Straight Talk About ESOPs and Co-Ops and EOTs, Oh My!

Introduction:

This week, Jay Goltz, Mel Gravely, and special guest John Abrams have a frank conversation about what business owners can do to avoid what John calls the “fat-wallets-and-broken-hearts syndrome.” That’s his term for what can happen when an owner sells to private equity and the company ends up getting stripped. Jay, Mel, and John all agree they want no part of that. They all would like to see their businesses continue on without them. And yet, in thinking about succession, they’ve chosen different paths. In a conversation sparked by the recent publication of John’s book, From Founder to Future, we discuss those choices along with such issues as: why there are so few employee-owned businesses, whether they outperform other businesses, how you can finance the sale of a business to employees, whether the employee owners of an ESOP are truly owners, and whether a worker co-op model just might work for a hard-bitten, old-school owner like Jay Goltz.

— Loren Feldman

Guests:

John Abrams founded South Mountain Company.

Mel Gravely is chairman of Triversity Construction.

Jay Goltz is CEO of The Goltz Group.

Producer:

Jess Thoubboron is founder of Blank Word.

Full Episode Transcript:

Loren Feldman:
Welcome, Jay, Mel, and our special guest, John Abrams, who recently published a book, From Founder to Future. It’s about the various flavors of employee ownership. Those flavors include ESOPs, which are probably the best known form of employee ownership but also worker co-ops and employee ownership trusts. John, when you decided you wanted to convert South Mountain to a form of employee ownership, you chose the version that I think sounds the scariest to many business owners. You made it a worker co-op. Why was that your choice?

John Abrams:
So in 1973, Loren, in my early 20s, I inadvertently, by the seat of my pants, founded a business that would be my primary work for the next half century. And in 1987, some longtime employees said they wanted to stay at South Mountain for their careers. They didn’t want to take the usual route and make their own businesses, but they needed a greater stake. And at that time, I could have made them partners, but somehow I stumbled on the notion of the worker co-op, and I thought, “Hey, if we do our job well, over time, we’re going to want to welcome more and more people in. Here’s a structure that does that.”

And at the time, almost 40 years ago, there were about a dozen in the U.S. Today, there are roughly 1,300, the numbers growing rapidly. But many of the originals, like Equal Exchange and the Rainbow Grocery cooperative, still thrive today, and they’ve grown significantly. I love that longevity. And so that just appealed to my particular nature, not to everybody else’s necessarily, but certainly to mine. And ultimately, South Mountain became a 40-person integrated architecture building and solar company that is always among the highest-scoring B Corps in the world.

And at the end of 2022, I retired. I passed it on to next-generation leadership. They are killing it with tools and resources unthinkable 25 years ago, and I think ultimately, they will take it to places where my intuitive and casual style of leadership may have been unable to. So, you know, I have no way of measuring, but I feel like whatever modest successes we have had go back to that hinge point—that moment when I decided to convert it to a worker co-op.

Loren Feldman:
Well, here’s one way of measuring. Can you tell us what the revenues were at the time you made the decision and what they are now?

John Abrams:
At the time I made that decision, they were probably $1.5 million a year, and now they’re well above $20 million.

Loren Feldman:
The thing that I think scares people about worker co-ops is there’s an implied sense that this is becoming something of a democracy, and you do use that word in the book. Tell us about that. Do you vote on everything at the company?

John Abrams:
Oh my God, no! So there’s a great misconception, this idea that the worker co-op throws out the notion of leadership. The worker co-op needs even better leadership than any other kind of company. So that’s quite a fallacy. And one of the keys to successfully operating a worker co-op is to have a very clear decision-making matrix that says, “These are the decisions that management makes and these are the decisions that the owners make.” And the decisions that the owners make are definitely limited.

Loren Feldman:
When you made it a worker co-op, did you create a board? Did you report to somebody?

John Abrams:
Yes, so for all my years at South Mountain, I was the CEO. I was the president of the board, but I was entirely responsible to that board, yes.

Loren Feldman:
And who was on the board? Did you control it?

John Abrams:
Interestingly, all of the owners were on that board. We decided at the beginning that we would just do that until it became unwieldy, because there were too many, and it never actually did. So, no, I did not control it, but I was the leader, and I had a leadership team that was tremendously well-aligned.

And when I retired, after three intensive years of building internal leadership capacity with this leadership team, there were six of us on that leadership team. And when I retired—actually about six months before my retirement date, we looked around at each other and we went, “Oh my God, we have done this job, and we have six months to just polish the mirror,” and ultimately, it was almost like I just slipped out in the night, because it was seamless.

Jay Goltz:
You know, I hear co-op, I think Birkenstocks and tofu, and you’ve got to be a vegetarian. I just, I don’t have a clue what that means. What does it mean to be a co-op? Who owns it? What does that mean? What’s the structure of it?

John Abrams:
First of all, let me give a little context about that. The worker co-op is by far the most widespread form of employee ownership in the world. And worker co-ops range from the Mondragon cooperatives in the Basque region of Spain, where there are roughly 80,000 employees, most of them owners. The largest worker co-op in the U.S. is the Drivers co-op in New York City with 10,000 members. They are not wearing Birkenstocks. They are driving vehicles day and night.

Jay Goltz:
And they’re eating hot dogs. I just want to hear that they’re eating hot dogs, right?

John Abrams:
Plenty of hot dogs, man. [Laughter] They’re probably all at Yankee Stadium. So it’s not an uncommon misconception, but it definitely is a misconception.

Jay Goltz:
So who actually owns—I mean, one minute you own it, and then when you become a co-op, what’s the legal structure?

John Abrams:
You sell it to your employees and yourself, if you’re planning to stay like I did for 35 years. And each member has one share, which means they have one vote on matters of policy. So they are determining the future of the company. They are not, in any way, managing the company.

Loren Feldman:
Well, John, if all the employee-owners were on the board, and you reported to the board, that is potentially a form of democracy, isn’t it? Could they have fired you?

John Abrams:
Absolutely. Yes, they could have fired me. It is democratic, but it’s only in particular matters: matters of policy. And that distinction between what is a management decision and what is a policy decision—and I’ll actually tell you, because we did not have many models to follow.

And I can remember times when I came to a board meeting and reported about a decision that I’d made, and somebody said, “Wait a minute. You made that decision without even asking us about it?” And I said, “Yeah, that felt like a management decision to me. Let’s talk about that.” Because we had to craft where the appropriate decision-making responsibility led. These days, it’s way more codified and simpler, and actually, one of the things that people love about worker co-ops is that they’re relatively simple to convert to and relatively simple to operate.

Jay Goltz:
You mostly were doing consulting or whatever. I’ve got millions of dollars of inventory. I mean, what if a company has got millions of dollars of inventory, equipment, maybe bank loans? Doesn’t that get complicated? Who’s taking responsibility for the money that has to be put into the company and signing on the bank note and all that good stuff? I mean, it doesn’t sound like you maybe had to do that, but what about a company like mine?

Loren Feldman:
Why wouldn’t John have had to do that? He had a construction business.

Jay Goltz:
Oh, I thought it was a consulting construction business. You actually—

John Abrams:
No, not at all.

Jay Goltz:
Oh okay, so you did own a bunch of equipment. So when you go buy a tractor for 300 grand, who’s signing the lease?

John Abrams:
So for example, right now, I’m working with a company that is a construction company converting to a worker co-op. They have 60 employees. Revenue is $15 million a year. They own real estate. They own a building that’s worth about $4 million. They have $2.1 million in bank notes. And all of this will be part of the valuation and part of the purchase price that the founder is selling the company for. The founder is making what the business is worth, and the employees who are buying it are taking on the responsibilities that the founders had so that, in five years, the founder will be able to fully retire.

And let me just say something: I make it clear in the book that my own inclination—I love the structure of the worker co-op, but you’ve got to remember that I lived it for 40 years. There are other forms of employee ownership that are equally important. Certainly, the ESOP is far more widespread in the U.S. The Employee Ownership trust is very new to the U.S., and there are very few employee ownership trusts, but it’s gaining traction quickly, and in the UK, it is the form of employee ownership. And it has a very successful and lengthy history.

So there are lots of ways to think about it, ways to choose, and certain types. No company’s the same, no owner’s the same, and different types appeal to different people, and it depends on your orientation and your aspiration. And my job, as a consultant, is not to tell people what they should do, but to figure out: What is this company? And what do you want to be? And how do we get there?

Jay Goltz:
I just got the book yesterday. I glanced through it. I didn’t read it thoroughly, but I’ve got to tell you, it really is honest, insightful, and most importantly, you weren’t trying to sell anybody on anything. And I appreciate that. You weren’t preaching. It’s not a socialist book about: “Everybody should own the business.” It really was a pleasure to read through that you’re just giving some honest—and showing the pitfalls of some of these things. Because, especially ESOPs, I spent two years looking into it, and like, I want nothing to do with it for various reasons, and you kind of covered some of that in there. So I appreciate that you’re giving an honest appraisal of the thing

John Abrams:
I really appreciate that, Jay. I mean, I think if we’re going to talk about the book, I probably should give a little context for it. Will you bear with me?

Jay Goltz:
Sure.

John Abrams:
So there are two things about the book. First, as context from the 1930s to the 1970s, U.S. labor unions helped to create a prosperous middle class by negotiating higher wages and a host of other benefits for working Americans. And during that time, wealth inequality declined significantly. But at the end of that era, the typical corporate CEO made roughly 20 times the typical worker. Today, that’s climbed to 250 to 300 times. And if workers’ wages had climbed at the same rate as corporate CEOs’, the minimum wage today would be more than $100 an hour.

Now, we know that nothing like that has happened. And in the 50 years that I spent at South Mountain, both political parties left workers far behind. I think, what I see around me—I don’t know about you guys, I’m sure you see the same thing—American workers are desperate for those who will fight for them and level the playing field, and my feeling is that maybe they can find that right inside the companies they work for, and the companies in which they’ve invested their future. So there’s that.

But second, meanwhile, today, there are about 3 million American small businesses with employees, with founders who are over 55 years old. And during the next 15 to 20 years, those businesses will transition in some way, and trillions of dollars will change hands in the process. Now, some of those companies, as we know, will be passed down in families. Many will unceremoniously close their doors when they can find no buyer, leaving holes on Main Street. Jobs will be lost. But many will be targeted by strategic buyers and what I call rapacious private equity. They may be absorbed and bundled and relocated and carved up, sold for parts, their mission and culture undone.

So while many founders wish to preserve the values with which they began their business, these businesses that they put heart and soul in for 30 years or more, their advisors—financial planners, succession consultants, business brokers, accountants, attorneys—know little of the employee-ownership options available that can accomplish that. Nor do the founders, nor do the 32 million employees who work in those companies. So my feeling is that employee ownership can reward founders for their time and investment and simultaneously reward the working people who have helped to build these companies.

Jay Goltz:
Amen.

John Abrams:
The book intends to inspire a different way of doing business that preserves mission and promises impact and longevity. That’s the purpose in the message.

Loren Feldman:
Let me jump in here for a second. You just spoke with a lot of passion, John. I’ve spoken with a lot of owners who’ve gone down this road and are similarly passionate about the choices they made. Many people, as we all know, see this as potentially the future of business. Ari Weinzweig, who wrote the introduction to your book and who was on this podcast very recently, happens to share that view. People see it as an antidote to private equity, as a solution—as you were suggesting—to the silver tsunami, a cure for wealth inequality.

But then, there are just so few companies that have chosen this, and I’m curious about why you think that is. But I want to start by getting Mel into this conversation. Mel, we’ve spoken a good bit here about your succession plan, and I think your thinking has had a lot in common with John’s. You both wanted your business to continue on in a recognizable form beyond you. You both chose to separate the ownership transition from the leadership transition. Did you consider any form of employee ownership?

Mel Gravely:
Yes, we did: a number of forms, although not the co-op. Listen, to me, this conversation is at the heart of the entrepreneur’s vision, the entrepreneur’s manifestation of what they really want. This is the ultimate decision, and I like all the options. You know, there’s a lot of things I like about an ESOP. I don’t know the co-op model as well, but there’s things I like about even just sharing the ownership privately. There’s the trust route. There’s advantages to that. What I like the most is the options.

So for me today—and I’ll always say that—it is going to remain a family asset. It is very important for me today, for us, to create a multigenerational organization that creates multigenerational wealth in the single Black family that I lead. That’s just important to what I believe in based on the history of the people that raised me and in the position I sit in today. For me, this is the right way. And for my kids later, they may decide to do something else, but everything we’re doing is trying to keep this as a family asset for now. And we’ll always consider other options as we go forward.

Loren Feldman:
You said you really liked the ESOP option. What kept you from doing it?

Mel Gravely:
I like a lot of things about the ESOP option. What kept me from doing it is it doesn’t stay as a family-owned enterprise, for us.

John Abrams:
Mel, I have to say to you that during the course of writing this book, I spoke to many, many business owners, and some of them were family-owned businesses. One that just stands out to me is a company with 300 employees in North Berwick, Maine, that has gone through six generations.

So there are some of these companies that have lasted 100, 200, 300 years. And my hope for you is that that’s exactly what happens to your company. But it’s also important—and you obviously are thinking this way—the family doesn’t necessarily want to keep going with them. So it’s great to have options for keeping the company going beyond the family, if necessary. And if not, that’s fantastic.

Mel Gravely:
Yeah. You know, John, we met back in the fall, I think, for the first time. And so you may not know exactly what we’re planning here, but I agree with you, and it’s part of the reason I separated ownership from leadership. Because we’re going to be privately owned, but we’re going to be professionally managed. And creating an incentive plan for the employees who work there so that they get a chance to participate in both the profit and the equity growth in this business is important to the longevity of having good, strong leaders who are not owners, who are not necessarily owners.

So I don’t have any kids or family members working in our business at all today, and I never have. And I don’t even anticipate that we will have, but I am trying to make sure that they understand at the governance level, at the board level, their fiduciary responsibility to continue to provide the governance that is necessary to have a thriving, multigenerational business.

John Abrams:
You sound just like me! I love what you’re saying.

Mel Gravely:
Yeah, I don’t think there’s much daylight between what we will aspire to have. I think that’s why I say I love all of these options, because I think they fit personality types. I think they fit your tolerance for oversight. The ESOP is a very, very complicated model that has oversight involved with it, because it’s got the tax advantages that it has. And so there’s a lot of different approaches here, and I like that option. To me, that’s what I’m living for, and that’s why I wanted to start my own business in the first place.

Jay Goltz:
Can I throw out: I spent two years looking at ESOPs. I went to two out-of-town seminars, and they did an excellent job of turning me off to it. They couldn’t have done a better job. It was all about the people who were taking them over. There was nothing available for the business owner who was thinking of doing it.

And let me just tell you my conclusion, and tell me if you think I’m off on this: Number one, the tax advantages, I realized: Wait a second, if I want to give some money to my employees to participate, I could bonus them out. That’s deductible to me. I could put in their 401(k) plan. That means they don’t pay tax on it. And as far as my own portion of what the business is worth, the fees are so tremendous that I figured whatever tax advantage I’d have is probably going to get chewed up in the $20,000, $30,000, $50,000 a year to run the whole thing.

And number two, after watching a couple of these webinars, these guys were foxes in sheep clothing. They’re saying, “Oh, I’m an investment banker. We frequently sell them after we do the deal.” It’s like a bait and switch. They sell you on the ESOP. You feel good about taking care of your employees and the neighbor and everything else, and a year later, they go and sell the whole thing out and everything you designed to happen: Poof! It’s all gone. Nw, I’m sure they work well for some companies. I’ve heard of some that have worked extremely well. But for me, personally—and I also don’t need to answer to the government every day. I mean, that’s not a goal of mine, that I’ve got oversight of trustees and bankers and a bunch of stuff. I couldn’t have been more turned off from it.

John Abrams:
I am with you all the way. It’s the last thing I would ever do with my company: way too complex, unsafe in terms of being susceptible to a sale that you don’t want to do, and it’s my last choice.

Loren Feldman:
John, it’s unsafe, you’re saying, because the next generation of leaders might even have a fiduciary responsibility to sell if they get a big offer.

John Abrams:
That’s exactly right. But the flip side of that is that there are ESOPs that take many of the attributes of co-ops—and in fact, some of them even call themselves ESOPeratives—that, to me, are exemplary companies. And these are incredibly successful companies, like Revision Energy in the Northeast, with roughly 500 employees, that are just doing a terrific job.

And the thing that worries me about what you’re saying, Jay, is, do you have a plan for what happens if things don’t go just the way you wish that they were? One of my favorite quotes in my book is from Eric Rieger. He’s the founder of a great company in Chicago called Webit Services. And he talks about various friends who have ended up selling to private equity because that was the only option they could find. And he says they took their seven-figure paychecks, and to a person, they’re all miserable. They sold their souls, and their employees got the shaft. I call it the fat-wallets-and-broken-hearts syndrome, and that’s what you’re talking about, Jay, when you said these companies that just sell out. But we don’t have to do that.

Mel Gravely:
Well, I just want to go on the record here, because you guys—Jay, you a little bit more than John—I have seen wonderful outcomes from ESOPs. I just want to go on the record and say that.

Jay Goltz:
Absolutely.

John Abrams:
Me too.

Mel Gravely:
I sit on the board of a company that just went completely ESOP. A small piece of my company is owned by another company. They happen to be an ESOP. I’ve seen wonderful stories of people retiring with millions of dollars of assets that they wouldn’t have had in virtually any other business model you guys can mention because they’ve been in an ESOP that’s been a company that is growing and their value is increasing.

Loren Feldman:
The situation you described, Mel, I think we’ve all seen examples of that. And it’s an amazing thing when somebody who’s a frontline employee retires with that kind of nest egg. But I think it gets at a bit of a misconception, or even something that’s oversold, about employee-ownership sometimes, which is the idea that it really is employee ownership.

Mel Gravely:
That’s right. That’s right.

Loren Feldman:
I don’t know that ESOPs are really employee owners.

Mel Gravely:
I would agree. I think you can treat your employees like they’re owners, but let’s face it: It is a glorified, deferred—

Loren Feldman:
Retirement plan.

Mel Gravely:
Yeah, absolutely. But hold on a second. But it is tied to the value appreciation of the organization, right? Here’s the bottom line, guys, I don’t care what company you run. I don’t care how it’s structured. I don’t care how it’s owned. If you don’t have a value-appreciating organization, your employees are screwed.

John Abrams:
So, Mel, I want to say that it seems to me that—and I think we may be getting hung up a little bit with ESOPs—we all agree that there are terrific examples of ESOPs, and there are times when ESOPs don’t achieve what we wish to achieve with our businesses. And I want to throw out that we’re talking about ownership, but ownership is not everything, and in fact, it’s only a part of things. What we’re all talking about is making great businesses that are good for the communities that they work in, that are a force for good, that are good for the employees, that are good for us. And there are many other elements to that. It’s not just about the ownership.

Jay Goltz:
There’s another issue that I stumbled on in my company. Think about it. We keep talking about retirement, retirement, retirement. Well, first of all, 20 percent of people—I just went to my 50th high school reunion. 20 percent of my class is dead by now, and that’s pretty much standard. 20 percent of people are never going to get to retirement.

So my question is: You got the guy, the woman, who works for you making $65,000 a year. Great. We’re funding their retirement fund. They need money now. Whereas if I did my own bonus thing, I could say to them, “How much would you like to put in your 401(k) plan? Oh, you’d like to take $10,000 of that and go fix your car, put braces on your kid’s teeth, fix your home?” It’s all on retirement. And some of these people—everybody’s not making $150,000 here. Some of these people could use a little money as they go along, as a bonus. And if you do an ESOP, I don’t think that’s an option. It all goes into their retirement.

John Abrams:
You just said, Jay, one of the great arguments for a worker co-op and an employee ownership trust. It’s that the employees are sharing those profits every year, not when they retire, but every year.

Loren Feldman:
How does that work, John?

John Abrams:
So it works differently. In employee ownership trusts, they are completely flexible. Basically, they’re set up as a trust to benefit the employees. And what that means can vary. In a worker co-op, at the end of the day, the profits are split between—so a worker co-op can deduct a certain amount in dividends, and those go to the employees. And the IRS demands that you make at least 20 percent of that in cash. Most worker co-ops do a lot more, anywhere from 50 to 100 percent, depending on their cash position. So I agree that sharing those profits year after year is one of the great advantages.

Jay Goltz:
How much oversight is there with a co-op versus—like, with the 401(k) thing, the government’s all over you. I mean, it’s regulated, and you’ve got to have—I’m not exaggerating when I say this—I think, what six different people? You have to have an appraiser, a lawyer, an accountant. What’s the story with a co-op? How much oversight is there?

John Abrams:
None of that. There is none of that. There are some basic regulations, IRS regulations that you have to comply with, but it doesn’t cost anything. It doesn’t require somebody saying, “Yes, you can do this.” So it’s a completely different animal.

Loren Feldman:
John, you were right that there is a danger we get too hung up on ESOPs. But I want to ask you a question that starts with ESOPs, but I’m curious how it applies to the other forms as well. We talked about—I think Mel kind of agreed with me, and maybe you do too—that ESOPs are really more of a retirement plan than shared ownership. And my question is, are they a good retirement plan?

Because, you know, any business can fail. What happens if an ESOP fails? That guy who thinks he’s got a million dollars waiting for him? That million dollars can just disappear. If it’s in a 401(k), that can’t happen. I mean, you can make bad investment decisions, of course, but it’s your money. It’s not segregated if it’s waiting for you at the ESOP. Do you see that as a problem, as well, and how do the other forms deal with that?

John Abrams:
I do see that as a problem. Of course, it’s a problem. It’s a problem for the employees when any business goes belly up. You know, just two weeks ago, a terrific company in Vermont called Gardener’s Supply, which was an ESOP and for many years very successfully, went into Chapter 11. And those people—just like you’re saying, Loren—who thought they had all that money don’t have it now. So that can definitely happen. But you want to hitch your future to a company that you think is going to succeed, and if any company goes under, you’ve lost your job.

Loren Feldman:
But if all your retirement savings are in a 401(k), you haven’t lost that.

John Abrams:
Absolutely, yeah, and I think that’s really important. In a trust that money is protected. In a worker co-op, and in an ESOP—properly run—there should be money going into a 401(k).

Jay Goltz:
And let’s just be clear, it’s not can. In 20 years— don’t know what the number is—a good percentage of companies are going to go out of business. I just look at Chicago, at the retail: Almost everyone when I grew up, all the retailers I know in Chicago, there’s like one or two left out of—I could list 30 companies that just went away one day. So that is a real situation.

John Abrams:
And Jay, remember what I said about the dozen co-ops in the U.S. in 1987, that most of them still exist, have thrived, and have grown? It’s a much more stable form of business.

Loren Feldman:
If Jay were to do a co-op, how is that financed? If he’s selling the business to the employees, what has to happen?

John Abrams:
So there are several ways. In my work—and I heard you say this, I think, Jay—I advocate for disentangling ownership and leadership. Do the ownership early, you know, in mid-career. Get that done. That’s the part that’s transactional. It’s less emotional, and it takes less work. Do the ownership, stay in your company with a long runway to leadership change, and build that leadership capability. So if you get the ownership work done, you’ve got the time, and you can finance it yourself.

Most worker co-ops are owner-financed over 10 or 15 years. Many also use financing from, you know, sometimes bank financing, but it’s tricky that way. When we became a co-op, there was no co-op infrastructure in this country. There was one organization, the ICA Group, that was helping people become co-ops, but there was nobody to finance them. Now, there are roughly a dozen financing companies that just do co-ops. They’re nonprofits, and their goal is to help those co-ops succeed. So you can do it. You can do a mix of owner financing and fund financing.

Jay Goltz:
I have to tell you, first of all, it was Mel that said he separated leadership from management. That wasn’t me.

John Abrams:
Oh, okay.

Jay Goltz:
I have to think about what that means. It never even crossed my mind, a co-op. It isn’t even on the radar screen. I’m very excited to talk to you further about it, because I do need to do something. The family thing? My kids are not taking over the business, so now I’m left with—and I still want to go to work every day. And I feel perfectly fine, but I know I’ve got to do something, so I absolutely want to follow up on that and see what the details are.

Because I’m not selling to private equity. I’m not. I’m not doing it. You know, I never realized this: When you’re a retailer, believe it or not, you can make more money with a going-out-of-business sale than you can selling the company. If you do the math with EBITDA times x, whatever that x is, and you do what your inventory turnover is, for a company my size, my business is probably worth about what my inventory is worth. So I can make more money having a going-out-of-business sale. And I don’t want to have a going-out-of-business sale, and I want to keep my employees working. So I do want to look into the co-op thing. I find it interesting that I’ve never even heard about them.

John Abrams:
That is why I wrote this book. You are like so many other people, and my aspiration is that one or more of the methods in the book, or one or more of the stories will inspire each reader to say, “Hey, that sounds like me. That sounds like the business that we want to be. That sounds like our future. I’ll take it.” So that’s what it’s for.

Loren Feldman:
Jay, one of the things that turned you off to ESOPs: You were thinking that maybe it would make sense to start at 30 percent, something like that. And you could probably do an owner-financed version of it. But you thought about it and you concluded, “Wait a second, if I do that, my employees are buying that 30 percent with money that I would have had anyway. I’m, in effect, just giving them the 30 percent.”

Jay Goltz:
Right, I’m giving them money to give back to me. But there’s a bigger problem. I’m embarrassed to say it took me two years to think of this part. The costs of this are substantial. Like, everybody says, the first year, it’s maybe 75 grand, and then after that, maybe it’s 30 grand. But if you’re only doing 30 percent, it’s literally 3.3 times more expensive. You’re not even leveraging it over the whole sale. So the math is horrible!

John Abrams:
$75,000 is really low to start an ESOP.

Jay Goltz:
Right, and if you’re only doing 30 percent, whatever tax savings you’re saving, you’re going to spend more on the fees than you’re saving. So that was out the window. Just like, I’m just giving them my own money to give back to me.

Loren Feldman:
Would that be the same case with a co-op?

John Abrams:
Similar, in a way, Loren. The difference is that it doesn’t cost a lot of money, and it costs almost no money to maintain. The ESOP also has annual fees because of the regulations that are extensive. So with a co-op, if you finance it and you take your money out, whatever the valuation is, you take it out over a period of time, out of company profits, you get paid. But meanwhile, you have something that you never had before, and that is a fully-engaged workforce who are working for themselves as well as working for you. So the chances for that company to succeed in a greater way are large.

Jay Goltz:
So at some level, let’s think this out. If Joe Schmo, who isn’t a private equity, who’s actually a normal business person who I think would take care of the business, he or she comes to me and says, “All right, I’ll give you four times earnings, okay? And I get a check.” All right, that would be one way out. This way, you sell to your employees and you let them pay you out over time. Like, okay, I don’t need the cash. This is really eye-opening. And like I said, the part that’s so interesting to me is, the only co-op I’ve ever heard of is REI.

John Abrams:
But REI is not a worker co-op.

Jay Goltz:
Really?

John Abrams:
REI is a consumer cooperative. It’s owned by the people who buy stuff from there. There are a lot of kinds of cooperatives. There are credit unions that are cooperatives. They serve 135 million people in this country. Utility cooperatives. Those are different. There are producer cooperatives or consumer cooperatives. Worker co-op is a different animal, because the workers are the ones who own the company.

And people ask, too: Are there marketing advantages to this? Well, that’s a really complicated question. We know what customers and clients want. They want great service and performance. They want their expectations to be met and exceeded. Some have the perception that employee-owned firms will do a better job of that. And in that sense, there’s sometimes a marketing advantage, but the big advantage is in terms of attracting talent. People want meaning in their work. They want a voice. They want to share the wealth. They find that in employee-owned companies.

Loren Feldman:
Mel, you spoke highly of some forms of employee ownership. You thought about it. Did you form an opinion as to whether employee-owned companies perform better than other companies, as well as other companies?

Mel Gravely:
Yeah, I’m not qualified to answer that question, Loren, to be honest with you. What I will say is that employee-first companies perform better than others. And I know employees feel, when they are treated, both through compensation and through development and through engagement in community, they feel different. They feel more engaged in the work. And so I will say an engaged employee clearly outperforms one who’s not engaged. I just think there’s a lot of ways to get there. Employee ownership would likely be one, but I think there’s some other ways to get there as well.

John Abrams:
I agree, Mel. When I sold my company, it was very familial. People were great friends. People had fun. There was the kind of engagement that you’re talking about, Mel. And I thought that by becoming a worker co-op, we were formalizing something that already existed. I was so wrong about that. Nothing could have been further from the truth.

People becoming owners, it means something. It means something to be able to walk out into the community and say, “I own that company.” So there’s an added level there. And employee-owned companies do, on average, outperform on measures of productivity, stability, resilience and what you’re talking about: employee engagement.

Mel Gravely:
Do you add all of the types of employee-ownership models to that statement, or just a co-op model?

John Abrams:
No, all of them, when they’re done well. That’s the key. And I think, Mel, you’re really talking about what the heart of the issue is. It’s making great companies that treat people well, engage people, and have open-book management so that people can help to make the business a success.

Jay Goltz:
I would just add, though, as a business owner—when you say engaged versus non-engaged—personally, I would say, make them more engaged. [Laughter] I believe my employees are engaged. And frankly, when I hear that stuff, it’s insulting to me. It’s insulting to employees, I would think, saying, “Oh, since I’m not an owner, I’m not engaged.” So I fully agree. I think they’re more engaged. I can’t argue with that. That makes perfect sense that they would be more engaged if they were owners.

And I do believe, on the marketing side, I’ve got people working in my framing showroom who have literally been here for 25 years. I’m sure the customers would be thrilled—they have a relationship with them—to hear that they’re now part-owners of the company. I do think that would be worth something, which was another appeal to the ESOP. What you’ve just told me is: Every single one of the things that turn me off the ESOP doesn’t exist with this. So I’m extremely excited about this. This has all the good stuff and none of the bad stuff, it sounds like.

John Abrams:
Well, I mean, that’s extreme, but yeah.

Jay Goltz:
Tell me what I’m missing. What’s the bad stuff?

John Abrams:
You have to have that orientation. You have to have a sense of trust in your employees. My biggest fear about becoming a worker co-op was that because the employees had certain kinds of power, that decisions would get made that would make this thing that I love become something that I didn’t love anymore. Boy, oh, boy, did that not happen.

Jay Goltz:
I have no concern. I have lovely, wonderful employees that have been with me for years. It took me many, many years to figure out how to do that, but I feel great about my people. My turnover is very, very low. My key people have been here for 20-30 years. So, that’s not a concern of mine. So, so far so good.

John Abrams:
You are the kind of person who would make a great owner of a worker co-op that becomes, instead of the owner, becomes an owner. And you just sound like the right kind of person.

Loren Feldman:
Jay, do you have Birkenstocks?

Jay Goltz:
I could get some, but I’m not giving up hot dogs. I swear, my connotation, the second I hear a co-op is the hippie thing. That’s what I’m thinking.

John Abrams:
Jay, you can eat hot dogs when you’re wearing Birkenstocks, I guess. [Laughter]

Jay Goltz:
All right, good to know. It just shows you the tremendous potential out there. As someone who has been involved—you know, I’ve been reading stuff for years. Like I said, I thought REI was a co-op. I’ve had zero exposure to this.

John Abrams:
Jay, when you get a chance, read the story in there about Snow River, which is a small manufacturing company in a rural town in Wisconsin. And the owner had been there a long time, union employees, and the owner said, “You know what, the hell with this. I’m out of here. I don’t care about this company anymore. I want to go to Florida to play golf.” And the union actually told the employees that, “You could buy this company and become a co-op.” And there was a lot of feeling, a lot of support for this, because if that company had left this town, had closed down, it would have been tough for the town itself. And I can tell you, those guys were not wearing Birkenstocks.

Loren Feldman:
Jay, you know, I hate to correct you, but I feel the need to point out that John actually isn’t the first owner of a worker co-op to appear on this podcast. A couple years ago, we had someone else on, and I’m pretty sure you listened to it. We at least talked about it, but I think you dismissed the idea at the time.

John Abrams:
Do you remember who you had, Loren?

Loren Feldman:
I was afraid you were going to ask me that. I could look it up. But off the top of my head, it was a very small firm in Oregon.

Jay Goltz:
I vaguely remember, now that you mention it. And I think that was the problem. It was a very small company with just professionals working there. And it didn’t resonate with me.

Loren Feldman:
That’s fair.

Jay Goltz:
I do remember, it was very small, and there was a handful of professionals, which is extremely different from what I have. I’ve got 125 employees, everything from $18 an hour up to six-figure people, and it just didn’t resonate.

John Abrams:
Jay, there are worker co-ops that don’t resonate with me at all. So, I mean, there are all kinds of variations in any business type. So I think you probably heard from one that just didn’t hit home with you. And like I said, you hope that one story will make you say, “Hey, this sounds right to me.”

Mel Gravely:
The punchline here, for me, at least, is: Father Time is undefeated, and if you want it to continue, what is the answer to the continuity of the business? And again, as an entrepreneur, I think having an understanding of the options is the point. And John, I’m just excited that you helped frame not just the worker co-op, but other forms and juxtapose them against each other. I think it just adds a lot of clarity. Because the point is: What are you going to do? And as an entrepreneur, I think we owe it to our employees to have an answer to what’s next—because it’s not going to be you. You’re not going to be here for the next generation.

Jay Goltz:
No, I’ve been in limbo. I’ve been trying to figure out: What am I going to do?

Loren Feldman:
You’re the poster boy for the silver tsunami.

Jay Goltz:
No, absolutely. I’m not doing private equity. I’m not planning on going out of business. My kids are not taking over. I’ve been just trying to figure this out. So today was perfect timing, because it’s never too soon to start working on this.

John Abrams:
You know, Mel, what’s really interesting to me is that we’re in this period of time—you talk about the different methods—where there’s a tremendous amount of experimentation going on that is so exciting. And there’s a chapter in my book where I talk about companies like Apis & Heritage and Obron and Teamshares. And these are cooperatives of cooperatives, or in the case of Apis & Heritage, they’re using private equity, they’re buying companies and making them employee-owned.

And I don’t know which ones of these are going to be successful, and which ones are going to take off, and which ones are actually going to do what they say they want to do. But it’s exciting to see this kind of experimentation. Like, one of them is buying companies like laundromats and tire shops—companies that never thought they would find a buyer at all. So there’s a there’s a tremendous amount going on in this country today to to help small businesses find different ways and new ways to elevate.

Mel Gravely:
Yeah, again, to me, that’s the exciting part. One day you’re going to collect and chronicle those as well, and they’ll serve as new inspiration for another generation of people who are trying to find the answer to: How do I grow, scale, add value for myself and for my employees? And as long as we’re pursuing that question, I think that’s the right question to focus on.

John Abrams:
But we’ll only tell about the ones that actually work, Mel, right?

Mel Gravely:
Absolutely. [Laughter]

Loren Feldman:
Unfortunately, we are out of time, but this is exactly the conversation I was hoping to have. My thanks to Jay Goltz, Mel Gravely, and especially John Abrams. John’s book is From Founder to Future. Thank you all for taking the time and for sharing your experiences and thoughts.

John Abrams:
Thanks so much. And Mel and Jay, great to talk to you both.