee Ownership Initiative at the Washington Area Community Investment Fund, a Black-led CDFI.

7 thoughts on “3 Reasons Why Our Employee Ownership Center Will Fail

  1. I love this approach Jennifer. When I’m feeling scared or anxious about something in my personal or professional life, a strategy I have come to rely on is to think “what is really the worst thing that can happen?” I think looking these fears in the face, really sitting with them, is the only way to move through them. The only way to do something new, courageous, risky, is to do it even in the face of fear.

    I’m wondering, following our conversation about localism today: what are the specific conditions in DC that either help or hinder this Employee Ownership Center in that specific location?

    Liked by 1 person

  2. This is a great, in-depth post. It’s quite compelling to lead with a project’s shortcomings, the risks of failure. This framing engenders trust that your project is rooted in substance rather than in “fluff” or unwarranted optimism.

    I think your argument could be even stronger toward the end of “reason 1.” When I read reason 1 — that there had not yet been any actual conversions — I expected that you would then delve into some specific reasons why conversions are challenging to bring all the way to the finish line. What are the obstacles that emerge along the way, and how is the new project specifically addressing those problems. You saw the foundation has been created for 3-5 conversions but I’m left wondering what that foundation consists of, in greater depth.

    Thanks for your hard work on such an incredibly important project!

    Liked by 1 person

    1. Daniel, thanks so much for this feedback and your questions. Our initial strategy was to build out the internal technical capacity at our CDFI to do employee ownership conversions. The employee ownership center model focuses on creating deal flow by serving as a hub for education on employee ownership. We will then serve as a matchmaker for selling owners and external conversion service providers. Instead of our CDFI completing the conversion, we’ll instead facilitate the connection to partners that have a track record of successfully completing conversions. This should allow for 3-5 to be completed in the first two years.

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  3. Love this post and I got to say “Why we’ll fail” is a hook that just draws you in :). I had to read yours first after I saw that. ˆI see where you’re coming from with you on all your points and I totally agree. You asked a question about why a business employee ownership center might fail at the end your post: I wonder, is what you have her a list of necessary things that must be done or in place, but are they sufficient for you to accomplish what you want? What is the compelling case? Is there a Michael Jordan ca. 1993 360 slam dunk for what you are trying to do and accomplish. As an example, Todd alluded to some compelling numbers (return on investment) through tax breaks or some such thing (above my pay grade), that he seemed to think was compelling from a return on investment standpoint. I don’t have anything specific in mind, but is there something there that could help you really enroll potential business owners (for self interest if nothing else)? Or is there some piece of know how that could help improve a businesses post purchase thus adding value quickly and making the case for investment?

    On a final note, great to meet you and get to know you. I was enriched by your presence in our small group. Good luck and see you in October!!

    Liked by 1 person

    1. Nick – so great meeting you too and I appreciate these questions. There are several compelling tax reasons for an owner to convert including deferred taxes on the sale of a C-Corp using a 1042 rollover and tax-free ownership in the case of an ESOP owned S-Corp. I think it will be important to clearly outline the benefits and process to ease any reservations selling owners may have. There are significant benefits for employees as well, and I’ve found selling owners are equally as interested in these benefits and more broadly in leaving a positive legacy.

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  4. I love the addressing reasons you might fail framework, too!! Thanks so much for the post, Jennifer. And I am excited for all that is to come with the Greater Washington Employee Ownership Center.

    I’ll add one potential reason why it might fail – it’s really hard for cooperatives to exist individually amidst capitalism and coops can’t establish themselves more solidly within the capitalist status quo without strong movements organizing to create, support and maintain cooperatives.

    Cooperatives, especially Black-owned and controlled cooperatives, have faced capitalist and white supremacist economic sabotage at every stage in their history in the US – from the cooperative stores that the Colored Farmers’ Alliance, the Farmers’ Alliance and the Knights of Labor set up as part of the wider populist movement/ agrarian revolt during the 1870s-1890s; to the cooperatives and mutual aid societies that Black sharecroppers created during the era of Black Codes and Jim Crow in the US South; to the Southern Federation of Cooperatives and Black-owned book stores and activist-owned health food stores in more recent decades. Cooperatives cannot compete economically against capitalist firms while cooperatives are also emphasizing that they are seeking to build beyond capitalism and to build different ways for cooperative members and the communities in which they are embedded to relate to each other and to society. In order to exist as a business, cooperatives need to contract with other businesses – there aren’t enough cooperatives so, inevitably, they need to contract with capitalist businesses. This gives capitalist businesses great power to shut cooperatives down when they become a broader threat politically. The banks, railroads and merchants of farm raw materials and equipment did this to the cooperative stores of the Colored Farmers’ Alliance, the Farmers’ Alliance and the Knights of Labor. This, I think, is why the majority of cooperatives that exist today are agricultural producer cooperatives and credit unions that do not emphasize, or maybe even conceive of, their political nature.

    So, I think that cooperatives need to be embedded within and supported by movements in order to attain any kind of scale under the capitalist status quo. In order to build powerful enough movements to help all of this happen, we need movement that look beyond professionals and conventional business people. We need to engage the grassroots, especially the poor and working class people who are most directly impacted by capitalism, white supremacy and patriarchy. The good news, I think, is that people are building these kinds of grassroots movements all over the country, including in DC. In order to build the Greater Washington Employee Ownership Center and any solidarity economy infrastructure in DC, I think we’ll need to seek partnership with these movement spaces, and, if we can do that, I think we have a real chance.

    Liked by 1 person

    1. Geoff, thanks so much for this detailed reply. I agree completely that in order for cooperatives to survive they need to be embedded in social movements. I’ve gotten a chance to speak with Merald and Molly from the North Carolina Employee Ownership Center and one strategy they discussed was creating a “train the trainers” model. This will create space for knowledge exchange so rural communities and communities of color can lead their own shared ownership projects. I’d like to see grassroots groups represented on the GWEOC board. I’d love to have a more in depth conversation around this with you, Bianca and others.

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