Business Growth
Why Aren't There More Employee-Owned Companies?
January 24, 2024
Supporters of employee ownership see it as a win-win that benefits workers and companies alike. They point to the life changing wealth built by employee-owners and the transformational impacts of ownership culture on business performance. The research done by proponents is so positive and the success stories are so prevalent that it can be startling to learn that fewer than 1 in 200 American businesses are employee-owned. If employee ownership is so great, why aren’t there more employee-owned companies?Taking a clear-eyed look at the constraints holding our community back can be challenging, but to grow it’s necessary to be honest with ourselves. In this blog post I outline four leading theories on how to grow the number of employee-owned companies, each associated with a potential blocker:Raise AwarenessImprove Financing OptionsReduce Transaction Cost and ComplexityCreate New StructuresRaise AwarenessPerhaps the most straightforward theory about what’s limiting employee ownership is that there are a large number of people who simply don’t know about the model. Awareness is certainly low among the general public. According to estimates based on data collected from our Members and the companies we’ve listed on our Directory of Employee-Owned Companies, just one percent of the labor force works at an employee-owned company. Our Members report that most new employees come in with zero familiarity. You can easily go through high school and college without hearing the words “employee ownership.” I myself never heard about the concept during three years at a major management consulting firm. To grow the number of employee-owned companies, the key audience to reach is business owners. Based on our 630+ Members, over 90% of employee-owned companies are created through conversion, and clearly business owners can’t covert to EO if they aren’t aware that it’s an option. Is awareness low among business owners? This is much more difficult to gauge. But there are a number of efforts that propose the answer is yes and are focused on raising awareness among business owners, either by reaching out to business owners directly or by targeting trusted advisors such as accountants, lawyers, and bankers. Two prominent recent awareness campaign are the EO Equals effort spearheaded by Project Equity and the Pittsburgh Citywide Taskforce on Employee Ownership led by the Pennsylvania Center for Employee Ownership.Improve Financing OptionsA second theory sees issues related to financing as the primary barrier to growing the number of employee-owned companies. As mentioned previously, the vast majority of employee-owned companies are created through a conversion where the owner(s) of the business sell it to the employees. A large portion of these transactions require the owner to provide seller financing. The details vary from deal-to-deal, but seller financing has two main challenges:The seller doesn’t get their money right away and instead is paid out over time, often over the course of 10 years. Sellers, like all people, tend to prefer money upfront.Due to #1, the seller is still linked to the company for many years. Many business owners prefer a clean break. Employee ownership is rarely the only option considered by a selling owner. Alternatives such as private equity or selling to a competitor are often able to provide most, if not all, of the purchase price upfront. It’s easy to see why a seller might take that deal, even if they prefer the legacy preservation that comes from converting to employee ownership.There are a number of creative new initiatives looking to provide improved financing options for employee ownership. Funds such as Mosaic Capital Partners and Apis & Heritage are turning the private equity model on its head and use private capital to create employee-owned companies. Venture-backed Teamshares offers small-business owners cash upfront and then sells the company back to employees over a 10 to 20-year time period. Recent policy proposals have floated the idea of government loan guarantees for employee ownership conversions, both and the national and state level. Reduce Transaction Cost and ComplexityToday, over 95% of employee-owned companies use an Employee Stock Ownership Plan (ESOP). According to Department of Labor data, roughly 250 - 300 new ESOPs are created annually and we estimate that currently around 5,700 employee-owned companies have an ESOP. While ESOPs are popular, they also have substantial transaction cost and complexity. ESOPs are great, but they can also be expensive. The cost to create an ESOP can vary widely, but a conversion generally ranges from $80,000 to over $250,000 and ongoing administration can be $50,000 to $100,000 a year. While certainly comparable, or sometimes less, than investment banking fees involved in an alternative path, the cost of ESOPs makes them out of reach for most companies under 40 employees. One major source of cost and complexity is regulatory. The ESOP structure was codified in law along with 401ks and profit sharing plans in 1974 as part of the Employee Retirement Income Security Act (ERISA). As a result ESOPs, are overseen by the Department of Labor (DoL). The DoL ensures that ESOPs are executed in a fair manner that sets employees up for success. However, for many years, the DoL has declined to provide clear and specific guidance around their expectations for important aspects of ESOP creation and oversight, opting instead to use litigation. This has created an unfortunate level of uncertainty for ESOP professionals and for owners who want to do something good by transitioning the business to their employees.In 2023 major progress was made when The ESOP Association successfully lobbied the DoL to provide clarity on the definition of adequate consideration when it comes to ESOP valuations. This is a huge step forward in reducing regulatory uncertainty that hopefully will result in the creation of more ESOPs.An ambitious idea to further reduce the cost and complexity of the ESOP is to take it out of ERISA entirely. ESOPs are not part of ERISA for any fundamental reason, but simply because Senator Russell Long was a champion for the idea and was the Chairman of the Senate Finance Committee at the time that ERISA was being created. While these favorable circumstances led to the creation of the most successful vehicle for employee-owned companies today, they have also led to much of the burdensome regulation that could be holding our community back. Removing the ESOP from ERISA and greatly streamlining the tax benefits could unleash growth analogous to the recent success of the Employee Ownership Trust in the UK. Driven by a much simpler framework, the number of employee-owned companies in the UK increased 37% in 2022. During that same time period, the number of employee-owned companies in America remained flat at around 6,400. Perhaps we can use the UK as inspiration to simplify our structure and unleash growth.There have been a number of non-regulatory proposals to streamline the cost and complexity of the ESOP. One idea is to create a “simple ESOP” with standardized plan design that receives streamlined regulatory treatment. Another is to use technology to reduce many of the ongoing administrative costs. Create New StructuresPerhaps the most creative and high-potential idea for creating new employee-owned companies is to create new structures. While the two legacy models - ESOPs and worker cooperatives - have been very successful, there might be untapped markets waiting for new approaches. This offers huge potential grow the employee ownership community, for example by increasing adoption among smaller companies, which as we pointed out in the 2022 blog post, could expnd the market for potential employee ownership conversions by hundreds of thousands of companies. Currently there are three promising new structures being explored. The first is the Employee Ownership Trust (EOT). Inspired by the success of the UK, groups such as EOT Law, Common Trust, and Purpose Owned have been setting up EOTs in the US since 2016. EOTs generally are more flexibly than legacy structures, and they’re substantially cheaper than ESOPs. The model is still in its early stages in the US and unfortunately doesn’t yet have tax incentives, but despite that headwind today there are roughly two dozen EOTs in the US. The second alternative structure is to do employee ownership through broad-based, direct ownership of company stock. This approach is being spearheaded by Teamshares (mentioned above) and the summary of the approach is that Teamshares offers a selling owner favorable terms, and then the employees buy up to 80% of the company from Teamshares over a period of 10 to 20 years. Teamshares is off to a hot start, with over 80 companies converted since their launch in 2019.The third alternative approach would be to implement broad-based employee ownership through stock options. Stock options are most well-known for their use in Silicon Valley, but they are an extremely flexible structure that can be designed in a broad-based way. Options plans are also low-cost, typically costing a few thousands dollars to implement and administer. Options are generally not a long-term solution, but could be a great fit for new companies who want to give early employees a stake in the outcome and then later convert to another employee ownership structure such as an ESOP.Which of these four theories is the correct approach? Weighing in on the likelihood is a matter of speculation. Advocates for each approach to growing employee ownership all have passionate and persuasive arguments, but ultimately nobody knows what will work until the number of employee-owned companies in the US starts to grow. At Certified EO, we’re diligently tracking the creation of new employee-owned companies as part of our larger effort to make our Directory an up-to-date list of all employee-owned companies. When we see that number start to grow, we’ll be sure to let you know.
Read More ▶The #1 Best Practice For Building Ownership Culture
July 14, 2023
Every company wants to best engage their employees. When it comes to engagement, employee-owned companies have a secret weapon: building an ownership culture. If done correctly, an ownership culture unleashes people’s full potential by creating an environment where everyone can think and act like an owner. Companies see increased growth and profitability while employees experience a better day-to-day environment and wealth building through ownership. Our experience working with 575 employee-owned companies for over five years is that the number one best practice for building an ownership culture is cultivating a dedicated group of internal champions who are passionate about employee ownership. These champions are typically organized and empowered by the organization through the creation of an Employee Ownership Committee. This article outlines Certified EO’s perspective on creating and running a successful Employee Ownership Committee including: Getting Started With The Right People Structuring & Training Your Committee Introducing Your Committee Keeping Your Committee On Track Getting Started With The Right People What is a committee? It’s group of at least three people focused on a specific and shared goal. The key in the beginning is to start small. It’s better to have fewer people with higher average engagement. One way to find your initial members is to reach out to your workforce to let them know that you are starting an Employee Ownership Committee and provide easy ways for them to apply. It’s also fine to hand select people who you feel are passionate about employee ownership. Generally it’s nice to have your committee broadly represent the company. It’s better to have people from different levels within the company, and if your workforce is distributed across multiple locations, you might consider having a committee member from each location. But you have to start somewhere. Our recommendation is to focus on finding at least three people who truly understand employee ownership, and then build from there over time. Structuring & Training Your Committee In our experience, successful committees have leadership buy-in but are led by employee-owners. Once your committee is established, you’ll want to create a committee charter and by-laws to align on goals and expectations. Typically, this involves aligning on a mission statement, deciding on term limits, clarifying responsibilities of committee members, and defining leadership roles such as chair and vice chair. The consensus among our Members is that it’s best for the chair to come from the rank and file of the company, but it’s okay for the inaugural chair to be a member of management or leadership to ensure the committee gets off to a strong start. Your committee members should feel confident answering questions about your employee ownership. Your first few meetings as a committee might need to be spent entirely on educating the committee members, but this will be a worthwhile investment because the more knowledgeable your committee, the more successful they will be at building your ownership culture. Providing your committee with a budget will multiply their impact. Even though the committee should be run mostly by employee-owners, working with leadership will be key to ensure alignment and resource availability. Many Employee Ownership Committees have an executive sponsor who can advocate for the committee’s budget each year. Introducing Your Committee Your committee should be visible and accessible. Be sure to introduce the committee so employees know who to reach out to for questions. The committee announcement is also a good time to let your employee--owners know that they can expect more regular communication about employee-ownership. This is also a great time to remind your employees that, as owners, everyone at your company has a stake in the outcome. This way the committee announcement reinforces a key message about employee ownership. To make the committee accessible, we recommend creating a committee-specific email that employees can email with questions that anyone from the committee can answer. Many of our Members have seen great results from setting up office hours, where one or multiple committee members are available at a regular time (in-person or virtually) so that employee-owners can drop-in with questions. Even if nobody comes by, it’s nice for people to feel supported. Keeping Your Committee On Track Starting a committee is just the beginning of building a strong ownership culture. Maintaining a successful committee over time can be challenging. It’s important to keep things fresh. Rotate themes, responsibilities and committee roles so that your committee members stay interested and engaged. Consider adding new members annually, but always be sure to prioritize passion. Creating an annual communication plan is another way to keep your committee on track. Align on a theme for the year, decide on the right number of touchpoints, and identify who is responsible for each. A common pitfall is for the Employee Ownership Committee to become the party planning committee. An annual event is a great idea, but make sure your committee is focused on building your ownership culture throughout the year. The goals of your committee should change over time with your company and your employee-owners. In the beginning, your committee might be focused on building a strong foundation of EO basics. But over time the needs might evolve as understanding grows. At Certified Employee-Owned, we help guide our Members through this evolution while providing them the tools and playbook they need to share their ownership story. You can learn more about our work here.
Read More ▶Which States & Industries Are Best For Employee Ownership?
May 3, 2023
Everyone involved in employee ownership has a responsibility to strengthen our community. Advocates, service providers, trade organizations, businesses, and employee-owners all benefit when our ranks increase. But to grow successfully, we must understand where employee ownership thrives.In this article, we combine our certification data with data from the US Census Bureau to analyze where there are a surprisingly large number of employee-owned companies. Looking at company size, industry, and headquarters location, we find insights that will help our community grow:Manufacturing, Professional Services, and Construction are the top industries for EO. Combined they have almost 600,000 non-EO firms, which means focusing on these sectors seems like the biggest growth opportunity for employee ownership. 100 - 500 employees looks like a sweet spot for employee ownership. It also represents a large growth opportunity with roughly 93,000 non-EO firms and over 18 million employees.10 - 20 employees has far fewer employee-owned firms than baseline, likely due to limits of current structures. With over 640,000 non-EO firms it represents a big opportunity to grow firm numbers (less so employee numbers), but this requires new EO structures such as Direct Share Ownership.Vermont, North Dakota, Maine, Iowa, Hawaii are the top states for EO by concentration. Together these states have around 67,000 non-EO firms with more than five employees, which makes it a smaller opportunity in terms of raw numbers. But efforts in these states will benefit from dense networks of peer firms that can advocate for employee ownership.California, Pennsylvania, and Ohio are the largest states (by number of firms) with an above-baseline level of employee-owned companies. This represents an alternative geographical approach that might yield more potential conversions because combined these three states have over non-EO 480,000 businesses.Details on our methodology and additional findings are below.Data on Employee-Owned and US CompaniesTo understand where employee ownership thrives, we must have a detailed understanding of both the number of employee-owned companies and the number of all US businesses. Looking at only the raw number of employee-owned companies can be misleading because it ignores baseline concentration. For example, if 5% of employee-owned companies were in a particular state, we would interpret that differently if 10% or 1% of all businesses were in that state.Data on employee-owned companies comes from our Directory of Employee-Owned Companies, an up-to-date list of all businesses that meet our standards of significant, broad-based employee ownership. We pulled the numbers on March 1, 2023 and in some cases we supplemented our information with 3rd party sources. Data on all US businesses come from the Census Bureau’s Statistics of US Businesses (SUSB). At the time of our analysis the most recently available series was the 2019 data set. Employee-Owned Companies By Ownership StructureThere are a number of different ways a company can be employee-owned. The following table breaks down the number of employee-owned companies by ownership structure:By far, the most common structure is the Employee Stock Ownership Plan (ESOP), accounting for roughly 90% of employee-owned companies. Worker cooperatives are the second most common structure, followed by a few emerging structures that are small but have the potential for rapid growth. Direct Share Ownership in particular is showing promise as the best structure for companies with fewer than 30 people, including newly formed businesses. Due to the emerging nature of these structures, our numbers are best thought of as lower bounds. All told there are at least 6,416 employee-owned companies in America. Employee-Owned Companies By SizeUsing information collected during our certification process to project the number of employees at every employee-owned company, we can analyze the size distribution:It’s important to note that the distributions are censored to exclude firms with fewer than 10 employees. The purpose is to focus on companies that have a substantial number of non-founder employees, which is the relevant comparison group for employee ownership. The chart clearly shows that employee-owned companies skew larger than baseline. There are fewer in the 10 - 20 size bucket, with 48.9% of all firms in this range but just 12.7% of employee-owned companies. The two distributions are in the same ballpark for 20 - 100 employees. But all buckets greater than 100 employees have far more employee-owned companies than baseline. Roughly a third (32%) of employee-owned companies are in the 100 - 500 range, 4.4x the baseline of 7.2%. We see a similar trend in the 500 - 1,000, 1,000 - 2,500 and 2,500+ categories. The simplest explanation for the skewed distribution comes from the well-known fact that ESOPs generally don’t work for small companies. The cutoff varies depending on who you ask, but is broadly stated to be between 20 and 40 people. Given that 90% of employee-owned companies have an ESOP, that would explain the skew. There are two implications for growing employee ownership. First, if you’re doing ESOPs, focus on firms with at least 100 people. The large difference in concentrations leads us to think that the 100 - 500 size range in particularly good. According to the SUSB this range has 94,957 total firms with 18,612,620 employees, which makes it a sizeable growth opportunity.Second, there is probably a huge opportunity to create and promote structures that work for firms too small for an ESOP. The 10 - 20 size range has 640,827 firms in the 2019 SUSB, but we estimate just 712 employee-owned companies. In my opinion, Direct Share Ownership models using stock options are the most promising opportunity here.Employee-Owned Companies By IndustryNext we can use the North American Industry Classification Systems (NAICS) to look at the distribution of employee-owned companies by industry:Three data notes. First, while NAICS is included in the DOL 5500 data for ESOPs, it is extremely messy. We have gone through and recategorized the industry information for all 6,300+ companies in our database. Second, we exclude the “Finance and Insurance” category for this analysis because there are a large number of community banks with a small ESOP (below our 30% threshold) that we are still cleaning. Finally, again we exclude small firms, this time those with fewer than five employees.Three sectors, Manufacturing, Professional Services, and Construction, account for nearly half of all employee-owned companies (48.7% combined). All three sectors far exceed the baseline distribution, but Manufacturing in particular stands out with 2.7x the expected concentration. These industries likely represent a substantial growth opportunity for our community. In the 2019 SUSB there are 144,201 Manufacturing firms, 213,955 Professional Service firms, and 242,885 Construction firms. Converting and additional 1% of each of these industries would roughly double the number of employee-owned companies. The importance of the baseline analysis are clear when looking at Retail Trade. On an absolute basis this is the 5th largest sector for employee-owned companies. But the concentration is 48% lower than baseline. There are three sectors that jump out as particularly challenging for employee ownership. Health Care, Accommodation & Food Services, and Other Services (details on this category can be found here). While there are employee-owned companies in each of these sectors, they all lag the baseline substantially. These industries account for 39.6% of all businesses but just 3.4% of all employee-owned companies. There are two ways to interpret this lag. There might be something about these sectors that makes it difficult to be employee-owned, or these might be industries where there are missed opportunities. A good starting point might be to connect with the employee-owned companies who do operate in this sector to get their thoughts on what is driving this trend. Employee-Owned Companies By StateWe can use the headquarters location of each firm to look at concentration by State. Again we focus on firms with at least 5 employees:California, New York, and Texas are the top three states for total number of employee-owned companies with 13.4%, 5.5%, and 5.2% respectively. But again the baseline analysis provides a more nuanced picture. Both New York and Texas have a lower share of employee-owned companies than expected given their share of all businesses. The implication is that these states might not actually be as opportune for employee ownership as the raw numbers imply.In terms of concentration relative to baseline, the top states for employee ownership are: Vermont (3.0x baseline)North Dakota (2.5x baseline)Maine (2.3x baseline)Iowa (2.2x baseline)Hawaii (2.0x baseline)Together these states account for 6% of all employee-owned companies but just 2.7% of all companies. Together they represent 67,348 total firms with more than five employees, many of which will have peers or neighbors that are employee-owned. Another approach to geography is to look at the largest states with an above-baseline level of employee-owned companies. This would suggest California (1.1x baseline), Pennsylvania (1.1x baseline), and Ohio (1.4x baseline) are the places to focus. This approach might yield more conversions because these three states have over 480,000 businesses with at least 5 employees.The states with the lowest number of employee-owned firms relative to baseline are Delaware (18%), Rhode Island (44%), Nevada (45%), New Jersey (45%), and Florida (48%). Again the interpretation here is a complex. Perhaps there is something about these states that discourages employee ownership, or perhaps these states simply represent opportunities to bring employee ownership up to par. The only way to know for sure is by contacting some of the 267,410 businesses in these states to see how many are interested in exploring employee ownership.
Read More ▶We Must Build an Employee-Owned Economy
December 6, 2022
When it comes to work, America is at a crossroads. Good jobs are getting harder to find as roles are increasingly contracted, gigged, and automated. Companies are being gobbled up through consolidation or closing down as the baby boom generation retires. On their own these trends have made work more precarious for millions. Together they are undermining the foundational premise of America as a land of opportunity. While momentum leads to a future of work that is ever more precarious, it is not too late to change course. We can create shared prosperity by building an employee-owned economy. Today’s challenges are decades in the making. The period just after World War 2 marks a high-point for job security. Large firms like General Motors and IBM sought dedicated employees and offered them stable careers. When companies did well, people did well. But globalization, offshoring, and technological change have broken that connection. Productivity and wage growth moved in lockstep from 1948 to 1978, but since then they have decoupled with productivity growing four times faster than average compensation. Companies are getting more valuable, but fewer of those gains are being passed on to workers. The rise of the gig economy on the heels of the financial crisis has accelerated this trend. If you work for Uber you might be a programmer with generous compensation that includes stock options, but more likely you are a driver, ping-ponging around town for the lowest price the algorithm thinks you’ll take while covering expenses out of your own pocket. The gig economy has exploded since 2009 with 23M Amricans (9% of adults) working a gig job in 2021. As more jobs are demoted to gigs, millions of Americans will find the skills they have spent years honing are no longer enough to make ends meet. What will these people fall back on? For many there is no safety net at all. According to the Federal Reserve’s Survey of Consumer Finances, in 2019 13 million households had negative net worth. And for others, a small net might be there but they can’t afford the fall. Just 4 in 10 Americans have sufficient savings to cover an unforeseen expense of $1,000. Looking at fifty years of increasingly precarious work combined with a snapshot of Americans’ finances, one thing is clear: millions could soon find themselves with no financial or human capital. This is a major concern for every single American. Since our country’s founding, leading thinkers have recognized that a healthy republic is rooted in the broad-based ownership of property. Founding Fathers such as Thomas Jefferson saw the small landowner as the bedrock of our democracy because owning land made them independent and active citizens. This was also the guiding principle behind the Homestead Act of 1862, which created 4 million family farms. These ideas and policies focused on land because in the agricultural economy of the 1700s and 1800s, farmland was the most important asset. Today, the most important asset is business ownership. Owning a business is how great fortunes are built, just look at Elon Musk or Bill Gates. According to the 2019 Survey of Consumer Finances, business ownership is the largest asset class, with public and private companies accounting for over $32T of wealth, much more than home equity ($19T). And it’s not just the household names who own stock. Among the Top 1%, the largest asset is ownership of private businesses, accounting for 38% of their portfolio with average value of $10.8 million, and the second largest asset is public company stock, accounting for 18% of their portfolio with average value of $5.1 million. Yet, the bottom 50% of households by wealth hold a combined 0.25% of all business ownership, just $1,347 per household. Securing the future of our democracy means expanding the opportunity of business ownership. Thankfully we have a solution that has been tested and proven for 50 years: broad-based employee ownership. The idea that employees should hold some stock in their employer has a long history, but it got meaningful traction with the creation of the Employee Stock Ownership Plan (ESOP) in 1974. Today, there are over 5,600 employee-owned companies operating in every industry and state. They range in size from 5 people to over 220,000 and employ over 2.5 million people. Employee-owned companies like Publix Supermarkets, Wawa, and Bob’s Red Mill represent the blueprint for modernizing the American dream. Employee ownership changes the relationship between the company and employee by ensuring that everyone who works at a company has reasonable access to the benefits of ownership. Making employees into employee-owners helps them build wealth. A 2021 study by the National Center for Employee Ownership found the average employee-owner had roughly $67,000 more in retirement wealth, compared to workers at non-employee-owned firms. And this can scale. Our research calculates that if every American company became employee-owned the net worth of the bottom 50% by roughly $81,000 on average. Employee ownership also benefits workers the first day they walk in the door by creating a better working environment. Broad-based ownership aligns everyone around a unified goal and creates a shared purpose. Alignment increases commitment, trust, and accountability. This leads to stronger relationships, closer connections with coworkers, and increased job stability. Finally, employee ownership makes companies stronger. Decades of research show that broad-based ownership combined with high-involvement management systems increases key performance indicators like productivity, revenue growth, and employee engagement. Even large private equity firms are beginning to see employee ownership as a way to supercharge engagement and increase business performance. Taken together, the evidence on wealth building, culture, and company performance show employee ownership is a win-win-win: it’s good for workers, good for business and good for our country. Transitioning to an employee-owned economy would create shared prosperity that benefits all Americans, but we must act now. A start would be converting a portion of the 2.3 million companies owned by Baby Boomers, the youngest of whom will hit 65 in 2029. But we must think bigger than just business conversion. An employee-owned economy represents an entirely new way to view work and a new relationship between the company and employee. We must make it easy for people who understand this difference to find employee-owned companies. We must coordinate and amplify the voice of our movement to share the advantages of employee ownership far and wide. And we must set a standard that people know and trust to defend against the inevitable pretenders. The need for broad-based business ownership has never been greater. The time has come to build an employee-owned economy.
Read More ▶How Many Businesses Are There in America and What Does it Mean for Employee Ownership?
July 14, 2022
Building an employee-owned economy can create a more prosperous future. Employee-owners benefit from higher retirement savings and increased job security, while employee-owned companies anchor jobs in local communities. That future begins by increasing the number of employee-owners. Some companies start out as employee-owned, but the vast majority convert after operating for some time under a different ownership structure. Since launching Certified Employee-Owned in 2017, we have spoken to over 1,000 employee-owned companies. Fewer than 10 began as employee-owned. It’s difficult to generalize, but based on our experience we think that over 95% of employee-owned companies were created through conversion. The importance of conversion means that advocates of employee ownership need a good understanding of the broader business landscape. The best source on the size and number of American businesses is the Census Bureau’s Statistics of U.S. Businesses (SUSB). In this article we will use the SUSB to analyze the business landscape and draw implications for the employee ownership community. Our key takeaways include: The number of companies large enough for employee ownership has been steadily rising since 2011 and now stands at just over 1.3 million. Most Americans work at large companies, but most US businesses are small. To drive a dramatic increase in the number of employee-owners, the employee ownership community needs a strategy for converting businesses with over 500 employees. Three sectors represent major opportunities for growing employee ownership: Health Care & Social Assistance; Accommodation & Food Service; Professional, and Scientific & Technical Services. Total Number of American Businesses According to the U.S. Small Business Administration, there are 33.2 million American businesses in 2023, but there’s a catch. That number is skewed because it counts every single corporation, including those setup by independent contractors and even shell companies created solely to hold an asset. There’s no bright line between a legal corporation and what a normal person would consider a business, but a reasonable breakpoint might be having at least one paid employee. That is the line used by the SUSB, and in 2019 there were 6,102,412 businesses meeting this criterion. The concept of employee ownership only starts to have real meaning when a company includes multiple non-founder employees. While there are exceptions, most companies exploring employee ownership have at least 10 total employees. A company of this size will generally have the resources that enable conversion while also seeing benefits from a formal employee ownership structure. Using the SUSB’s size categories, we found that in 2019 there were 1,311,698 businesses with at least 10 employees. We estimate that there are roughly 6,000 employee-owned companies in America (our Directory provides an up-to-date list of all the ones we know about). That means that employee-owned companies are just 0.5% of the total number of companies with at least 10 employees. The chart above shows how the number of companies with at least 10 employees has changed since 1999. It dipped slightly at the turn of the millenium following the dotcom crash, increased steadily in the early 2000s before dipping again after 2006 and plunging after the 2008 financial crisis. After hitting a bottom of 1,173,373 in 2011, the number of companies with at least 10 employees has seen year-over-year increases every year through 2019. For the employee ownership community, it’s encouraging to see that the number of companies that are large enough to consider employee ownership has been steadily rising for almost a decade. Size Distribution Analyzing the SUSB size categories, we see that US businesses have a skewed distribution of size. While most firms are small, most people work at large employers. Roughly 30% of private-sector workers work at the 1,112 firms with over 10,000 employees, while the 4,790,714 businesses with fewer than 10 employees account for less than 10% of private sector employment. In other words, firms large enough to support an employee ownership program account for over 90% of the private-sector workforce. The skewed distribution of firm size presents a tradeoff for employee ownership advocates: do we focus on the number of companies that are employee-owned or the number of people working at employee-owned companies? If we are interested in maximizing the number of employee-owned firms, we’re going to have the most success focusing on small companies. But if we are interested in maximizing the total number of employee-owners, the emphasis should be on the big companies. This tradeoff is mirrored in the change in firms and employment from 1999 to 2019. The bulk of firm and employment growth was driven by large firms. Over this time period, the total number of firms with at least 10 employees increased 9% and employment at these companies increased 22%. Almost all of the increase in the number of firms was driven by companies with less than 500 employees, while 75% of the change in employment was driven by firms with 500 or more employees. The trend is clear: while there are more companies now than 20 years ago, the bulk of new private sector employment over the past two decades has been due to growth of larger firms. Industry Distribution Finally, we use the SUSB industry categroies to analyze changes in employment and total number of firms by industry. It’s worth noting that all categories here are based on the North American Industrial Classification System (NAICS) and that the SUSB excludes railroad employees, agricultural production employees, and most government employees. The following chart shows employment by Industry for 2019 for all firms with at least 10 employees. Below is a table with both employment and number of firms by industry. Note that the number of firms doesn’t align exactly with the previous section, likely because some firms operate in multiple industries. The four largest industries by employment - Healthcare & Social Assistance, Retail Trade, Accommodation & Food Services, and Admin, Support & Waste Management - are all part of the service sector. Manufacturing, once the backbone of the American economy, is now the fifth largest sector by employment. Construction and Professional, Scientific & Technical Services, and Other Services (excluding Public Admin) are notable for having a high number of firms of a smaller average size. Finally we look at how the number of firms and employment by industry have changed over the last two decades. This chart above shows the percent change from 1999 to 2019. Dramatic increases of over 50% employment occured in many service sectors including: Accommodation & Food Services; Educational Services; Health Care & Social Assistance; Arts, Entertainment & Recreation, Professional, and Scientific & Technical Services; and Admin, Support & Waste Management. Several industries show signs of consolidation with increasing employment and decreasing number of firms: Information; Finance & Insurance; Retail Trade; and Wholesale Trade. Finally, the dramatic decline in manufacturing can be seen in a 26% decrease in the number of firms and 28% decrease in total employment. Combining current firm size and employment with growth trends can help identify large and growing industries which would be good to target for the expansion of employee ownership. Based on the above charts, Health Care & Social Assistance; Accommodation & Food Service; and Professional, Scientific & Technical Services merit further investigation.
Read More ▶10 Reasons Business Owners Have Transitioned to Employee Ownership
January 20, 2022
Since launching Certified Employee-Owned in 2017, I’ve spoken to over 1,000 employee-owned companies. These conversations are the highlight of my day. I love hearing stories about entrepreneurs starting companies and I'm always curious to learn how founders have come across employee ownership. Spending so much time talking to entrepreneurs and leaders in the employee ownership space has shown me a few interesting trends. Most notably, the vast majority of companies I have spoken with did not start out as employee-owned, but transitioned after many years in business. I haven’t kept exact numbers, but I would estimate this is the case with over 95% of the companies I know. While there are as many reasons for conversion as there are founders, there are a few trends that stick out. Here are 10 reasons that stand out as to why business owners have made the transition to employee ownership, along with a paraphrased story for each one that captures the essence of the journey: 1. Keeping it in the family“ Starting this company was my dad’s greatest accomplishment and growing the business has been my life’s work. But none of my kids were interested in taking the reins. I know what can happen when a company is taken over by a strategic or private equity and I didn’t have the heart to do that to people I’ve known my entire life. Transitioning to 100% employee-owned was my way of keeping the company in the family.” 2. Giving our owners partial liquidity“ To me going 30% employee-owned was a no-brainer. I got some liquidity, and now my people have a direct stake in the action, so the company is doing even better. As a bonus I have a built in succession plan. I don’t have any plans to step back, but you never know what will happen and it’s great to have that option.” 3. Continuity through succession“ This company was her baby, she wasn't going to sell it. She really liked the idea of leaving the company in the hands of the employees, because the alternative was going the way of other companies that she had seen bought out and changed completely.” 4. Staying an anchor in our community “Our founder was deeply concerned with what would happen to the local economy. He knew that if he sold to a strategic buyer, they would move the headquarters and maybe even the factory. We’re the biggest employer in the area so that would have devastated the town. By transitioning to EO our founder kept us local and kept the town alive.” 5. Start-up business sharing equity “A lot of start-ups share equity with talented employees in exchange for under-market wages, but my vision for sharing equity in the company was different. I wanted all my dedicated employees to have skin in the game from the beginning. The set formulas for sharing equity with only early employees didn’t work for me.” 6. Aligning employees at a time of growth “After years of start-up hustle, we were finally poised to take our company to the next level, and employees were going to be critical to our growth. We wanted to align the interests of owners and employees by giving employees a stake and a better understanding of what makes our company tick.” 7. Finding alternatives to private equity“ Private equity started knocking at our door and it made us think critically about the future of our company. We believe in our mission, our people, and the services we provide and are not willing to compromise those to get the highest dollar. Some of our shareholders were pressuring us for liquidity, and we needed to figure out how to provide that without overburdening the company with debt.” 8. Mission-driven at our core “We have been mission-first since day one. I started the business to help us transition to a sustainable future. Growing the company and making money has always been an outcome of our success, not a goal. I transitioned us to employee-owned to lock that mission-focus into our DNA. I want everyone here to have a stake in our future and to feel as bought-in as I feel as the founder.” 9. Feeling alone at the top “I did not expect to become a solo entrepreneur running a company by myself. I always wanted to do this as a team. I don’t have a co-founder anymore, and I want everyone to be more bought in and engaged as co-owners of this business.” 10. Democracy at work“ We wanted to be a worker cooperative from the start. It is the only corporate structure that aligns with our values - that each worker should have equal say in the governance of the company. We are in this together and that should be reflected in every aspect of our structure and culture. ”Are you a business owner looking to learn more about employee ownership? A great place to start is our overview.
Read More ▶Featured Articles
Three Inspiring Examples of Employee-Owners Building Life-Changing Wealth
Read More ▶
The Simple Concept That Turns Employee-Owners Into Millionaires
Read More ▶
The Top 25 Cities for Employee Ownership 2023
Read More ▶Ready to be Certified?
Take advantage of all the benefits of becoming a Certified Employee-Owned member.
Schedule a Call