Act: Inspiration

Acquisition-conversion: the promising new strategy for scaling worker ownership

August 24, 2021

After spending more than a decade building new ventures, the Evergreen Cooperatives have started pursuing a new answer to the long-running question of how to expand the co-op sector — co-op conversions.

Instead of cooking up co-ops from scratch, they’re buying existing firms and converting them to co-ops.

In the past three years, Evergreen’s Fund for Employee Ownership has invested $13 million in acquiring and converting companies with more traditional structures to employee-owned businesses, allowing the Cleveland, Ohio-based firm to accelerate its growth and increase its impact.

In the process, it joined a growing number of organizations within the co-op ecosystem that are moving away from cultivating startups and toward tapping new sources of capital to more effectively expand the co-op sector via conversions. A research group specializing in this sector projects that up to $650 million could be deployed for co-op conversion annually, with over a dozen distinct funds currently investing in employee ownership.

Co-op conversions outperform co-op startups

“When we look at existing co-ops, the ones that have been around the longest, the ones that are the most traditionally successful in terms of growth or sales or revenue or sustainability or longevity or scale — almost all of them were conversions,” Esteban Kelly, Executive Director of the US Federation of Worker Co-ops (USFWC), a national grassroots membership organization for worker cooperatives, told Shareable. “There is something that we recognize about conversions as an origin story that gets us to a higher rate of traditional success.”

Of course, converting traditional businesses to a co-op structure is not necessarily new. The difference now is that shared ownership models are experiencing a surge in interest from investors such as impact and social investment funds, even as a demographic phenomenon known as the “silver tsunami” makes the timing for such deals ripe.

As baby boomers reach retirement age, many will be selling or liquidating their businesses in what could amount to one of the largest generational transfers of wealth in US history. Boomers own one in every two small businesses, yet the vast majority of the estimated 2.34 million boomer-owned businesses don’t have succession plans.

Working with funders and municipalities from California to Florida, the Berkeley, Calif.-based nonprofit Project Equity targets these businesses for potential conversion to employee ownership.

“Business ownership is a very highly concentrated form of wealth, and there’s a risk of further concentrating it by allowing these companies to be acquired by larger companies or by private equity,” says co-founder Alison Lingane. Instead, Project Equity aims to achieve a “lower concentration of wealth and a broader base of ownership.”

The organization has successfully facilitated the conversion of dozens of businesses into co-ops, ranging from a boutique glass blowing business to a solar company to a pizzeria.

“We don’t at this point do acquisitions, but we bring financing for conversions to the table,” Lingane told Shareable. “We help the workers buy the business — so there’s not an intermediary step of ownership — but the end result is the same that the employees own the company and, if it’s a co-op, also govern it.”

Shrinking the racial wealth gap

Such ownership stakes can help address race and gender wealth gaps, according to a report published by the Democracy at Work InstituteThe Aspen Institute, and Rutgers University’s School of Management and Labor Relations.

“Targeting business owners who have a black and brown workforce is probably one of the fastest ways of not just catalyzing worker ownership, but of democratizing in a racial sense,” Kelly says. He pointed to the multimillion-dollar Business Legacy Fund, headed by Co-op Cincy and the Seed Commons national financial cooperative, which helps small and mid-sized firms design succession plans to transition their businesses into worker ownership. 

In June, the Democracy at Work Institute’s Legacy Fund by Apis & Heritage Capital Partners announced its first close at $30 million. Its aim is to turn businesses with workforces of color into employee-owned firms, which it calculates can increase participants’ retirement savings by as much as $120,000 each. The fund serves the institute’s goal of expanding employee ownership to those traditionally locked out of quality jobs, focusing on Black, Indigenous, immigrant, and low-wage workers.

“We are moving toward this purpose of addressing the racial wealth gap, building not just wealth but communal, shared, cooperative, democratic wealth in communities of color — and especially in Black communities,” Kelly says.

the Local Enterprise Assistance Fund (LEAF) offers another route to racial equity by providing financing and development assistance to cooperatives and social purpose ventures that create and save jobs for low-income people.

“Most of what we do is lending, but we do have a team of technical assistance which provides financial advice, which we think complements everything from other providers in the field,” says José Luis Rojas, Chief Operating Officer at LEAF. Instead of focusing on co-op structures and models, the LEAF fund works to assess “the best financing structures beyond lending that co-ops can benefit from.”

LEAF has recently helped with the co-op conversion of a number of businesses, including The Drivers Cooperative, a driver-owned ride-hailing co-op in New York City. They also work extensively with food cooperatives and affordable housing co-ops, all with a focus on human and economic development particularly in low-income communities and communities of color.

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A number of other organizations do similar forms of conversion facilitation. They include:

  • The Working World, which provides financing and support to businesses exploring employee ownership;
  • the ICA Group’s Funds for Jobs Worth Owning, which promotes workplace democracy and participation by providing start-up capital and lines of credit for new and existing co-ops; and
  • the Cooperative Fund of New England, a community development loan fund that specializes in facilitating investments in worker-owned businesses.

Capital hurdles to growing the co-op sector

Some of the biggest hurdles to expanding the co-op universe have been limited access to capital and lack of awareness among both business owners and investors that cooperatives can provide a viable exit or succession strategy.

In 2017, financing employee-owned enterprises was not considered part of impact investing, according to a report published that year by the Democracy Collaborative’s Fifty by Fifty project. To change that, the paper, recommended the industry build more investor awareness and better investing infrastructure.

Since then, the impact investing market has exploded, reaching $715 billion in 2020, the Global Impact Investing Network reports — and proponents of cooperatives have taken note.

“Impact investors and other capital providers could be the agents to give [our current economic] crisis a silver lining by catalyzing employee ownership buyouts at scale,” the Fifty by Fifty project reported this year in a white paper titled Opportunity Knocking.

“The real big barrier was that there wasn’t capital with agency,” Karen Kahn, an editorial consultant for the white paper, told Shareable. “The way private equity works is they go out and they say, ‘Hey, you want to sell your firm? We’re ready to buy it. We’ll give you X dollars.’ Nobody was doing that with employee ownership.”

For far too long, much of the co-op movement has assumed the most effective path to scaling cooperatives was to simply provide information to owners and help to facilitate the sale of businesses to workers, the report found. Although these efforts can be fruitful, the report suggests that “risk capital is the agent most likely to bring about desired change because it is already poised to capture firms as their ownership changes hands.”

That capital — especially if it comes in the form of impact private equity funds — is the missing agent for scaling up employee ownership, according to the report.

Scaling up co-op conversions

As the pool of available capital widens, businesses focusing on acquisitions and conversions are finding opportunities to scale up.

In 2019, Project Equity launched a joint initiative with Shared Capital Cooperative, a national loan fund and Community Development Financial Institution (CDFI) focused on financing cooperatives of all types. The initiative, called Accelerate Employee Ownership, supports the sale of small businesses from the owners to the employee base, most often as a retirement and succession plan. Project Equity is also planning to launch another new fund in the fall which will enable them to bring more forms of capital to companies considering employee ownership.

In using its Fund for Employee Ownership to buy and convert businesses, Evergreen Cooperatives found that it could generate benefits for employee-owners much more quickly than under its traditional model, according to Chief Investment Officer Jeanette Webster.

Evergreen started in 2008 with the aim of creating startups using a worker cooperative model similar to the Mondragon Cooperative Corporation in Spain, which, since its founding in 1956, has grown to over 250 companies employing over 80,000 workers. With Mondragon’s success as their inspiration, Evergreen launched the Evergreen Cooperative Laundry business, as well as the largest urban greenhouse in the US, called Green City Growers, which also operated as a cooperative.

Many of the businesses Evergreen targets with its new fund, launched in 2018, have no options other than selling to a private equity outlet or competitor, both options that put jobs at risk. Instead, the Fund for Employee Ownership purchases these businesses’ assets and keeps the employees as owners in a model that replicates its success with startups but in a much shorter time frame.

“We have done four acquisitions and conversions in the last 16 months, and each one — even with paying back the debt to the fund over a period of time — are still successful and in most cases can realize profit-sharing and employee benefits in the first year,” said Webster.” That’s much faster than Evergreen’s startup model, which can take five to seven years to achieve profit-sharing with its members.

The fund’s assets are split into two pots. The first provides acquisition dollars and the second consists of money that is invested in operations, including educating and training new employee-owners on governance and financial literacy.

“Once the process of becoming an employee-owner has been achieved, the benefits to the employees in that environment are tremendous,” Webster noted. “And for the community, as the employee builds wealth in the business through patronage, dividends, and from profit-sharing, the wealth of that employee base stays in their community and improves their family as well as the economic spending in the community.”

Building a co-op conglomerate

The vision outlined in Opportunity Knocking is one of connecting capital to co-ops. One model based on that idea is the Obran Cooperative, a worker-owned cooperative conglomerate that acquires and holds profitable small- to medium-sized businesses and real estate on behalf of the co-op’s worker-owners.

“We’re not an investment fund, we’re not a private equity shop — we are a worker cooperative,” Joseph Cureton, Chief Coordinating Officer at Obran, told Shareable. “We’re what happens if a worker cooperative and a private equity firm sort of got together and had a baby.”

Focusing on a broad range of industries, from employee services to real estate to property management, construction, and even health and waste management, Obran buys lower-middle market businesses and invites the workers of all of those businesses into their membership. These companies operate as service lines or business units owned and operated by the cooperative — making it a conglomerate. Those companies are then governed, managed, and owned by both the specific company’s workers and all of Obran’s workers.

There are a number of practical benefits to this model, one of which is particularly relevant during our current, precarious economic climate which has only been exacerbated by COVID. Similar to the Mondragon Cooperative model in Spain, Obran treats all of its businesses as part of one large cooperative, making sure that all worker-members are supported, regardless of which particular business they work at.

“During the global pandemic, our employment services business took a pretty big hit, which makes sense — staffing was not really in high demand,” Cureton said. “Because we also had supportive housing, we literally invested in property that some of our members live in and provided rent deferment.”

“Deferring rental payments and then supporting those members in getting construction jobs in our construction company is an example of what that solidarity practice means,” he adds.

For Cureton, the Obran model is particularly exciting because it is creating a bigger, stronger ecosystem within an economic system that is often hostile to cooperative values.

“The purpose of a traditional firm is generally to grow, expand and service its shareholders,” he says. “Generally, we’re not that different. Obran’s existence is to maximize use-value of the cooperative for its members and their community — it’s that simple little reframing of the purpose of the firm.”

“We want to be an economic actor — we want to be billions in revenue,” he added. “We want to be influencing policy and politics and ways that are meaningful to our members and community.”

Obran’s goal is to achieve scale and economic sway. The company currently has 35 members, and projects that their next acquisition will bring in another 150-200 members within the next quarter.

“With each subsequent acquisition, we’re sort of ratcheting up and going upmarket,” says Cureton. “First we had to cut our teeth and understand who we are, and now that we understand that and have been involved in setting the governance and making the decision making processes very clear and the benefits strong, it’s time for us to actually go out and do these acquisitions.”

A model similar to Obran has emerged in Boulder, Colorado.

The Main Street Phoenix Project is a response to the precarity faced by many businesses during COVID — particularly in the restaurant industry. We all probably know of at least one of our favorite restaurants that has closed since the pandemic began, and as the COVID economic crisis threatens to further decimate main streets across the U.S., the Main Street Phoenix Project has begun to acquire and invest in at-risk businesses.

Through buying these struggling businesses, bringing them into cooperative ownership, and providing resources and support to worker-owners, the project’s mission is to build a more equitable and resilient main street economy based on quality jobs and vibrant neighborhoods.

A co-op Cambrian explosion

There are so many different projects popping up that it’s hard to keep track of them all. A few other notable ones include:

  • The $25 million Kachuwa Impact Fund, an investment cooperative and public benefit corporation focused on owning and operating “impact real estate” and investing in privately-held “impact companies;
  • Local Economy Preservation Funds, a model proposed by the Democracy Collaborative, in which states and cities establish public holding companies that acquire an ownership interest in distressed businesses, and eventually exit their investments in ways that could build a more democratic economy after the recovery from COVID begins.

As demonstrated through the Obran and Main Street Phoenix models, the momentum behind new, innovative forms of growth and scale in the cooperative field is taking many forms. Another interesting sign of this comes in the form of a new fellowship program launched by Purpose US, a foundation that helps businesses and communities build more equitable ownership, governance, and financing models.

Purpose’s Emerging Fund Managers Fellowship is designed for fund managers who are working on new capital vehicles targeting either business succession or real estate projects that integrate shared ownership and governance.

“This is probably the most interest we’ve ever gotten in a fellowship” from participants, donors, or investors, Derek Razo of Purpose US told Shareable.

With legal and technical support, expert training, and key networking opportunities with aligned investors and others, the fund aims to support a diverse cohort of individuals who themselves intend to support and grow the field of shared-ownership models in businesses across the US.

“There’s this Cambrian explosion happening with both the interest in alternative, shared, steward ownership models, whatever you want to call them, and also the appetite of capital to potentially participate, as well as the innovation in structures,” said Razo. “The opportunity is basically to build a new generation of these shared ownership capital vehicles that can raise larger amounts of capital than I think we’ve ever seen.”

The recent shift in interest around shared-ownership models coming from impact investors is something Razo and others are eager to take advantage of and leverage towards growing and scaling employee-ownership. The benefit that comes with partnering with folks that have experience and credibility within the impact investment field is invaluable — it takes things to a whole new level, and is also a sign of a seismic shift in the field of alternative ownership structures.

The United States is not particularly known as a hub for cooperatives, but as the trend in acquisitions and conversions continues — fueled by an injection from social impact capital — that could very well change.

The experience of Purpose US could be a harbinger. Said Razo, “People are actually writing checks — literally writing checks — to help us develop capital vehicles they can actually invest in, which is not something that was happening 12 months ago.”

 

This article originally appeared on Shareable.net.

 

Teaser photo credit: A food cooperative in Ames, Iowa. By Crcjfly – Own work, CC BY-SA 3.0, https://commons.wikimedia.org/w/index.php?curid=54783719

 

Robert Raymond

Robert Raymond is the Co-Producer and Creative Director of the Upstream Podcast and Senior Producer, Designer, and Creative Director of The Response. He is passionate about exploring the intersections of sound design, storytelling, and eco-socialist principles to help ease our way out of these tumultuous times.

Tags: cooperative businesses, cooperative conversions, new economy, worker-owned co-operatives