Employee ownership can help businesses stay open, give tax benefits to retiring owners

Local businesses are a powerful economic driver in small cities like Athens, collectively employing a large number of people and making up a big part of the tax base. Yet, even some highly successful local businesses may cease to exist over the next decade as their owners retire without a succession plan to continue their legacy.

According to the Georgia Center for Employee Ownership, it doesn’t have to be this way. Matthew Epperson, GACEO’s local outreach coordinator for Athens, estimates that there’s about 1,000 local businesses owned by baby boomers in town that could be saved over the next decade through employee ownership.

 “A lot of business owners think that if they can’t find a third-party buyer or someone wealthy enough to buy the business outright, that they’ll have to close. That’s not true,” Epperson told APN. “There’s this huge world of employee ownership that people don’t know about. It’s everywhere.”

Different models of employee ownership

Employee ownership can take many forms, ranging from true worker-owned cooperatives, in which the workers own and run the business themselves, to employee stock ownership plans (ESOPs), where workers are granted shares of company stock every year, giving them a stake in the businesses’ success.

Workers owning the means of production themselves sounds like a form of socialism, but many big businesses have taken advantage of the benefits that employee ownership provides across the US.

Publix Supermarkets is the largest US company that provides an employee stock ownership plan, having over 250,000 participating employees nationwide. In Athens, there’s just one example of a local business with an ESOP – Joma Construction – but Epperson hopes that this number can be increased over the next decade as baby boomers retire.

For companies large enough to consider the ESOP model of employee ownership, the tax benefits are enormous. For example, business owners don’t pay capital gains tax when they sell their business to an ESOP, which is a type of tax-exempt trust. Specific companies, called S corporations, are exempt even from corporate income tax if they have an ESOP, making this kind of employee ownership a big win for both retiring business owners and their employees.

For smaller businesses, another shared ownership model to consider is an employee ownership trust (EOT). In this case, the retiring business owner would sell to a trust, which would steward the business thereafter for the benefit of the employees. While the tax benefits here are not as great as with an ESOP, Epperson says that the EOT model can be attractive because it has a very low transaction cost and is extremely quick to establish.

“You can hire an attorney and, in two months, transfer ownership to your employees in perpetuity. It’s lightning fast,” Epperson said.

But how can employees afford to buy the company?

Some business owners might wonder how their employees could afford to pay a fair market price for the business they’ve spent decades building. But don’t worry – Epperson isn’t recommending employee ownership out of a desire for charity. In the models discussed above, the owner would continue to be paid after they retire out of business profits until they receive the full amount they’re owed.

“People often ask, how can the employees afford this? But in most of these transactions, it costs the employees either nothing or very little money, because the sale is leveraged by the profits of the company itself,” Epperson said. “For most small business owners, their business is their single largest and most significant asset in their life. This is a way we can turn the business into their retirement plan.”

A buyout leveraged by company profits might take five or ten years to complete while the former business owner is slowly paid back as they enjoy retirement. Another option would be for the company to get a bank loan to allow the owner to walk away sooner, with more money up front. In this scenario, a business owner might be paid back fully in three years, according to Epperson.

In many cases, if a business owner doesn’t choose to sell to their employees when they retire, they may be forced to either close the business entirely or sell to a third party in the private equity market. Even if they find such a buyer, Epperson feels that employee ownership can be a much better option for most business owners.

“Do you really want private equity to buy your business? They want to take your information, they want to take your customers and they want to lay off your employees,” Epperson said. “I want to bring people back to why they created their business in the first place. The purpose you came with can live on beyond you, and your employees are the best people to carry that vision forward.”

A free online training about employee ownership

The Georgia Center for Employee Ownership is hosting a free online training about their Employee Ownership Ambassador Program at 1 pm every Thursday in November (with the exception of Thanksgiving). The fourth installment of the training will be held on December 4.

According to their website, this training “is tailored for professionals shaping the business landscape: business owners, economic developers, legal experts, financial advisors, chambers of commerce leaders and more.” Epperson says the training may be especially relevant to certified public accountants since they are the most common provider of succession advice to retiring business owners.

If you’re interested in the Employee Ownership Ambassador Program, you can register at the link above or contact Epperson directly at matthew@gaceo.org.

The Employee Ownership Ambassador Program was developed as part of Athens-Clarke County’s Business Development and Workforce Support Task Force. It was funded with a $150,000 grant through the American Rescue Plan.

Epperson hopes to reach at least 750 business owners over the age of 50 in Athens and inform them of the benefits of employee ownership as they plan for retirement. 

“As a selling owner, you will have flexibility in the way that you exit, in terms of your timeline, but also the price of the business. You can negotiate and actually get a fair price by selling to your employees,” Epperson said.