Project Equity and Mission-Driven Finance collaboration offers flexible capital to businesses transitioning to employee ownership
by Karen Kahn
After a second pandemic summer, this Labor Day feels unique, says Alison Lingane, co-founder of Project Equity, a nonprofit that supports the transition of businesses to employee ownership. “As a society, we’ve come to understand in the last year and a half that people who do ‘essential’ work are barely surviving.”
“Employee-owned firms are different,” Lingane continues. “Many prioritized health and safety during the pandemic. Research shows job quality is better. We want to see a new chapter for labor, and employee ownership offers that opportunity: better, more resilient jobs for workers so they can support their families and have a financial cushion.”
Removing Barriers to Employee Ownership Transitions
To write that new chapter, Project Equity and its partner Mission Driven Finance, an impact investment firm, used Labor Day to announce the launch of the Employee Ownership Catalyst Fund, an Evergreen debt fund that will offer flexible financing to businesses preparing for—or executing—an employee ownership transition. The fund targets businesses across the U.S. with 25 to 100-plus employees, particularly those employing frontline, low-wage workers and workers of color.
Shared ownership is a proven path toward a more equitable economy. We want to make sure that capital is not a barrier to transitions.”–Lauren Grattan, Chief Community Officer, Mission Driven Finance
According to Project Equity, over half of privately held businesses with employees are owned by baby boomers. Many are approaching retirement and looking for an exit plan, but struggle to find buyers in these uncertain times. Selling to employees offers a path forward with multiple benefits: the seller is able to recover the equity in the business for retirement, a valued business doesn’t close, and workers keep their jobs. Even for employers not yet looking for an exit, an employee ownership transition can be beneficial, reducing turnover and making the business more resilient. But to make this transition feasible for more business owners, says Lingane, more flexible capital is needed.
“When we talk with small business owners about exiting to employee ownership, cash is often the barrier to moving forward,” says Lingane. “The business may need an infusion of cash to recover from the impact of COVID-19 before the owner would feel comfortable selling. Or an owner, facing today’s economic uncertainty, may be prioritizing cash so may be less comfortable with cash outflows to assess the feasibility of a transition or to hire professionals to complete the transaction.” The Employee Ownership Catalyst Fund is intended to help owners get over this hump in whatever way works for them, whether the need is working capital or transaction financing, or some combination. “Our goal is to get them on the on-ramp for employee ownership,” Lingane stresses.
The Right Financing at the Right Size and the Right Time
Project Equity and Mission Driven Finance chose to partner because of their values-aligned missions and complementary skills. As an impact investment firm and certified B Corp, Mission Dirven Finance’s mission is to provide flexible financing to empower communities and build more inclusive and sustainable local economies. Says Lauren Grattan, co-founder and Chief Community Officer of Mission Driven Finance, “shared ownership is a proven path toward a more equitable economy. We want to make sure that capital is not a barrier to transitions.”
Ultimately, says Grattan, the fund looks to provide the right capital at the right size and the right time to help small businesses thrive. Sometimes that is a fixed-term loan, sometimes it is revenue- or profit-based financing, where the payback terms are more flexible, and sometimes it is an equity purchase structure. The Employee Ownership Catalyst Fund won’t be tied to a single formula—the goal is to find the right financing for the current hurdle and to keep working with the seller over time to ensure a successful transition.
Investors Seek to Build More Equitable Economy
The Employee Ownership Catalyst Fund has the support of Living Cities, a collaboration between large U.S. foundations and commercial lenders that uses innovative capital strategies to address racial income and wealth gaps in the U.S. Living Cities Blended Catalyst Fund is an investor in the Employee Ownership Catalyst Fund, along with other institutional and individual investors, including donor advised funds (DAFs, philanthropic funds created by high-net-worth individuals).
Living Cities Blended Catalyst Fund is an investor, along with other institutional and individual investors.
A lot of high-net-worth individuals work with us, says Grattan. “They see employee ownership as a powerful tool to close the racial wealth gap and create the world we want, one that is more equitable.”
Supporting employee-ownership transitions can offer an opportunity for investors to use their money to make the change they believe in, creating economic resiliency for frontline workers while strengthening small businesses and local economies, notes Lingane. Data shows that employee-owned businesses grow faster than traditional businesses and outperform their peers in business cycle downturns.
Says Grattan, “Project Equity has a track record working with municipalities and other partners to identify businesses that will make good candidates for transition. Transitions financed by the fund will be supported on-the-ground by a team that understands what it takes to build a successful employee-owned company.”
Editor’s note: The Employee Ownership Catalyst Fund is currently open to accredited and charitable investors.
Karen Kahn is a communications consultant and the editor of Employee Ownership News.