Re: Fw: Worker co-ops as a structure for buy-outs

["Don Jamison" <donjam@together.net>]

Mr. Logue --

     Thanks for your thoughtful reply.  No, we don't have any examples of a
sale to a co-op using the 1042 rollover.  The sales to a co-op that Jim
Megson at ICA has told me about have involved owner financing.  Coming up
with a big chunk of change is a challenge for most working folks.  This is
where our local community loan fund and "community development" credit union
can (and seem to be willing to) play a role.  A local attorney who does a
lot of ESOPs thinks this is all great, and that there could well be a bunch
of small business owners who would be very receptive to selling to their
employees if we can figure out the means.  Maybe we'll lead the way toward
bridging the co-op/employee ownership gap, and bring employee ownership to
some of the many very small businesses out there.  This is kind of fun!

Regards from Don Jamison

-----Original Message-----
From: John Logue <jlogue@kent.edu>
To: EOsubnat@cog.kent.edu <EOsubnat@cog.kent.edu>
Date: Thursday, June 01, 2000 11:48 PM
Subject: Re: Fw: Worker co-ops as a structure for buy-outs


>Dear Don,
>
>Here's my take on why there are so many retiring owner ESOPs and so few
>co-ops.
>
>1) We have yet to find an example of a 1042 rollover sale to a co-op --
>although the law provides the same tax break for a co-op as for an ESOP.
>Peter Pitegoff didn't know of any either, when we last talked to him.  We
>need an example of how it is done to publicize.
>
>Do you have one in Vermont?  Or elsewhere??
>
>2) Some owners are concerned about co-ops being too radical.  We had one in
>a company with 5 employees insist on doing an ESOP instead for that reason.
> It made no economic sense whatsoever.
>
>3) There's a disconnect between employee ownership and the traditional
>cooperative movement.  If we bridge that -- which I see as one of the prime
>political necessities for employee ownership to develop more quickly in the
>US -- we might well see more worker co-ops.
>
>4) As for financing, you are right.  In the concrete situation, try the
>National Cooperative Bank or its development corporation.  More generally,
>we need local credit unions that do business lending to co-ops.
>
>Another possibility is to get a mutual insurance company to join in
financing.
>
>I seem to be getting back to the need for an alliance with the traditional
>cooperative organizations.
>
>5) Can the credit union you met with do business lending?
>
>6) Carla Dickstein, across the way in Maine at Coastal Enterprises, may
>have some good ideas.  She's in this discussion group.
>
>Good luck with promoting the idea of co-ops among retiring owners!
>
>John
>
>
>Greetings!  At the suggestion of Dan Bell, I am forwarding the following
>message.  Any thoughts would be much appreciated.
>
>-----Original Message-----
>From: Don Jamison <donjam@together.net>
>To: Cooperative business list <cooperative-bus@relay.doit.wisc.edu>; worker
>co-op list <workers-net@lists.services.wisc.edu>; Northwest Cooperative
>Federation <nwcf@seanet.com>
>Date: Friday, May 19, 2000 11:33 AM
>Subject: Worker co-ops as a structure for buy-outs
>
>Hello, all --
>
>     Do any of you have experience with using the worker co-op structure in
>employee buyouts?  Have any of you promoted the worker co-op an option for
>ownership succession?
>
>     Employee Stock Ownership Plans are the primary means bringing about
>worker ownership these days.  But, besides the fact that ESOPs are not
>inherently democratic (though they can be made so), they are not suitable
>for smaller businesses because of the costs of maintaining them.  I've
>heard mentioned several thresholds for ESOP affordability (some say roughly
>a dozen employees, a local lawyer who has done a bunch of ESOPs says the
>business needs to have a value of roughly $750,000) -- all are well over
>the heads of many of the businesses that are being sold here in Vermont,
>and everywhere else too...
>     A 1988 book by Daniel Bell of the Ohio Employee Ownership Center
>called Bringing Your Employees Into The Business is mostly about ESOPs, but
>also has a chapter on using the worker co-op structure for smaller
>businesses.  It points out that, just as with a sale to an ESOP, an owner
>selling to a worker co-op can defer taxes by rolling over proceeds from the
>sale into eligible securities (stocks and bonds), and that it would appear
>to be possible to sell over an extended period of time (the tax deferment
>kicks in when the business is 30% owned by the co-op -- again, just as with
>an ESOP).
>     Why hasn't this mechanism been used very much?  Why couldn't the
>worker co-op structure be used to make employee ownership as common an
>option for very small businesses as it is becoming -- through ESOPs -- for
>larger businesses?
>     I've heard two explanations.  First, it is said that turning a
>business into a worker co-op requires much more of a cultural shift than
>does an ESOP.  But I wonder -- if an owner planned for a sale to employees
>in a timely way, and allowed for an adequate transition period (either
>before the sale, or after -- with the former owner sticking around as a
>consultant), why couldn't an "ownership culture" be created in plenty of
>time -- with outside help, of course.  Second, the financing mechanism for
>an ESOP allows for a lot of leverage.  There is nothing comparable for the
>worker co-op.  In most of the cases I know of where an owner has sold to a
>co-op, owner financing has been part of the deal.  What would it take on
>the financing side to make sales to worker co-ops more common?  An equity
>fund dedicated to the purpose?  A willingness on the part of some CDFI to
>make loans for member share purchases?  What else?
>     These are not just idle questions.  I know of several business owners
>who would be interested in selling to a co-op if we could figure these
>things out -- and we haven't done much in the way of outreach.  I'll soon
>be meeting with a local credit union and a community loan fund, and could
>use your ideas! [This meeting was last week, and all are enthused!]
>
>Regards from --
>
>Don Jamison
>New Leaf Cooperative Enterprise Program
>Burlington (VT) Community Land Trust
>donjam@together.net
>802-660-0640
>
>
>
>John Logue
>Ohio Employee Ownership Center
>Kent State University
>Kent, OH 44242
>(330) 672-3028
>(330) 672-4063 fax
>jlogue@kent.edu
>http://www.kent.edu/oeoc/