Retiring Boomers Turn to Co-Ops to Keep Their Businesses Running

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(Bloomberg Businessweek) -- In 1995, Susanne Ward opened Rock City, a homey cafe in the Maine fishing town of Rockland offering morning coffee, warm lunches, and evening performances by local musicians. Fast-forward 20 years, and Ward was tiring of the grind and wanted to cash out and travel, but she feared a buyer might change the character and charm of the business she’d spent much of her adult life nurturing. So she floated the idea of converting Rock City to a cooperative owned and managed by the staff, and after some initial resistance, 17 of the 35 workers opted to join. “We’re small and live in a rural area where good jobs with retirement programs are few,” Ward says. “None of my employees could have bought a business like Rock City on their own. Buying it as a group allowed them each to have ownership.”

It’s an idea with growing appeal for small-business owners. The U.S. has about 800 worker-owned co-ops, up from 350 a decade ago, employing more than 8,000 people and generating almost $500 million in annual revenue, the U.S. Federation of Worker Cooperatives estimates. Co-ops run businesses ranging from housecleaning to taxi services to construction. The smallest have fewer than a half-dozen worker-owners, while the biggest are sizable players in their industries. Founded 35 years ago to boost employment and wages in low-income areas, Cooperative Home Care Associates in New York City has more than 1,000 worker-owners caring for the elderly, ill, and disabled. “In many communities, there’s a hunger for jobs that offer both dignity and a chance at ownership and control,” says Joseph Blasi, director of the Institute for the Study of Employee Ownership and Profit Sharing at Rutgers University in New Jersey.

While most companies operating as cooperatives have shared management and ownership from the beginning, more conversions are likely as baby boomers—who own two-thirds of small businesses in the U.S.—move toward retirement. Many have no succession plan, and finding a buyer isn’t always easy, especially in rural areas where high-quality employees are scarce and many young people have moved to cities in pursuit of opportunities. “The typical succession strategy in a lot of rural Maine is liquidation and closure,” says Rob Brown, a director at the nonprofit Cooperative Development Institute (CDI), which provides training and technical assistance to co-ops in New England. “The business owner isn’t realizing the wealth they should be, and employees lose their jobs.”

Recent federal legislation has made it easier for co-ops to get loans and for small businesses to finance a conversion, which typically costs about $30,000 for technical assistance and closing expenses, according to the CDI. The U.S. Department of Agriculture in 2017 modified its lending rules to allow former owners to stay involved in a co-op for five years after conversion. And a 2018 law requires the Small Business Administration to make loan-guarantee programs more accessible to worker-owned co-ops and directs the agency to promote employee ownership through its investment funds.

Businesses with a long history in their market tend to transition best, and most remain small so each worker can afford a meaningful share. Almost three-fourths of American workers would prefer to work for an employee-owned company, according to a survey by the Employee Ownership Foundation, and studies have found that worker ownership increases productivity, profits, and wages and creates stability.

Entrepreneurs who need help with rapid expansion but have difficulty recruiting and retaining managers are also helping fuel the shift. Aja Hudson founded a landscaping company in New York’s Catskill mountains 19 years ago, and as the business thrived she found herself having to turn away potential customers. Four years ago she converted the company, now called Earth Designs, into a cooperative she owns with nine employees. “It was too much for me to manage by myself,” Hudson says. The transition from owner to co-owner “required a tremendous amount of patience and many more meetings than any of us expected,” she says. “But every time, the group was able to rise above it, and the rewards have been great.”

Since the conversion, Earth Designs’ staff has grown from 9 to 25, and sales last year approached $2 million, almost four times what they were in 2015. Before the transition, Erin Domagal had worked as a crew manager, overseeing projects in the field; after buying a stake in the business, she became creative director. She’s working harder, she says, but she earns more and the job feels more meaningful. “It takes more work to engage this deeply,” Domagal says. “Our employees value the way they are seen and heard within the company, which they’ve never experienced at other jobs.”

To contact the editor responsible for this story: David Rocks at drocks1@bloomberg.net

©2020 Bloomberg L.P.

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