The unique succession strategy can save jobs, prevent companies from moving out of Pittsburgh and improve retirement planning. Business Transition Advisor’s Dan Zugell, Senior Vice President, and two BTA clients testified to the Pittsburgh City Council on the benefits of ESOPs.
PITTSBURGH, PA – Pittsburgh’s City Council held a Public Hearing on Jan. 29 at City Hall to listen to testimony about employee ownership—a unique strategy to save jobs, prevent companies from moving out of Pittsburgh and improve retirement outlooks for employees.
Councilwoman Erika Strassburger (D-Squirrel Hill) called the hearing to learn how employee ownership could improve lives and decrease the wealth gap in Pittsburgh.
“Employee ownership has proven to be beneficial not only for employees, but also for business owners looking to strengthen their workforce’s commitment to the company and engage in succession planning. As the nation grapples with a shrinking middle class, providing information and tools for businesses and lending institutions about employee ownership is one really easy way for policymakers to start to empower and build wealth among the workers in our society, and I look forward to doing this in our region,” Councilwoman Strassburger said.
A recent study by the National Center for Employee Ownership in California revealed employee-owned companies are more productive, have 92 percent higher household wealth, 33 percent higher wages and 53 percent longer job tenure.
“We are on the cusp of a Silver Tsunami. As the baby boomers age, 4.5 million companies will transact over the next 10 years. Yet 30 percent of business owners over the age of 55 have no succession plan. Worse, almost 60 percent of those over 55 have less than $50,000 saved for retirement. What will become of us?” Kevin McPhillips, executive director of the Pennsylvania Center for Employee Ownership (PaCEO), said. “The opportunity and the solution exist today. It’s just that no one knows about it. It’s employee ownership.”
Baby boomers currently own nearly half of the privately-held businesses in America and while some will be passed down to family members, many are expected to wind up on the auction block where they will be sold to private equity groups that move the business out of the state or country to consolidate them into existing businesses.
Employee ownership offers a solution to the auction block. The most common way, is through Employee Stock Ownership Programs (ESOPs).
Formalized by Congress in 1974, workers pay nothing to participate—the company takes out a loan to buy the shares from the previous owner or shareholders, then divides the shares among the employees. Profits from the employee-owned portion of the company are tax-free, so the tax savings can be used to pay off the loan. As co-owners of the company, employees vote on major events like mergers and spinoffs, but a management team still handles day-to-day decisions.
However ESOPs are typically appropriate for organizations with 20 or more employees. For the millions of small businesses in the country, an alternative is a cooperative business—Co-Op.
In a Cooperative Conversion, the employees of the café, hardware store, laundry service, landscaping business, boutique or drycleaners collectively buy the business from the previous owners. The business is run jointly by the new members, and the profits are shared by all. This works the same way for new business startups.
“Needless to say, having a stake in the place where you work, brings added incentive for success, improved wages, and a real future. But no one knows about it,” McPhillips said.
McPhillips proposed creating a citywide task force led by the City Council and the PaCEO that would assemble stakeholders from government, business, banking, nonprofit and advocacy, community development and education to increase awareness and create more employee owners.
The center is a volunteer collective of current and former CEO’s with experience in employee ownership looking to pay it forward. It is supported by foundations such as the W.K. Kellogg Foundation and universities like Chatham University in Pittsburgh.
There are currently more than a dozen companies in Pittsburgh that are either partially or fully employee-owned. They include, Voodoo Brewery, Joy Cone, Thermo-Twin, Silver Star Deli, KTA-Tator Engineering, Kerotest and Tech Met. Some other Pennsylvania employee-owned companies include WaWa, Dansko Shoes and Sheetz. Nationally, Publix, New Belgian Beer and 5,000 other companies have ESOPs.
Glassport-based Chemical Milling company, Tech Met, formed an ESOP in 2015 when the founder retired. In just four years since the ESOP was formed, the number of employees has nearly doubled from 23 to 42 and the value of the company more than tripled.
“The financial benefits of the ESOP for the company has enabled reinvesting and expansion into new technologies and areas of opportunity for the company, but the biggest reward has been in the employee’s commitment to the company’s growth and success,” Tech Met President Mike Vidra said. “Tech Met is not just a place where they work. Rather, the work that they do every day is a reflection of themselves and of the company that they collectively own. As the company’s president, I can’t imagine a better recipe for continued success.”
CAPTION: Pittsburgh’s City Council held a Public Hearing to listen to testimony about employee ownership with local business owners and the Pennsylvania Center for Employee Ownership on Jan. 29 at City Hall. Pictured (from l.) is Mike Vidra, CEO of TechMet; Councilwoman Deb Gross; Councilman Anthony Coghill; Charita Bush, Employee Owner at KTA-Tator; Ron Gaydos, Manager of Pittsburgh Chamber of Cooperatives; Councilwoman Erika Strassburger, Dan Zugell, Sr. VP Business Transition Advisors; Rosalie Evans, Marketing Coordinator for PaCEO; Kevin McPhillips, Executive Director/CEO PaCEO. Not pictured is Jake Voelker, COO, VooDoo Brewery. For more information, visit ownershippennsylvania.org.