Shining a Light on Cooperative Ownership Transitions

Worker cooperatives help create resilient, vibrant local economies.  While American corporations relocate their production and “invert” their headquarters overseas in a never-ending quest to maximize shareholder value, cooperatives in the East Bay have been flourishing – creating stable, high paying jobs that serve the interests of the local community.

Supporting worker cooperatives has been a core mission of the GC3 clinic.  At the local level, GC3 has been on the frontline, helping entrepreneurs successfully launch worker cooperatives and assisting in a variety of advisory matters.  Recently, GC3 has entered the area of cooperative ownership transition, which is when a business is sold to the workers and re-organized into a worker cooperative.

Several recent ownership transitions demonstrate the flexibility of this approach as an exit for business owners.  Select Machine, a tool and equipment manufacturer based in Illinois, converted to an employee cooperative in 2005 through several stock redemptions, financed by a combination of cash buyouts, bank loans, and a note from the owners, spanning over the course of several years.  Real Pickles, a local and growing pickle manufacturer that converted in 2014, financed their conversion through a direct public offering, issuing non-voting preferred shares to local investors.  Conversion is a real option for larger businesses as well: more than sixty employees formed a cooperative to buy out three privately owned businesses from their employer in the recent Island Employee Cooperative conversion.

There are many reasons for businesses to transition ownership.  For example, a retiring business owner who has a strong working relationship with and respect for her employees may be interested in selling the business to the employees rather than an outside buyer.  Conversion offers these business owners a pathway to retirement that also protects their employees’ livelihoods.

Most business owners fail to consider conversion as a viable exit strategy.  There are multiple reasons for this, including a lack of understanding of how to successfully convert, few precedents to follow, and few consultants who can assist a business owner through the process.

To encourage more conversions, GC3 has teamed up with local non-profits Sustainable Economies Law Center and Project Equity to publish a how-to guide to inform business owners, employees, and outside consultants about how to sell a business to its employees.

If you are interested in learning more about cooperative conversions, keep an eye out for the guide in the spring of 2015.

Phil Garber is a GC3 law clerk and a second-year law student at Berkeley Law.

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