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How This Type of Business Model Could Spur Purpose and Growth For Small Businesses Whether you're a small business leader deliberating over succession planning and employee engagement strategies or an owner with a vision to establish and lead a values-driven enterprise for decades, you may want to delve deeper into the employee ownership model.

By Zoe Schlag Edited by Kara McIntyre

Key Takeaways

  • Employee-owned companies enjoy higher retention rates and wage benefits, with some workers earning up to 33% more than their industry peers.
  • The “ownership flywheel” effect from employee investment leads to more resilient businesses able to weather economic downturns better than traditional firms.
  • To successfully implement employee ownership, businesses must consider the right approach, financing model and rollout strategy to foster shared success and longevity.

Opinions expressed by Entrepreneur contributors are their own.

At a time when a mere 32% of workers admit to being engaged and a staggering 70% are on the verge of resignation, employee-owned firms boast up to four times the retention rate of other enterprises. For many employees at employee-owned enterprises, a significant perk manifests in the form of higher take-home pay and overall better wages.

As a result, employee ownership has a venerable history of impact and wealth creation for workers. In comparison to their peers at non-employee-owned firms, workers at employee-owned enterprises tend to earn 33% more, according to the National Center for Employee Ownership (NCEO). The impact is further magnified for minority workers, whose earnings can soar up to 12 times the median wealth of their counterparts nationwide. Employees from historically disadvantaged cohorts fare equally well. A 2021 report from the Aspen Institute found that the wages of single and married women at employee-owned companies experience substantial boosts of 24% and 17%, respectively, while employees of color enjoy a 30% wage increment over their non-employee-owner counterparts.

When you add flexible work schedules, generous retirement plans and childcare benefits to the mix, an "ownership flywheel" effect occurs. Employees who hold a stake in the company's success are more poised to make pivotal contributions and drive enhanced performance. These actions, in turn, foster more resilient businesses that are better positioned to navigate downturns. This resilience was evident in the aftermath of the economic downturn triggered by the global pandemic, as employee-owned firms at essential businesses laid off staff at one-quarter the rate of their non-employee-owned competitors. This buoyancy was undoubtedly propelled by employees' aspirations to preserve their investment in their business and the ability to take a long-term view of the business.

Related: Stronger Together: Why You Should Consider Employee Ownership For Your Business

Navigating the transition to an employee ownership culture

Whether you're a small business leader deliberating over succession planning and employee engagement strategies or an owner with a vision to establish and lead a values-driven enterprise for decades, you may want to delve deeper into employee ownership. For numerous companies, this setup is a mechanism to protect and bolster the purpose, culture and vision of the business you've built while engaging and incentivizing your workforce.

As you begin your research, remember that a successful employee ownership plan hinges upon the following three key factors.

Factor #1: The right approach

Every enterprise will exhibit different dynamics that will influence how to optimally set up an employee ownership structure, ranging from the business model and industry dynamics to the current leadership and the company culture. Therefore, it's imperative that the form of employee ownership you establish is customized to those dynamics.

Increasingly, owners understand that an employee ownership structure can morph into a competitive advantage for the business. Not only are they highly adaptable to the unique circumstances of each business, but they also permit you to tailor your program based on the results you aim to incentivize and reward. In this manner, your transition to employee ownership is constructed to support all your business's key stakeholders and leverage the performance advantages that are intrinsic to the employee-owned business model.

For legacy-minded business owners looking to preserve what makes their business unique as they transition out of the business, Employee Ownership Trusts (EOTs) present a remarkable opportunity to design an exit strategy that both nurtures worker wealth and safeguards essential facets of the company's mission. For example, the recent transition by Utah's Clegg Auto highlights how this model can be embraced to reap significant advantages for employees and business performance alike. This innovative approach allowed for a shared reward system and enabled responsible succession planning, ensuring the continuity of company values and mission — not to mention doubled profits within a year of the transition.

Related: 4 Ways You Can Create a Culture of Ownership

Factor #2: The right financing model

Your employee ownership financing strategy should be orchestrated to bolster your employee ownership objectives. Here's a case in point: A crucial element of a successful employee ownership transition is for employees to understand and experience the material benefits of employee ownership. If employees are barred from meaningfully taking part in the company outperformance due to the capital structure of the buyout, you risk grave repercussions on employee morale, company culture and retention.

WinCo Foods is a shining example of a company that got it right. The discount grocery chain transitioned to an Employee Stock Ownership Plan (ESOP) in 1986 and has experienced sustained growth due in large part to employee retention. The company says "being an employee owner means having a stable present while building your future. Our employees enjoy industry competitive wages and the long-term investment that comes from company ownership."

Engaging with capital providers who are well-versed and seasoned in structuring employee ownership buyouts is a prudent strategy to ensure that your transaction structure incorporates best practices to optimally support businesses and tap into the performance gains of employee ownership.

Factor #3: The right rollout campaign

After ensuring the design of your employee ownership plan is truly bespoke and the transition will be financed by a capital structure that is aligned to your employee ownership goals, you need to unveil everything with intention. For some enterprises, implementing an employee ownership transition may simply be a natural progression of its pre-existing company culture. For others, it may signify a meaningful transformation in how the business operates and behaves.

Either way, you want to ensure that your workforce is equipped to align around the core objectives, values and purpose of the transition and fully understand their role in the new business ownership structure. Everything from how you choose to communicate the transition, at what point, and what kind of resources you provide to your employees to fully understand the new structure and their role will impact the success of your employee ownership transition.

Related: The Critical Thing Entrepreneurs Rarely Consider... Until It's Too Late

Because this is so critical, many business owners will choose to work with an organization that can help you successfully roll out and implement your employee-ownership program. This reduces the risk that your organization, its culture, and the trust you've built among your employees is bruised due to a rushed or poorly planned rollout.

Transitioning to an employee ownership model isn't merely a shift in business structure — it's an investment in your company's future and a catalyst for a culture of shared success. As a business owner, adopting this model fosters a self-perpetuating cycle of engagement, accountability and enhanced performance that sets your business apart in the competitive market. With every success, the collective ownership spirit is invigorated among employees and drives further growth.

Zoe Schlag

Entrepreneur Leadership Network® Contributor

Co-founder and managing partner at Common Trust

Zoe Schlag is a leader in the employee ownership financing and impact investment space. She is the co-founder and managing partner at Common Trust, an employee ownership buyout platform enabling small business owners to access liquidity by selling to their employees.

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