Hey, Boss! You’re getting old. What’ll happen to your business when you die? More importantly, what will happen to my job?
Most people do not have to worry about this, but some do. If you are working for a small business owner who is getting older, but does not seem to be letting go of any of the reins, you need to worry, especially if you are getting older, too. There are other signs you need to worry as well: Is the business relying on just a few large clients? Is it growing or stagnating? Those things may not be all that alarming. They may just be the way it’s been done for 30 years and it has worked OK. Alarm bells need to go off if the owner begins to withdraw and important things do not get done. Bad leadership did get things done all this time. No leadership will not. The end is inevitable and if you do not want to go down with the ship, you need to take action.
If you are young, you may be able to go to a different company. If not, that may not be an option. How about starting your own business? After all, you’ve been doing it for 30 years. It shouldn’t be too difficult. The reality is that running a small business is getting harder by the day.
Before you blurt out the fact you are interested in taking over, it might be useful to think about how to go about it. Let us get into the owner’s head for a second.
Getting the Boss Ready
Lots of small business owners aren’t business owners at all. They started the business to make a living, to provide for themselves and their families. The choice may have been a result of an assessment of skills and interests, but probably most importantly a desire to be independent. Running the business was never their main job. Providing services or making products were. Being the owner was a necessary side effect, so they did a mediocre job at best.
Since they are “business owners,” they should probably behave like business owners. They may have subscribed to a few business magazines or followed business channels on TV. They know they have to exit some day, but someday is far in the future. Right now, it is more about surviving.
It is also possible that they may have had aspirations that one or more of their children might want to take over. That used to be common, but young people nowadays have so many more attractive options so that is unlikely to happen.
The business was founded on a passion for plumbing, auto repair, painting or what have you and that passion may still be burning. It is still what gives meaning to life. What else would they be doing anyway? Playing golf all day, every day? I don’t think so.
Besides, who is going to buy a business that is just scraping by? Well, there are actually people who look for just that. What they will do, is strip it of its assets, lay off all the workers and shut it down. You mean kill my baby? Yep, that is exactly what I mean.
There is actually a surprisingly large number of owners who declare that they do not need to prepare for retirement at all. Denial is a very powerful defense mechanism. It is also dangerous if there are people who depend on you for their survival as well.
Getting Yourself Ready
With all that, you should now be able to have the talk, but hold on for a second. The other question is what about you? How prepared are you? Running a business isn’t easy. What do you know about running a business? Do you have the skills or could you acquire them? What other options are there?
Before you go ahead, I should probably tell you that although employee buyout is the most common transition method, a lot of them fail within the first three years for a variety of reasons, chief among them is lack of leadership, but that discussion will have to wait for another day. Today, we will just discuss converting to a worker cooperative as an alternative to closing the business.
There have only been a few hundred transitions so far, so we do not really know if they are more likely to survive than traditional management buyouts, but I think they are for several reasons. Again, I will get back to that another day in a separate post. In the meantime, let us look at what a transition to worker cooperative is and how it works.
What Is a Worker Cooperative?
A worker cooperative is a company that is 100% owned and controlled by its workers. That means that everyone is an owner. Everyone participates in the decision making process as well as the profits of the company. Everyone has one voting share. Profits are shared according to how many hours you have worked. Worker ownership means that everyone is equally responsible for the survival of the company, one of the reasons it is more likely to survive than a traditional management buyout.
Transition to a Worker Cooperative
The mechanics of becoming worker owned is similar to a management buyout. The main difference is that most of the workers become the new owners instead of just a few managers. Usually, the initiative to become worker owned comes from the owner as part of an exit plan. When the owner does not seem to take that responsibility seriously, it becomes up to the workers if they want to salvage their jobs.
The decision how and when to approach him/her is a difficult one and there is really no way to know how in advance, but it helps to have a plan.
- Learn as much as you can about the owner and his financial situation. Does he have dependents? What motivates him to keep going – or not?
- Learn as much as you can about the business. Is it growing or contracting? Does it depend excessively on the owner’s presence or on a few large clients?
- Decide at what point inaction will have intolerable negative consequences and something must be done.
- Learn all you can about worker cooperatives ahead of time. Find a local cooperative developer to help with this. Get answers to common questions.
- Give ample time for the owner to get used to the idea. Let him know that help is available.
- Be prepared for push back from his advisers who most likely have never heard of anything that crazy.
- Work with the owner and the cooperative developer to create a plan for the transition that will work for everyone.
- Present it to the other employees and get their buy-in. This may be more difficult than you think. Being well prepared is key to this.
After that, the mechanics of the sale is pretty much the same as any other management buyout. Professionals will take care of most of this. Again, being prepared ahead of time is key.
South Mountain Company is one of the most successful worker ownership transitions so far and it all came from meticulous planning and attention to detail in the process.