A conversation with Todd Leverette
“The business, economic and human case for an expansion of employee ownership, specifically for black and brown workers, is hard to overstate,” write Philip Reeves and Todd Leverette, in Impact Alpha, an online publication covering the world of impact investing. Reeves and Leverette are partners at Apis & Heritage Capital, an investment firm incubated by Democracy at Work Institute to facilitate an increase in employee-led buyouts through the Legacy Business Initiative. The initiative focuses on expanding business ownership as a means to build wealth for workers of color.
U.S ESOPs, the authors note, currently hold nearly $1.4 trillion in pre-COVID plan assets, with the average employee ownership stake over $130,000. Research indicates that for marginalized and low-wage workers, ownership stakes significantly increase household wealth: “On average employee owners making less than $30,000 have 17 percent greater median household net worth and 22 percent higher median income from wages than their non-owner peers.”
By helping to scale employee ownership, impact investors can make a real difference in the lives of people of color.
Today’s economic crisis is having a particularly devastating impact on communities of color. People of color are experiencing the double whammy of holding “essential jobs,” which put them at risk for COVID-19, and losing jobs at a faster rate than white people, many more of whom hold jobs they can do from home. In April, more than half of Black workers were already unemployed.
Even before COVID-19, the median white family had 41 times more wealth than the median Black family and 22 times more wealth than the median Latino family. Without a viable solution, our current economic crisis is likely to result in an even wider racial wealth gap.
Employee buyouts are one path forward. Many owners, particularly those close to retirement who are unwilling to weather a second economic recession in less than 10 years, will be looking for an exit plan. An employee ownership transition, the authors argue, would allow these owners to cash out, while employee owners could take advantage of the tax incentives to restart in the post-COVID economy.
To scale these transitions, there is a need for capital — and that’s where impact investors come in. When targeted toward workers of color, the authors argue, employee ownership has profound social impact — “expanding the middle class, closing the racial wealth gap, and strengthening the economy.” In a recent phone interview, Todd Leverette and I explored these issues in more depth.
Karen Kahn: Todd, great to talk with you. You make a great case for why employee ownership could be transformative for black and brown communities. But employee ownership has never really taken off in the U.S. We have less than 7000 employee-owned firms, a number that has barely grown in decades. Why do you think that might change now?
Todd Leverette: Recently, I heard a quote that goes something like this: “In times of difficulty, hardship, confusion, ideas that are lying around, that are sitting there but may have been ignored, those are the ideas that people pick up and use as solutions.” While I know it originally was used in a starkly different context, I do see a connection between that quote and the current moment in the ownership economy. It’s been here all along, but now we are seeing economic developers, municipal leaders, politicians, and investors taking notice.
The wealth gap, especially the racial wealth gap, started to open people’s eyes to broad-based ownership even before COVID, but now a spotlight is shining directly on inequality and the misaligned risk and reward of being a worker in this economy. As a movement, we have an opportunity. We have to make sure that people with the political power, the capital, can’t ignore this moment or our movement for a more equitable economy.
A spotlight is shining directly on inequality and the misaligned risk and reward of being a worker in this economy.
What has impeded growth in the past?
As I travel around the U.S. talking to people about broad-based ownership models —coops, democratic ESOPs, Employee Ownership Trusts — it makes total sense to them. But they often question, why haven’t I heard of this before? Specifically, in my conversations with business owners, they often wonder — why didn’t my accountant, banker, wealth manager or lawyer tell me about this option — what’s the downside? We need to educate, to let people know this is not just an option but, possibly, the best option out there.
Another impediment is capital — and that’s why we wrote the piece for Impact Alpha. Just like any other M&A transaction, employee buyouts often need third-party capital. Most people don’t buy a business with 100 percent of the equity in hand. Private equity is a good example — the goal of the investors is to put in as little as possible, and to use that to leverage other sources of financing. You balance risk with a full capital stack.
The same structures are needed for employee buyout transactions. There needs to be senior lenders who understand the employee ownership model; mezzanine lenders; SBA 7(A) loan guarantees, which are involved in over half of small business transactions. The SBA, through its loan guarantees, reduces risk so people can buy and sell businesses. We need those same tools for these specific transactions. The Main Street Employee Ownership Act, which passed in summer 2019, was exciting because the federal government took some initial steps in this direction.
In your Impact Alpha article, you are making the case to impact investors that they have a role to play here. Why should they consider investing in employee buyouts? The point we were trying to make is that employee ownership has significant social impact, particularly for black and brown workers. We want impact investors to understand that an investment in a trash hauler or a commercial cleaning firm or a landscaping business — a business that isn’t on the surface purpose-driven — when ownership is transferred to the workers, particularly immigrants and workers of color, that is an impact investment. This is a shift in the conversation, a broadening of the definition of what an impact investment is.
When ownership is transferred to the workers, particularly immigrants and workers of color, that is an impact investment. This is a shift in the conversation, a broadening of the definition of what an impact investment is.
If we want to advance racial equity as a nation, we have to address the racial wealth gap. As we say in the article, ownership shares represent down payments on homes, college tuition, health care coverage, and a secure retirement. But it is more than that. Employee ownership gives black and brown workers the ability to both build wealth and improve the quality of their jobs through actually having a voice in not just their day-to-day activities but in the actual governance structure of their firms. This is the thing we love about the ESOPerative (hybrid ESOP & cooperative) model — it does just that. By helping to scale employee ownership, impact investors can make a real difference in the lives of people of color.
One of the reasons impact investors are so needed to scale employee ownership is the nature of the transactions. Currently, these deals are often heavily financed by the selling owner, who extends a note to the company and may wait five or ten years to realize the gains. But every owner can’t do this. It takes a certain privilege to be able to carry the note, not to need the liquidity. Owners in general and owners of color in particular don’t necessarily have the generational wealth needed to extend that financing, so you are left having to sell to a private equity buyer or a competitor — or worse case scenario, sell the business for parts. If impact capital could step in and fill in that gap, with mezzanine financing, far more owners would likely be happy to sell their businesses to their employees.
If you want EO to address the racial wealth gap, how do you find the right businesses? What does that process look like?
We start with publicly available information that identifies minority-owned businesses. Minority ownership can be a proxy for minority employment — that is, you are more likely to find a higher concentration of people of color employed by these businesses. But that only gets at part of it. Lots of businesses owned by white people employ large numbers of people of color. Think about where you see “essential” workers—groceries, hospitals and nursing homes, meat-packing plants. These are all places that employ people of color.
In addition to looking at specific industries, we look at demographics — certain regions of the country have more people of color and immigrant populations — for example, the District of Columbia, where I live is a rich mix of Latinx, Black, and immigrant populations. We layer the demographic data and industry data, along with the minority-owned businesses, to zero in on businesses where employee ownership conversion will have the greatest impact.
How do investors ensure that they are investing in deals that will benefit workers over the long run?
It’s important for impact investors to do their due diligence, and ask questions about intentions around job quality, governance, and the extent of employee ownership. The investment vehicle needs to be aligned with the impact you want, particularly when investing in an ESOP.
Cooperatives have worker benefits structured into their DNA, but ESOPs are different. An ESOP can act like a 401K. It might not guarantee anything other than a retirement benefit; it won’t necessarily improve job quality or business outcomes. The keys to unlocking the potential of the workforce are democratic governance and open-book management. These factors have the greatest impact on productivity, which is what truly benefits investors in the long run. That’s why we believe that the ESOPerative model is oftentimes the best way to go.
Any final thoughts, Todd?
When it comes right down to it, employee ownership makes total sense because your shareholders are the people working in the business, producing your product or service, every day. Doesn’t it make sense for them to have a say in the direction of the business? You want those who own the company to have a deeper relationship with it, because they are the ones who add the most value. That’s going to drive success.
Karen Kahn is a communications consultant and the editor of Employee Ownership News.