Employee Ownership Capital

SCP has partnered with a major Canadian institutional investor to finance Employee Stock Ownership Plan (ESOP) conversions.

Our objective is to enable large institutional investors, such as pension funds and foundation endowments, to help grow employee ownership by shifting significant capital into ESOP conversions. This represents one of the greatest opportunities we’ve seen to build wealth and create economic opportunity at scale.
 
We are currently seeking opportunities to support companies in an ESOP conversion. Please e-mail us confidentially here to discuss.
 

ESOPs are great for owners, employees, communities and investors

Converting a company to employee ownership through an ESOP is a proven and established tool  in the United States with compelling tax advantages for the owners and the company, and a robust ecosystem of service providers.

 

Owners are able to exit at a fair market price while rewarding employees who helped build the company. It secures the owner’s legacy as a builder and community leader because it keeps jobs in their local community and enables them to stay involved to ensure the company’s long-term success. (For more, please read about New Belgium BrewingLitehouse Inc. and Clif Bar).

 

Investors experience lower financial risk for greater societal reward because ESOP-owned companies tend to default less often, grow faster and experience lower turnover than their peers. These companies are managed similarly to traditional companies, so are easy for investors to understand and benefit from significant tax advantages in the United States, leading to better cash flow.

 

Employees don’t need to pay for their shares, making the ESOP structure a great wealth-building tool for people who otherwise can’t afford ownership.  Currently 14 million American employees are covered by ESOP structures with a total value of $1.4 trillion. This works out to a retirement benefit of $100K per employee.  Employee-owners have a 92% higher net worth than non employee-owners. For investors looking for both returns and positive social outcomes, these proven results make ESOPs a particularly attractive investment.

ESOPs are under-utilized due to a lack of capital

ESOPs generally have only two sources of funding: banks and the owners themselves. Because of this, owners are able to take a lot less money off the table than they would in a traditional sale transaction.  Only the owners most committed to employee ownership are willing to make that sacrifice.

 

There is a lot of capital that specializes in funding successions, such as private equity funds and mezzanine debt funds, but they have the wrong set of incentives for providing funding for this market.  Their return is maximized if the companies they invest in are re-sold within a short time, which is a fundamental mismatch with the ESOP model. ESOPs are a long-term investment where returns come from having loans paid back and not from being sold again in the future.  As a result, very little of this money flows to ESOP conversions.

 

Our research and modeling show that, if structured properly, additional funding for ESOPs can provide better exits for owners and produce returns that meet the thresholds for institutional investors such as pension funds and foundations.  Better exits would drive more owners to convert their companies to ESOPs.

 

So, how do you bridge the funding gap between these institutional investors and owners who want a great outcome for their employees and communities?  That’s what we’re working on.

Solving this could be one of the fastest, most scalable ways to build middle-class wealth

Baby boomers own about two-thirds of North American businesses, which means a historic level of capital will change hands over the next 5 to 10 years, as many as 2 million businesses representing 24.7 million employees.

 

A credible alternative for those business owners that pays them a fair price for their businesses while protecting the legacies they’ve built could convert a much higher percentage of these to employee ownership. Better funding for ESOP conversions would create a massive new source of wealth to be divided amongst many more people. Billions of dollars could flow to employee conversions, created twice as much wealth over the next 10 years. And, it’s entirely measurable. Anyone investing in ESOP conversions will know exactly how much wealth their capital has created for people. It’s one of the most exciting opportunities we’ve worked on at SCP.

SCP is well positioned to take on this challenge

SCP was founded 18 years ago to design projects that create economic opportunity.  Our approach is to understand entire systems, and to figure out how incentives work and what outcomes they drive.  Then, we create new models with different incentives to drive different outcomes. In the succession capital system, a new model with different incentives is exactly what is needed.

 

As an independently funded non-profit, we have the flexibility to incubate and demonstrate a new kind of fund manager with incentives that are perfectly aligned with the ESOP market. Our approach is to tie the fund’s returns to the wealth we generate for employees, which itself is tied to the repayment of investor capital. This creates a fundamental alignment with employees, previous ownership, the fund manager and the investor that is very rarely seen. As a non-profit, we charge below-market fees to ensure the demonstration is a success and to prove that ESOPs can be a great investment for large institutions.

 

We also have a team with the right private sector experience to deliver results. Collectively, the SCP team has invested in private equity on behalf of an institutional investor, founded two companies with over $250M in revenue, grown another one to over $250M in revenue, consulted with world-leading strategy consulting companies, invested tens of millions of dollars of our own funds and taken a company public with a $1B valuation. Our partners will also be making significant co-investments.

 

As a result of our commitment and experience, we are a great partner for entrepreneurial owners considering an ESOP exit strategy, and will be a trusted manager for institutions. We look forward to discussing our approach with any institutions, foundations, aligned organizations or advisors who think we may be a good partner or are otherwise exploring the employee ownership market.

 

We are currently seeking opportunities to support companies in an ESOP conversion. Please e-mail us confidentially here to discuss.

But what about Canada?

We’d love to do this in Canada! Unfortunately, the ESOP structure that optimizes this process doesn’t yet exist in Canada. There are alternatives and work-arounds, but they’re much less compelling, and offer a much slower path to scale. This is evidenced by Canada having a tiny fraction of the employee-owned companies that exist in the United States. We will be working to try to get an ESOP structure established in Canada.

For more information on ESOPs, please visit:

National Center for Employee Ownership

Fifty by Fifty (an advocacy group for employee ownership)

The ESOP Association