EOTs as Tools for Strengthening Neighborhoods

Reporting out from last month's Neighborhood Economics conference

In February I represented EO+WD at the Neighborhood Economics conference where I hosted a breakfast meeting with other shared ownership actors and moderated a panel on employee ownership trusts with Zoe Schlag from Common Trust and Alison Lingane from Project Equity. In a time where it is all to easy to get dejected by the challenges our country faces, I came away from the conference inspired and reinvigorated by all the work that is being done around the country to strengthen local communities.

With the help of Otter.ai transcriptions, Claude.ai writing, and some old-fashioned human-powered editing, here are some of the key points of our panel discussion.

Customizable Benefits of Employee Ownership Trusts

Our discussions highlighted employee ownership trusts (EOTs), a form of perpetual purpose trusts (PPTs), as highly customizable vehicles that enable businesses to share economic benefits with employees while retaining control. While EOTs are not the sole path to decentralization, they are one of various employee ownership (EO) models which offer advantages like perpetuity, flexibility, and tax benefits, particularly for larger enterprises.

Seeking Inspiration from Real-World Transitions

To better understand the motivations and processes behind EO transitions, we discussed real-world examples of companies that have taken this journey. Clegg Auto and Hummingbird Wholesale are two examples of companies that chose perpetual purpose trusts due to the models' perpetuity and alignment with the owners' values. The flexibility of partial sales also piqued our interest, enabling business owners to diversify their assets and plan for the future.

Aligning Goals and Sizing Up Suitability

We emphasized the critical importance of understanding both the sellers' goals and the employee groups' goals during business transitions. Our discussions identified an ideal size threshold of around 20 employees for successful EO transitions, while acknowledging that smaller businesses and tech companies seeking high multiples may require different thresholds.

Addressing Wealth Gaps and Economic Revitalization

A sobering reality we confronted was the impending crisis of 3 million baby boomer-owned businesses in need of transition, potentially leaving local communities without ownership and economic growth opportunities. However, we found hope in the potential of employee ownership models to rebuild local businesses, empower low-income workers and workers of color, address wealth divides, and generate new wealth.

Community Benefits and Policy Tailwinds

We also covered the potential of employee ownership to keep wealth, profits, and quality jobs rooted in local communities while fostering democratic decision-making among citizens. Encouragingly, we noted bipartisan support for employee ownership policies, with recent legislation passed in California and Washington. Efforts to establish a state-level commission in Colorado aimed to create a sustainable infrastructure beyond a single governor's term, further bolstering our collective optimism.

Crucial Issues and Flexible Models

Two critical issues emerged in our discussions: personal guarantees for Small Business Administration (SBA) loans and the pros and cons of federal legislation akin to the Employee Equity Investment Act. We also explored the flexibility of perpetuity in EO models, raising questions about governance rights and the ability to modify setups as circumstances evolve.

Striking a Balance in Trust Agreements and Implementation

We stressed the importance of striking a balance between strength and flexibility in trust agreements, enabling mechanism updates while maintaining permanence. Additionally, we recognized the vital role of cultural implementation and training for successful trust agreement rollouts, with tailored approaches needed for different businesses.

Financing Landscape and Stakeholder Inclusivity

Our conversations highlighted the significance of employee training and coaching during EO transitions, encompassing both soft skills and financial literacy. With around 50 EOTs currently existing and growing at a rate of 1-2 per month, seller financing emerged as a common funding approach, with sellers converting shares into notes paid over time. We also explored the inclusion of other stakeholders, such as supply chain farmers, in exit strategies through trusts or profit-sharing agreements.

International Perspectives and Knowledge Sharing

We touched on the growth of EOTs in the UK, where enabling legislation has led to the rapid transition of many businesses to this format. We identified a need for increased research and the sharing of best practices across borders.