Is Employee Ownership Having a Moment?

Formal employee ownership structures can be traced back to 19th-century worker cooperatives and have taken on numerous forms over the centuries, with varied levels of adoption and success. Co-ops are alive and well in today’s corporate world as they have evolved with the times. Since the 1974 omnibus ERISA legislation codified employee stock ownership plans (ESOPs), which is likely the form of employee ownership you probably hear about most, awareness and support, have accelerated among the aging US population, in government at both the federal and state levels and within the private equity community. And with the more recent rise of employee ownership trusts (EOTs) and other structures, employee ownership is having a moment in 2024 that should last for the foreseeable future.

A Diverse Array of Employee Ownership Models

The market response to this building momentum includes various options for employee ownership, each with a unique structure and specialized benefits that cater to different business needs and preferences.

• Employee stock ownership plans. The concept of employee ownership is universally supported, and ESOPs—essentially, retirement plans that invest in the stock of the sponsoring employer—offer a variety of benefits that can satisfy the needs of most business owners. Adding to their popularity, ESOPs provide significant tax advantages for business owners and their companies, enhance employee engagement, and serve as effective succession planning tools.
• Employee ownership trusts. Set up to hold a controlling stake in a company on behalf of its employees, EOTs have become a popular option in Europe, and adoption in the US continues to increase. These trusts ensure long-term employee ownership, align employee interests with company performance, and provide stability by discouraging hostile takeovers. By forgoing many of the tax benefits ESOPs provide, they can offer certain businesses a less expensive, easier alternative.

• Worker cooperatives. Worker co-ops are businesses owned and self-managed by their workers, each of whom has an equal vote in decision-making processes—making them more common in smaller companies. This model promotes democratic management, typically improves job satisfaction and retention, and often creates a focus on social and community-oriented goals.

Employee Ownership for the Baby Boomer Generation

Regardless of the chosen structure, employee ownership is an adaptable and appealing option for many companies and their owners, including those of the baby boomer generation. And with nearly all of the baby boomers reaching the age to sell their business and/or exit the workforce, the long–awaited silver tsunami is upon us. This generation generally enjoyed better economic conditions compared with their predecessors in the silent and greatest generations, which led to greater opportunity for business ownership—and now a greater need to sell those businesses.

Other factors, too, have motivated baby boomers to consider employee ownership, including their desire to remain involved in the company for longer—often beyond their ownership period. Furthermore, living during a time of significant economic growth and social change has left boomers more inclined to consider their employees as the next owners of the business. Add to that the pent-up demand after the COVID-driven M&A slowdown of 2020 and 2021, and you have an economic landscape brimming with business owners in need of options for their future.

Government Support for Employee Ownership

A move toward employee ownership requires government support through legislative efforts, financial support through grants and tax credits, and various incentives that can encourage business owners in that direction. The pandemic accelerated many such efforts in support of employee ownership, and states have followed the federal government in making employee ownership more accessible for business owners. Highlights include the following:

• SECURE 2.0 Act of 2022. This federal legislation included provisions that make retirement plans, including ESOPs, more attractive for both businesses and employees. The act increased the potential amount of employee contributions to their retirement plans, for example, and expanded tax credits for certain types of contributions, further incentivizing companies to consider ESOPs.
• State Small Business Credit Initiative (SSBCI). Created by the US Treasury Department, SSBCI is a loan program designed to provide financial assistance to small businesses. Following the pandemic, the program was expanded to specifically include funding for employee ownership transitions, giving states a way to provide loans or other forms of capital to companies looking to sell to their employees through an ESOP or a similar structure.
• State tax credit and reimbursement programs. Recognizing the benefits of employee ownership, many states have implemented their own programs to encourage it. A leading example is Colorado, which in 2021 started offering a tax credit of up to $150,000 to offset the costs associated with creating an ESOP. Other states offer similar tax credits, grants, or reimbursement programs to help businesses navigate the process of transitioning to employee ownership.
• Proposed promotion and expansion of the Private Employee Ownership Act. To make the ESOP a more viable option for a wider range of businesses, this proposed federal legislation aims to further improve ESOP functionality, particularly for S corporations.
• Improvements to the Main Street Employee Ownership Act. Recent efforts to improve this legislation aim to streamline access to Small Business Administration (SBA) loans for companies considering employee ownership transitions. Facilitating access to capital can make it easier for businesses to finance the purchase of shares by their employees through an ESOP or another ownership structure.

The Role of Private Equity in Employee Ownership

Another important factor in the employee ownership trend has been growing support from the broader market, especially the private equity community. A small but powerful group of private equity firms, which have been characterized historically as a group at odds with employees, have thrown their weight behind the effort to expand ownership at their portfolio companies beyond just the executive team. Led by the original private equity firm, KKR, these firms have increased awareness of employee ownership and continue to push the employee ownership concept into the mainstream. Many have made their support public through the nonprofit organization Ownership Works, whose mission is to provide all employees with an opportunity to build wealth at work.

Building Employee Ownership Momentum

Employee ownership creates wealth for all levels of employees. Seeing significant momentum behind efforts to close the wealth gap, as well as plenty of demand and regulatory support, we expect the employee ownership moment to last well into the future.

At PCE, we are committed to staying at the forefront of these developments, providing expert guidance and support to businesses considering employee ownership. If you are exploring employee ownership as a potential strategy for your company, our team is here to help you navigate the complexities and achieve your goals. Contact us to learn more about how employee ownership can benefit your business and employees.