Fixing the Full Employment Paradox

Lately, investment news have reported record stock index valuations. Unemployment is at its lowest level in decades. The economy is booming, they say. At the same time, they say we need more economic stimulus. A recession is coming.

There is much less talk about increasing poverty, caused, not by unemployment, but under-employment. Millions of people survive in multiple, low-wage, part-time jobs without benefits. Many others live on freelance, gig or independent contractor work also without benefits or any kind of job security.

Until recently, municipalities have responded with tax incentives to attract big businesses to re-locate into their communities. Surely, that would create good jobs, right? On the contrary, not only did it send big businesses shopping for tax incentives around the country, it also sent the resulting profits out of the local economy and into the hands of shareholders living somewhere else.

Fortunately, municipalities are beginning to see what is going on. More and more of them are looking at ways to keep existing businesses in business rather than attracting new ones. In many cases, the answer is cooperative business development. They make it easier for retiring small business owners to transition to worker ownership.

The most glaring obstacles to this new approach are leadership and financing. Workers are not used to taking leadership roles. They may even have been discouraged from doing so. There is a great deal of educational catching up to do. Indeed, a massive culture change is needed. The Main Street Employee Ownership Act of 2018 requires Small Business Development Centers around the country to provide training and education, but until people’s eyes have been opened to the possibilities of worker ownership, there will be precious little for them to do.

The existing financial world is not well equipped to deal with enterprises with multiple owners. Besides, some banks are known to avoid areas where investment is needed the most. The Main Street Employee Ownership Act also contains provisions for this, but more is needed. Again, a culture change is needed. Worker cooperative owners do not see capital as a path to work-free income like investors do. For them, capital is simply a tool to obtain the things you need to start producing things. The answer is credit unions for business; essentially non-profit banks owned and controlled by the local cooperatives.

A third obstacle is the myriad of government requirements together with all the other things that distract them from their core business. Again, the answer is local non-profit management cooperatives.

It is good that municipalities are catching on. There is a lot they can do to empower workers to become owners; to take control of their work lives instead of being controlled by business owners.

However, the real power lies in the workers themselves. Lots of social justice advocates and centers around the country already help set up worker cooperatives, so why not on Long Island? That is up to you.

Cooperatives and Local Development: Theory and Applications for the 21st Century

Most people are in daily contact with a cooperative in some way. They just do not know it when it happens. Cooperatives employ more than two million people in the U.S., generate more than 600 billion in revenue. There are over 900 electric cooperatives, almost 6,000 credit unions. Butter, cheese, orange and cranberry juice are produced by cooperatives. You local hardware or grocery store may be a cooperative. Is it time to find out what cooperatives are?

Buying Your Workplace

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.

1. 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?
2. 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?
3. Decide at what point inaction will have intolerable negative consequences and something must be done.
4. Learn all you can about worker cooperatives ahead of time. Find a local cooperative developer to help with this. Get answers to common questions.
5. Give ample time for the owner to get used to the idea. Let him know that help is available.
6. Be prepared for push back from his advisers who most likely have never heard of anything that crazy.
7. Work with the owner and the cooperative developer to create a plan for the transition that will work for everyone.
8. 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.

Companies We Keep: Employee Ownership and the Business of Community and Place, 2nd Edition

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.

Employee, Contractor or Worker? What’s the Difference?

The question came up during a discussion about the difference between Employee Stock Ownership Plans (ESOPs) and Worker Cooperatives. Why couldn’t it be Worker Stock Ownership Plans and Employee Cooperatives? It may seem like a question of semantics or really just splitting hairs. It isn’t. The distinction is really important and mostly has to do with control.

Sometimes companies get in trouble when they try to classify employees as independent contractors. They do this to avoid some of the labor laws that protect employees from abuse or the benefits employees are entitled to. The reason labor laws are necessary is that the employer/employee relationship is not a relationship among equals. The employer has way more power than the employee. We are not going to get into a discussion of why that it is so here except to say that this is the way it is and most people can agree on that.

Independent contractors on the other hand do not have these protections and theoretically they do not need them. The idea is that the relationship is one of equals between one contractor and another contractor. That can quickly become an illusion when an individual contracts with a large corporation and the large corporation begins to decide how or when the contractor should do his or her work. This is frequently the situation when the Department of Labor steps in to protect the little guy. In other words, the distinction between an employee and a contractor has more to do with control than it has to do with how they are paid.

Sometimes you hear employees referred to as workers and without a doubt they do actually work and so do contractors. So why do we prefer the term worker when we talk about worker cooperatives and not employee cooperatives?

The reason is all about control. The relationship employees have with employers is a servant/master relationship. The employer tells the employee what to do and how to do it. Workers in a worker cooperative, on the other hand, are more like contractors. The relationship between workers in a worker cooperative is by definition one among equals. Every member has only one vote regardless of their contribution of labor or capital.

Because workers in a worker cooperative make all the decisions about how they should organize themselves, no one outside the cooperative who is not a member can tell them what to do. Even though members of cooperatives are independent individuals with control over themselves, they frequently choose to give up that control, not to an employer, but to their fellow workers in community with them. They become a worker cooperative.

Some worker cooperatives decide that they like the protections of labor laws and voluntarily subject themselves to them. Some are even unionized. Others prefer to treat each other as partners. All of them have their own reasons for what they do.

Some states have cooperative corporation laws. Most, if not all, assume the workers will treat themselves as employees. But worker cooperatives do not have to incorporate as cooperative corporations to be considered a cooperative. There is no single universally accepted definition of what a cooperative is. Any legal entity, except a sole propriety, can be a cooperative. Each one is different as defined by its members. Some frequent characteristics are that they are democratically controlled on the basis of one person, one vote and that surplus, profit attributable to the labor of its members, is distributed according to labor contribution rather than capital contribution.

This debate may seem trivial, but it is not. It becomes particularly important when we talk to policy makers and employers about converting companies to employee ownership to preserve jobs. That conversation frequently lumps worker cooperatives and stock ownership plans together as one and the same, but they are not. They are fundamentally different and it has to do with control.
Governing the Firm: Workers’ Control in Theory and Practice
Why are companies almost always controlled by shareholders and not by their workers? This book suggests that labor is inalianable from the workers. The worker must always be present to perform the labor. Capital, on the other hand, can freely move around the economy regardless of where the owner is.

Are worker cooperatives the same as ESOPs?

Both are forms of employee ownership, but that is just about the extent of their similarity. ESOPs, or Employee Stock Ownership Plans, are fundamentally retirement plans much like 401k plans except they invest only in company stocks. You may have heard of Stock Option Plans, but that is something completely different.

An ESOP is an example of indirect ownership. A worker cooperative is an example of direct ownership. In an ESOP the employees do not directly own their shares. They are held in trust for their benefit by a Trustee appointed by the employer. Therefore, ESOP participants do not usually have any influence on how the company is run. The Trustee votes their shares for them. Only a very small number of 100% employee owned companies have taken the final step towards democratic governance. Most companies with ESOPs have implemented a culture of employee participatory management style, but not actual control.

In a worker cooperative, each employee purchases and directly owns one voting share of the company. Each owner has one vote, so the main difference between worker cooperatives and ESOPs is in the area of control.

Most worker cooperatives pay out profits called surplus annually, but often retain a portion to be owned collectively. The company will pay the taxes on that portion. Another portion may be deposited in the worker’s individual capital account along with their initial buy-in share. When that happens, enough will be paid out in cash to cover the taxes on the worker’s portion of the surplus. In ESOPs, the shares that are held in the employee’s individual account is not taxed until he or she leaves the company and withdraws the funds in the account.

So both have individual capital accounts and both get liquidated and paid out when the participant leaves or retires. It is for this reason ESOPs need to have an annual evaluation to determine the value of their shares. Liquidating the voting share in a worker cooperative prevents control attached to the voting share from leaking out of the company.

 

Building Co-operative Power: Stories and Strategies from Worker Co-operatives in the Connecticut River Valley

Worker cooperatives can take many forms, but their real power is not revealed until they begin to work together.

Financial Retirement

You might think you have this covered, but a recent survey of Long Island business owners revealed that 52% are not financially prepared for retirement. That is actually quite good, but might reflect a measure of optimism unsupported by reality. Other surveys show that as many as 85% lack exit plans.

The Business Owner

No doubt you will agree that business people or entrepreneurs are different from other people. They are not better or worse, just different. For example, they tend to be more focused and more committed. That can be good and bad. It is good to focus on your business goals, but when it causes you to neglect other important aspects of your life such as family or personal finance, the negative consequences can be dramatic.

The Business

Of course, when you are first starting out, retirement is not your priority, surviving and becoming profitable is. After that, your focus may shift to growing your business. You invest every extra penny back into it. You are totally focused on providing services or selling products and you may forget about retirement until you suddenly realize it is around the corner. Some things can be dealt with quickly and efficiently. Retirement planning is not one of them. Retirement takes time and careful planning and that can be frustrating for someone who is used to be in control and getting things done. Since there is no second chance, it is important to get it right the first time, so do get started early. It should be on your mind from day one.

Funding Retirement

You might think that your business will provide for you in retirement, but business is far more risky than most people realize. Things can change really quickly. Your reality could end up very different from what you expected, so accumulating retirement funds outside your business is vital. Investing in mutual funds may be the most boring and uninteresting thing on the planet. That is precisely why it is the safest and most reliable way to generate income with very little work. That may not seem important now, but it will be in retirement when you can no longer work. Because of the magic power of compound interest, time is your best friend.

Put away small amounts of money often enough for a really long time and you will be able to retire comfortably

I know there is nothing exciting about it and you may be disappointed that I do not have a new and innovative solution to offer, but that is deliberate. If I told you there are other ways to accumulate wealth, it might distract you from what you are supposed to do or put your retirement funds in jeopardy. Remember, you probably have 40 years of work life, but you may also have 40 years in retirement. The return on your retirement fund investments is far less important than the amount of time you have available to grow it. Get started. Get started early.

Tapping Your Business

If, after all that, you end up with a gap anyway, all is not lost. One very effective way to close it is to make your business more valuable to a buyer. It may sound counter intuitive, but the greatest value booster is for you to get out of the way – to extract yourself physically from the business. If the business cannot run without you, it really has very little value to anyone else. There are several other ways to increase the value of the business. The way to uncover them is to mentally step into the shoes of a prospective buyer. Imagine what would be important to him or her.

Conclusion

Again, there is no substitute for an early start when it comes to retirement. The best investment in your 20’s is in financial literacy. No other degree comes close when it comes to building wealth in your life.

The Business Owner’s Guide to Financial Freedom: What Wall Street Isn’t Telling You

Owning a business has the potential to create great wealth, but the opposite is also true. Owning a business is far more risky than being employed. Accumulating funds outside your business could mean the difference between struggling and being comfortable in retirement.

Emotional Retirement

Like everyone else, business owners will eventually have to turn it over to someone else. As a business owner, you are more likely to be more emotionally attached to or engaged in your job than an employee. Therefore, there is an increased chance that you will have more difficulty disengaging from it. At the opposite end of the scale, the reason for starting it in the first place was so you could retire early and moving on to what you really wanted to do. Of course the vast majority place somewhere in between these two extremes.

Even if you are one of those people who keep going till the end of your life and have great joy doing so, there is still a need for a succession plan. We know what will happen to you, we just do not know when. What will happen to the business when that happens? You still need a plan for that.

You may have heard about business owners who have sold their businesses intending to retire only to start another one just like it soon after. Their problem is that they forgot or did not know that they had to prepare mentally for retirement as well as physically and financially. That is what this article is about.

Just like determining your financial status and setting goals for your physical and financial retirement, there is a need for evaluating your emotional state and setting goals for how you will occupy your mind in retirement. Start with what occupies your mind now besides your business. How can that knowledge help you shape your future? What will your social environment look like? Will you have meaningful connections? Will your life still have purpose?

Identity Retirement

People were never designed for retirement in the first place. Most of us define ourselves through the work we do. Either that or others will do it for us. Our original design from the time of creation is as members of a community or tribe where everyone regardless of age has a role to play. Everyone has value of some sort. Originally, value or status was mostly defined by how well you contributed to the community and not how much you got out of it.

If you are one of those people whose identity is closely tied to what you do as a business owner, sudden retirement could be a particularly frustrating time in your life. You may have been used to being in charge and in control. With that suddenly gone, a big void has entered your life and you have nothing to fill it with. Suddenly retirement does not seem like what you had expected. Misery, even depression, could set in. If you are one of this type of people, preparing for retirement is not only important, your life could literally depend on it. Having something meaningful to do becomes critical.

Social Retirement

As a business owner, you probably spent a good deal of your time interacting with people, maintaining relationships and solving problems. It may come as a surprise to you that all these relationships were professional, not social. Now that your identity has changed from a co-worker to an acquaintance, you may find that the busy people you used to surround yourself with no longer have time for you.

Therefore, it becomes essential that you develop another social circle of friends outside of work, preferably well ahead of time. Otherwise, if work was what used to drive you, you may find yourself looking for a way to get back into business.

Fortunately, there is a plethora of excellent resources to tap. They will not do you much good unless you actually use them, though. The point is that whether your retirement is joyous or miserable is largely within your control. Only you can design it the way you want it, but do get the help you need.

How to Retire Happy, Wild, and Free: Retirement Wisdom That You Won’t Get from Your Financial Advisor

The ability to create a new identity outside your business could mean the difference between joy and misery in retirement. A new circle of friends may also be needed.

Can Your Business Run Without You?

There are three reasons you might want your business to be able to run without you.

You Could Become Incapacitated

Surprisingly few owners have procedures in place for this eventuality or for any other calamity that might strike their businesses unexpectedly.

You Want Your Business to Grow

As a one-person operation, there is a limit to how much business you can handle. When you have reached that limit, you stop growing. Your experience may begin to resemble that of an employee.

You Want to Sell Your Business

Some day you will want to retire and transfer ownership to someone else. If your business depends on your presence, there is not much of value you can transfer to anyone.

Become a Business Owner not an Operator

To free yourself from being bogged down by the day-to-day tasks of serving customers or producing products, you will be the one who decides how things are done, by whom and when. There are three kinds of tasks:

Routine Tasks

Every task can be broken down into a series of steps. Write down every single step in so much detail that anyone can do it exactly the same way. Do not rely on common sense. What is obvious to you, may not be so obvious to someone else. Not only can the task now be done whether you are there or not, the outcome will also be consistent.

Taking on your first employee is a really scary proposition and it comes with lots of administrative responsibilities. One alternative is to use temporary employees. Hiring independent contractors comes with its own set of regulatory pitfalls.

Instead, begin with automation. Lots of routine tasks can be done better, faster and more accurately by machines. You may already be doing this without realizing it, but take this exercise to the extreme and you can probably find more.

Day-to-Day Decision Making

Look for routine tasks that require some judgment or discretion. You cannot make step-by-step instructions, but you can make guidelines. Your job is to make sure that everyone not only knows what your overall philosophy is, but also how it manifests itself in their daily activities. Have standards for how the phone is answered, how visitors are greeted, how complaints are handled, etc.

Now that you have allowed the human factor into your business, things might begin to slide. You cannot turn them into machines and you cannot expect them to behave like machines nor would you want to. If you did, you would no doubt be met with resistance. What you can do, is explain why things are done this way or that. When they make small changes to the established standard, it could affect something else in the grand scheme of things. Once they understand this, they will begin to take pride in following the rules to the letter.

On the flip side, you can take advantage of this human capacity to be creative. To do so, you need to have established procedures for changing established procedures. For the employees, the many different functions might seem disjointed or unrelated. As the business owner, it is your job to have the big picture; to know how all the different functions work together. The better you can convey that to them, the easier your job will be.

What you would really want is for them to replace you. You cannot turn them into you, but you can motivate them to think and behave like you. The best way to do this, is to make them actual owners. There are several ways to do this, but that is outside the scope of this article.

Strategic Planning

Finally, there are the kind of tasks you think no one can do but you. These may include long-term strategic planning, the vision you have for your company. But if your vision is clear enough and you can communicate it to your staff, you may still be able to leave your company for an extended period of time, even leave it altogether. One of the keys to doing that successfully, is that you will need to write it down in great detail and make sure your employees understand it.

Do not expect it to be easy. Changing the work culture of a business is really difficult. It is tempting to hire on skills alone just to ease a short term pain to get the job done. This is what you hire temporary workers for. For long term employees, focus on attitude. Ask yourself, “Could they become good owners some day?” This is what will allow you to step back and let your business grow beyond your own capabilities.

How To Make Your Business Run Without You

When it comes to selling your business, the greatest value booster for your business is to get out of the way. If it depends on your presence, it really does not have very much value for someone else. Learn to identify systems and processes that will allow it to run without you.

Getting Yourself Ready for Retirement

Most business owners have a business plan and a marketing plan. Although all of us will eventually have to exit some day, almost no one has an exit plan. A little bit of planning can make this a joyous occasion to celebrate.

You may be thinking this is about selling your business. It is, but using that as a starting point for your planning would be a mistake. You may end up with the perfect sale. You get everything you want, but what are you going to do with it? I think you should consider selling your business the end point, not the beginning. A better place to start is with you. What do you want your retirement life to look like? What do you want for yourself? Figure out what you will be doing; how you will live. Will that work for your family as well?

There are at least three decisions you will have to make:

1. When do you want to retire?
2. What will retirement look like to you?
3. Who will take over?

Therefore, the exit strategy begins with a retirement plan. Start with yourself, then include your family and others who may be impacted. Every good retirement plan also includes an estate plan, the plan that goes into effect when you die. Who will take over is the last stop on that journey, not the first.

There are essentially three things you will need to do. You must extract yourself

1. Physically
2. Financially and
3. Emotionally

from your business. The emotional extraction could be the hardest to achieve, but let us look at them one at a time.

Physically
Assuming you have employees, to what extent do you have processes in place to allow your business to carry on without you? Does that include a management team capable of making strategic decisions or are they limited to day-to-day operational decisions? Simply delegating tasks will do little to take you out of the loop. You will need to go at least one step further. Give them real responsibility with consequences.

Extracting yourself physically is also a great help in case you are suddenly unable to perform your daily duties. It is not only a good retirement decision, it is also a good business decision. Test your plan. Go on an extended vacation.

Financially
It is not uncommon to find small businesses where the economy of the business and of the family is so entangled that one cannot be distinguished from the other. Of course, this is problematic for many reasons, but especially when you need to transfer the business to someone else.

It is tempting to pour all your resources into growing your business. I get that. At some point you must stop doing it, though. It is essential to divert at least some of your assets towards retirement outside your company. There are many ways to do this and one or more will meet your needs. The main thing is to get started early and do it often. Even small amounts invested frequently over a really long time can mean significant wealth in retirement, perhaps the difference between struggling and being comfortable.

Emotionally
As mentioned earlier, figuring out what you’re going to do with your life post-retirement could be the hardest task you will have to do. Starting early is key. Begin with extracting yourself physically from your business. Do something else for a while. It may take some time and some tries, but it is vitally important to get this right. It could mean the difference between misery and joy. Unlike an employee, you have the flexibility to experiment with different options. You can make your exit gradual if you need to. Above all, get an early start on this.

Selling your Business
Deciding who will take over should be the end point of your plan. Ask a number of business owners who they want to take over and they will almost invariably say they want to sell to a third-party and there are many good reasons for that. Reality is that only about one in five actually do, so it is wise to think about alternatives. Alternatives could be a family member or one or more of your managers. Do not overlook the possibility of selling to your employees as well. There are many benefits and several ways to do this. I have discussed these options in more detail in another post so I am not going to do that here. You can always contact me if you are interested in learning more about employee ownership and I will get you a copy.

Retirement Planning for Business Owners – Six Ways to Sell Your Business

Everyone will eventually have to retire. That means your business will have to somehow be transferred to someone else. That can happen in a number of different ways. Most business owners will tell you that they want to sell to their children or a third-party, but there really are several other good options.

Selling to relatives used to be common. Now, fewer and fewer take this route. The process can be seriously challenging emotionally especially when multiple parties are involved. Avoiding taxes is another, but the processes needed are well understood by most transition professionals.

Selling to a third-party sounds easier than it is. Only one in five who try actually do. It can be a good option and may result in a premium if you have a desirable patent, a unique process or a particularly lucrative corner of the market. Other buyers simply see acquisitions as a more cost-effective way to grow. If the owner is indifferent to the future of the company and its employees, this will work. Having access to top-notch professional help is crucial. The buyer does and so should you.

The government encourages selling to employees primarily through tax benefits. Selling to employees can be accomplished in a number of different ways, the management buy-out being the most common and most well-known. Less well-known and often misunderstood options are the Employee Stock Ownership Plan (ESOP), the Employee Ownership Trust (EOT) and the Worker-owned Cooperative. Let us look at them one at a time.

The Employee Stock Ownership Plan is often confused with stock options, but that is something completely different. The ESOP does three things. It is at once a transfer of ownership, a productivity enhancing measure and a retirement plan. Because it is a retirement plan, it falls under the regulations of the Employee Retirement Income Security Act (ERISA) of 1974. That makes it a serious challenge to implement and maintain, but the tax benefits are well worth the pain. An ESOP is an example of indirect employee ownership. Employee owned shares are being held in a trust, but in individual accounts. The employees share in growth as well as profits.

The Employee Ownership Trust is a relative newcomer in the U.S., but now quite common in the U.K. where it enjoys far better tax benefits than in the U.S., at least for now. The main benefit of the EOT is that the owner completely controls the transfer process from beginning to end. In fact, the employees do not even need to know until it is all done. An EOT is also an example of indirect ownership. Shares are also held in a trust, but do not need to be held in individual accounts. Employees share in profits only. Unlike ESOPs, EOTs are really simple to set up.

Finally, there is the worker-owned cooperative. As with ESOPs, capital gains on the sale may be deferred under certain circumstances. Worker cooperatives do not have a retirement element, so, like EOTs, they are not heavily regulated. The main benefit to the owner is that his legacy gets preserved and that is for many an attractive alternative to liquidating with resulting job loss. Because of their democratic governance structure, worker cooperatives can be a bit challenging to set up. Gradually transferring ownership is relatively easy. Gradually transferring control, on the other hand, is a significant challenge. Worker cooperatives are an example of direct employee ownership with absolute control the biggest benefit for employees. Ownership is held in individual capital accounts in the form of a buy-in to ensure some skin in the game from participants. Participants share in profits only.

Each of these options require a different strategy and positioning your company for the outcome you want could take some time. Therefore, it is essential that you make three decisions as early as possible:

1. When do you want to exit?
2. Who do you want to take over?
3. How do you want to live in retirement?

You need to get your company ready for the transition, but you also need to get yourself ready. That involves three steps you must take. You must extract yourself from the company physically, emotionally and financially.

Finally, you must

1. Prepare your exit plan as well as retirement and estate plans for yourself and your family.
2. Execute them.

They are of little help if you keep them in your drawer. Update them periodically.

The Cooperative Enterprise: Practical Evidence for a Theory of Cooperative Entrepreneurship (Cooperative Management)

There is a myth saying that cooperatives are a bunch of hippies with guitars and flowers sitting around a bonfire. There may be some who do that, but for the most part, they are real businesses with real business challenges some of which may be different from traditional businesses, but most are exactly the same.

While a hierarchical, vertical management structure is common in traditional businesses, leadership in a cooperative is flat and democratic.