New Report Analyzes Market for Co-op Conversions
by Alison Powers
In September, Capital Impact Partners and the ICA Group, with support from Citi Community Development, released a groundbreaking report, “Co-op Conversions at Scale: A Market Assessment for Expanding Worker Co-op Conversions in Key Regions & Sectors.” The report points to an enormous opportunity to convert local businesses in low-income communities to worker cooperatives in the wake of the rapid retirement of baby boomer business owners.
Like so many small businesses, A Child’s Place in Queens, New York, was created out of personal necessity. Linda Coles, and her husband, Greg, found that holding down two jobs while managing the expense of day care for their daughter was unsustainable. In response, they opened a day care facility, allowing them to build their own business while also caring for their first child. It proved more successful than they could have imagined. After three decades, A Child’s Place serves 300 children and employs nearly 70 people.
With retirement approaching, Linda and Greg faced a new challenge: how to retire while protecting their employees and the families that have relied on them. They were also concerned about the impact of rapid gentrification of their neighborhood on the largely African-American community. As they explored their options, the idea of selling their business to the employees to form a cooperative became the perfect solution. With a loan and technical assistance from the Working World, the Coles have begun the transition.
This is one example of the impact converting businesses to worker ownership can have for low-income communities. The question is not whether this approach can work, but how can we take this practice to scale?
Wave of Retirements Represents Challenge and Opportunity
Since its founding in 1981, Capital Impact Partners, a Community Development Financial Institution (CDFI), has worked to address issues like these as part of a larger mission to support equity and economic opportunity in low-income communities. The coming wave of baby boom retirements could shake up the small business landscape at the heart of these communities, disproportionately impacting women and communities of color, who rely on these enterprises for jobs, core services, and economic contributions to their neighborhoods.
The report examines the market potential of cooperative conversions by looking at the actual transfers and closings of businesses that are high-potential targets for successful transactions.
Conversions to worker ownership offer a scalable solution, but there has been little quantitative analysis examining the market opportunity. A new Capital Impact Partners report is a step in bridging this gap. It examines the market potential of cooperative conversions by looking at the actual transfers and closings of businesses that are high-potential targets for successful transactions.
Using a proprietary longitudinal database, the ICA Group examined the strongest market potential for conversions in five industry sectors across five geographical regions. The regions — New England, New York Metro Area, Mid-Atlantic cities, Chicago Metro Area, and Los Angeles and the Bay Area in California — were chosen because they are home to a number of technical assistance providers or are being targeted by national philanthropic-funded initiatives providing conversion support.
The five industry sectors — child day care services, home health care services, nursing care facilities, grocery stores, and food manufacturing — were chosen because they employ large numbers of service sector employees, especially women and people of color, and are well-positioned to help low-income workers build wealth, retain jobs, and expand their opportunities.
Co-op Conversations at Scale: The Findings
Since 2000, in the sectors and regions analyzed, more than 1,200 independent businesses in operation for more than 25 years closed. These businesses each employed 20–100 workers, for 52,000 jobs in total.
Among independent firms operating for more than 25 years, researchers found, the ratio of business closures to business sales was 9 to 1.
Among independent firms operating for more than 25 years, researchers found, the ratio of business closures to business sales was 9 to 1. Nine businesses closed for each one sold. Since these businesses employ 17 percent of all U.S. workers, the impact of closings is profound. Providing an opportunity for entrepreneurs to sell their businesses is of benefit both to them and to their communities in terms of job retention and wealth creation.
In the selected industries and regions, Capital Impact estimates a potential market of 159 to 200 conversions per year; that number will grow as retirements increase in coming years.
Co-op Conversions at Scale: Success Factors
Capital Impact believes that cooperative conversion efforts will have the most impact on disadvantaged communities if they focus on these closely held small independent businesses, with 20 to 100 employees and meaningful connections to their community. The most promising among these are businesses that need financing of over $800,000. Targeting firms of this size increases the potential for scale.
Closely held small independent businesses, with 20 to 100 employees and meaningful connections to their community are the most promising.
To ensure conversions can be successful, while also addressing the needs of lower-income communities, the report recommends the following:
Expanded emphasis on outreach to small, independent businesses: Very few small business owners are aware that employee ownership is an option. Deliberate outreach and education efforts targeting older business owners need to be expanded.
Improved access to financing: At a median estimated value of $777,000 per firm, the transfer of 30 firms per year will require $23 million in capital. That sum is more than half of existing mainstream worker cooperative lending. An expanded pool of patient and accessible capital is needed from community development financial institutions, credit unions, and banks.
Increased funding for technical assistance: New cooperatives need technical assistance to ensure a smooth transition. Sustainable funding sources are needed for technical assistance, including economic or workforce development dollars that can offset the transactional and ongoing costs of the transition.
Enormous Opportunity for Capital and Technical Assistance ProgramsThe sheer volume of small businesses that can be successfully transitioned to employee ownership represents a huge opportunity for lenders, as well as foundations doing program-related investments. A number of recent changes put in place by the Small Business Administration (SBA), especially its flagship 7(a) loan guarantee program, could further support this effort. At the same time, the need for technical assistance services will similarly grow.
Responding to this need, the Democracy at Work Institute, which works to expand worker ownership, convened the Workers to Owners national collaborative of technical assistance and capital providers in 2016. The collaborative, which now includes over 25 member organizations, functions as a clearinghouse for effective tools and practices, a place for organizations to seek and share advice, a laboratory to test strategies, and a first point of contact for those interested in conversions, whether business owners or technical assistance partners. Collaborative members also gather data on impact, which is critical to a better understanding of barriers and opportunities to scale.
To reach scale, it is vital to get the word out to a wider audience about the conversion opportunity, especially to those retiring owners, their workers, and capital providers. Capital Impact is working with the Democracy at Work Institute to amplify the findings of this publication to a wider audience of CDFI and banking stakeholders through a targeted convening. Capital Impact Partners recently made an investment in a co-op-focused CDFI that is growing its conversion portfolio and looking at partnership opportunities. As a Steering Committee member of the Workers to Owners Collaborative, Capital Impact is looking to foster additional collaborations as the worker co-op conversion ecosystem grows.
Alison Powers is a program officer at Capital Impact Partners and leads the organization’s efforts to support and scale cooperatives.
For copies of the full market study that examines each of these areas in more detail, contact the ICA Group at (617) 232–8765 or email@example.com.
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