Owner transfers business to her employees: The Improve Group, a worker-owned evaluation consulting cooperative

Key takeaways

• Owner wanted the transfer to ensure stability, legacy, and respect for her employees.
• Transferring to a worker cooperative involves process and time.

A business succession and transition (BST) case study

Storyteller: Seller
Business location: Metro
Industry: Professional services
Business type (storyteller's view): Woman-owned

On this page

• Planning for transition
• Valuing employee ownership
• Structuring the employee ownership model
• The transition
• Challenges with transition
• Financing the purchase
• The emotional toll
• The impacts of employee ownership
• Life after ownership
   

Planning for transition

In 2019, Leah Goldstein Moses was approaching her 20th anniversary at Improve Group. While she was proud of what she had built there, she also felt burnt out. In a lot of ways, she felt as though she had reached the extent of what she could do with the business. Maybe, she thought, it was time for a new chapter in her life. Coming to terms with these feelings, Leah began to plan for her exit. However, Leah wasn’t looking for just any typical business transition; she wanted to exit the company while maintaining her legacy and honoring what she had built there.

Leah approached transition with specific goals: stability, legacy, and respect for her employees. While she wanted to get a fair price for her business, she was not necessarily looking for the highest price possible. In Leah’s opinion, this set her apart from a lot of sellers. She didn’t need to close the deal as quickly and efficiently as possible. Instead, she was comfortable with taking it slow and figuring out the details as she went. Ultimately, she wanted to take her time with the transition to ensure an outcome that benefited everyone.

“I wanted to maintain it in a way that honored the strengths of the employees and what had been built while giving myself the freedom to step away from it.”
- Leah

When Leah first began considering her options, she looked into an Employee Stock Ownership Plan (ESOP). An ESOP structure would allow employees to own shares in the company. While Leah explored this option, she was transparent with her employees about what she was considering. On top of that, she designated a small group of employees to serve as an exploratory committee that represented employee interests. After more research, Leah found that creating an ESOP would be too costly and cumbersome for the size of business she had — 24 employees at the time. So, she went back to the drawing board.

While Leah decided against transitioning to an ESOP, she was still interested in employee ownership in some form or another. Looking for other options, she reached out to an exit planner. Leah told the planner that while she really valued employee ownership, an ESOP didn’t seem to be the right path. Now, she felt stuck, and she wasn’t sure how to be able to honor her values. The exit planner introduced Leah to a concept she had not been familiar with: worker cooperatives.

Under a worker co-op, the employees own and self-manage the company. Additionally, the exit planner connected Leah with Project Equity, a national organization that facilitates conversions to employee ownership. Project Equity conducted an assessment of Leah’s company to determine if a cooperative was the right fit, incorporating employee interviews and a review of company financials. After the assessment went successfully, Leah decided to move forward with a transition to a worker co-operative.

Valuing employee ownership

For a lot of small business owners, employee ownership is not a priority. In fact, University of Minnesota Extension research shows that most business owners are not aware of the three most prevalent options for conversion to employee owners (i.e. ESOPs, worker-owned co-ops, and employee ownership trusts). But for Leah, the goal of employee ownership guided her decision-making as she approached transition. There were a lot of reasons for this. For one, Leah thought the company would do better under employee ownership. The business was a consulting firm with a billable hours model. Essentially, the more time employees billed, the better the company did.

Because of this, there was always a tension within the company between finances and culture. Basically, the company could prioritize maximizing billable hours to do the best financially, or they could maintain modest billable hours and give employees more flexibility. Leah felt that the employees — not her — were best suited to make this decision. At the same time, Leah really valued her employees. The company would not be where it was without their expertise, time, and talent, and she wanted to reward that.

“I felt like [the employees] were the ones that would be in the best position to make the decisions about the company in the future.”
- Leah

Structuring the employee ownership model

Before the transition, Leah’s employees held a vote to assess interest in employee ownership. The vote found that approximately 80 percent of employees wanted to buy in (i.e. to become employee owners), 10 percent were likely to buy in, and 10 percent were not interested. Leah understood why some of her employees felt skeptical. As much as employee ownership meant that employees would get to make decisions, it also meant that they had to. For some employees, this was intimidating.

Would involvement in the decision-making process just mean more work for them? Despite their initial skepticism, these employees eventually bought into the cooperative, even though they were not required to.

Worker-owned cooperatives typically operate in a similar manner. Employees buy into ownership with a membership fee, and the co-op bylaws set the terms of that membership fee. At the Improve Group, an employee is eligible to participate after three months of employment. At that time, they can choose to opt in with a $500 “buy-in” (i.e. their member investment). Once an employee buys in, they are entitled to all of the benefits of ownership, including annual distributions of profits.

However, none of the employees are required to become owners, and there is no requirement for any particular threshold of employee participation. Note that member “buy-in” amounts vary; $500 may be on the high side for many worker cooperatives.

Prior to transition, Leah was the President and CEO of Improve Group, making her the final decision-maker on important strategic decisions. However, as the company transitioned to a worker co-op, the leadership model would become more cooperative. Leah decided to approach this transition gradually, beginning this process long before the transition of ownership was final.

As they approached transition, Leah had her management team take on more and more of the day-to-day decision making. Additionally, she had them propose their own strategic ideas, so when Leah exited, they would be prepared to take over. 

After Leah’s exit, this five-person management team became responsible for most of the strategic decisions in the company, while the worker co-op board had voting rights on a certain number of those decisions. The rules that dictate the balance of power and responsibility between these boards are laid out in the cooperative’s governance documents.

The transition

As the CEO and owner of the firm, Leah had to navigate both the transition of ownership and the transition of management. Leah decided to begin the transition of management before the transition of ownership. As soon as she began to consider employee ownership, Leah cut her time back by 20 percent, and she continued to pull back gradually over time. Eventually, Leah was only meeting with the full management team once a month to guide strategic decision making.

While Leah transitioned out of management, she and the employees began the process of transitioning ownership. However, the transition from a singular owner to a collective ownership requires special consideration. First, the workers formed a committee to lay out what ownership meant and how an ownership role, not just management, was important to the company. The committee was composed of two employees from the management team to represent leadership, and a number of other employees represented the staff more generally. One person from this committee was selected to negotiate with Leah directly while representing the employees’ interests. However, the negotiations proved challenging for Leah.

As the founder and owner, she thought the company was worth a lot, and she wanted to get a fair price for it. At the same time, she valued her employees, and she wanted them to get a fair deal, too. Leah and her employees went back and forth, even taking a break from negotiations a few times. Leah had never sold a business before, and her employees had never bought one. They were all navigating this process for the first time, and emotions ran high. Even though it all worked out in the end, Leah and her employees couldn’t stop their emotions from surfacing along the way.

Challenges with transition

While everyone was happy in the end, the process was not always easy. The transition of management moved forward, but the transition of ownership got delayed. As a result, there was a period of time when Leah was not involved in decision-making but still owned the business. She was nervous. She held this huge asset, but someone else was in control of managing it. It was hard for her to let go, especially when she still would be the one to face the consequences at the end of the day. Ultimately, the situation brought up a lot of anxiety for her.

Thankfully, Leah had some guidance through the process. Since neither Leah nor her employees had experience with business transition, the company worked with an advisor from Nexus Community Partners — an organization based in Minnesota that specializes in advising worker-owned cooperatives. While Leah appreciated their help, she assumed they would advise both sides of the transaction. Instead, Leah eventually realized they were there to support the buyers, not her.

In retrospect, this made sense to her. After all, she had a lot more business experience than they did. However, at the time, she thought the advisor was there to support her, too. Leah wishes she understood this going in, because if she had, she would have hired an advisor of her own. Even though it all worked out in the end, Leah thinks the process would have gone a lot smoother if she had someone looking out for her side of the transaction.

“I felt kind of alone at times, and the thing about being alone is you’ll still probably figure things out eventually. But because I didn’t even know what the options were, it just took me a lot longer to figure out.”
- Leah

Leah wanted the best outcome for her employees, but this doesn’t mean they were always in agreement. With so many parties involved, it was difficult for them to agree on a sale price. According to Leah, the sale price was largely representative of the cash in the business. While Leah wanted to walk away with a lot of that cash, the employees wanted to keep it in the business.

Ultimately, Leah suspects that the employees were afraid of failing, and because of that, they wanted to have a cushion of cash to support them. In a way, Leah feels like the employees doubted their ability to be business owners. Before, if the business went bankrupt, it fell on Leah. But now, it fell on all of them. The risk, even though it was collective, was scary. During negotiations, the employee committee asked to leave $800,000 in the business — around six months of expenses. However, Leah felt like the amount was far too much. While she went back and forth with the committee numerous times, they eventually came to an agreement.

“Of course, I think the company is worth a lot. I also want [the employees] to have a fair deal, but not such a fair deal that I’m screwing myself over.”
- Leah

Financing the purchase

The employees ultimately financed the purchase with three buckets of money. The first, and the largest, was from cash in the business. There was a lot of cash in Improve Group, and because the business was set up as a C Corporation, the company owned the cash — not Leah. The second bucket was from a bank loan. The employees took out a loan from Shared Capital Cooperative, a co-op lending and investment group. Traditionally, a bank will require a guarantor on a loan. However, for worker co-ops, there is not one person to be a guarantor because there is not one person who is willing to take on all of the risk. By working with Shared Capital, the employees had the ability to take on this risk collectively. Finally, the last bucket was seller-financed, with a loan from Leah.

While Leah likely received a lower price than she would have with a strategic buyer, she believes the tax benefits associated with forming a workers’ co-op makes up for that potential loss.

The emotional toll

When Leah decided to sell Improve Group, she was overcome with a range of emotions that she was not prepared for. At that point, she had owned and operated the business for most of her life, a total of 23 years. More than that, the business had become a huge chunk of all of her worldly assets. Still, she didn’t expect the process to be as emotional as it was. In letting go of the business, Leah realized how much of her identity had been tied up in it. She was a business owner; she always had been. But now, she wasn’t. Who would she be now? She felt an overwhelming sense of grief, not just over the loss of the business, but the loss of her identity as a business owner.

The impacts of employee ownership

According to Leah, every consulting firm has a tension between revenue and culture — primarily driven by the balance of “billable hours.” Increased billable hours can mean more revenue for the company, while reduced billable hours can mean enhanced employee satisfaction. When this balance feels off, employees may feel inclined to blame the owner at the top. But now the employees are the owners, and they have control. Leah thinks this creates a healthy opportunity for people to be honest with one another — and themselves — about what they want to get out of work. If they want to have more vacation time in exchange for a modest salary, they can do that. If they want to have less vacation time in exchange for a larger paycheck, they can do that, too. No matter what the outcome, the decision was now theirs to make.

“There always is a little bit of suspicion of ownership. But now, you know, it’s you. You have to look in the mirror, and you’re the owner.”
- Leah

The first year of employee ownership was the most successful in the company’s history. According to Leah, the company made a larger profit than she ever had. Not only were the employees energized by new ownership, but they were empowered by their ability to make decisions. Ultimately, the control, the stakes, and the excitement all encouraged the employees to be successful.

“If what that seller really wants is to maximize their dollars, it’s probably not the right strategy. Or, if they want a really efficient process, it’s probably not the right strategy. But, if what motivates you is that you’re just really proud of something you created and it’s beautiful and you love it, then 100% consider it.”
- Leah

Life after ownership

Leading up to the transition, Leah was forced to confront a lot of sudden emotions about her identity. She knew she was ready to move on, but she wasn’t sure exactly what that meant yet. Mostly, she just felt lost. In the months following the sale, Leah applied for an assortment of jobs and volunteered for a number of organizations. She did everything she could to find one thing that felt right.

“I did so many things because I was like, ‘Who am I now? I don’t know.”
- Leah

For a while, Leah said yes to everything. She wasn’t sure where she would end up, so she tried it all. Eventually, Leah found herself in the final stage of a job interview process for a CEO role. However, when she felt like they were going to give her the job, she realized she had a problem: she didn’t want it. After Leah withdrew from the application process, she reflected on what it was she really wanted to do. Eventually, she had it. Leah realized that she just really loved employee ownership, not just for her own company, but for others. Essentially, she wanted to help more companies transition to worker cooperatives. With this goal in mind, Leah is launching, with some partners, an initiative to accelerate employee ownership in Minnesota. She hopes she can use her experience transitioning her business to employee ownership to help other business owners do the same — first in Minnesota, and then beyond.

“I would encourage anybody to look into [employee ownership] as they’re looking at their options for exit. It was probably one of the more meaningful things I’ve done in my life.”
- Leah

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