Would a True Capitalist Consider a Worker Co-op?
Introduction:
A few months ago, John Abrams—author of From Founder to Future—joined us to talk about succession strategies and the different ways business owners can share ownership with employees. For his own business, John chose one of the more radical options: he turned his construction firm into a worker cooperative. Perhaps surprisingly, the more he described the co-op model, the more intrigued Jay Goltz became—although, predictably, Jay did retain a degree of skepticism. So we asked John to come back on the podcast to help Jay dig a little deeper: Are co-ops really all about democracy? Does someone on the loading dock get the same vote as the CEO? How do profits get split in the co-op model? How do losses get absorbed? How are loans secured without burdening frontline workers with personal guarantees? And perhaps most important: What can go wrong? In the end, I think surprising even himself, Jay failed to identify any real dealbreakers.
— Loren Feldman
Guests:
John Abrams founded South Mountain Company.
Jay Goltz is CEO of The Goltz Group.
Producer:
Jess Thoubboron is founder of Blank Word.
Full Episode Transcript:
Loren Feldman:
Welcome Jay and our special guest, John Abrams, who is back here again after joining us a few months ago to talk about the various flavors of employee ownership. As I think you know, John, Jay has been on quite a journey to try to figure out what to do with his business. The last time you were here, somewhat to my surprise, you clearly piqued his interest with what you had to say about worker cooperatives. We had to get past the Birkenstock jokes, but once we did, Jay was intrigued enough to at least want to know more, which is why we’re here today. So maybe we could start: John, can you just explain to us quickly what exactly is a worker cooperative?
John Abrams:
So Loren, work co-ops are businesses that are owned and democratically controlled by their employees, and the structure creates an economic alternative to the traditional corporate model. It’s a way to assure continuity and legacy in small businesses. And what distinguishes the worker co-op is that they have workplace democracy built into the DNA of the structure. Other than that, they’re generally C corporations, and there are lots of parts that we will get into in this conversation, but it’s really a democratically-owned and -controlled business.
Loren Feldman:
Okay, so now, Jay, I know your skin started to crawl every time John used the word “democratic”—
Jay Goltz:
You know me too well. You know me too well, yes.
Loren Feldman:
We’re going to get to democracy, and how that plays into this, but first could you just tell us, based on that first conversation, what caught your attention? Why are you at all interested in this idea?
Jay Goltz:
Well, I’m 69. I’ve owned the business for 47 years. I have 120 employees who I like, every one of them, and I’ve recognized that I can’t do this forever. And even though I have no plans on retiring, I’m gonna die one day. I got that. And I’ve gone through the family business thing. I have three kids, three sons. I made it clear to all them: I don’t want to hang this on anybody. If you’re not interested, blah, blah, blah.
Loren Feldman:
They’re not interested.
Jay Goltz:
They’re not interested, right. And now, I call this: I’m in the “suck” part of succession planning. [Laughter] So now I have to figure out the next plan, and I can tell you what’s not on the agenda: I’m not selling to private equity and watch them screw up what I built all these years. I don’t need the cash so bad, because I own the real estate. And the fact is, in a retail environment, my inventory is probably worth almost as much as the business. So my options are: have a going-out-of-business sale. Not appealing. Sell to private equity. Totally not appealing. Kids aren’t interested. Sell it to a competitor. My framing business is way bigger than anyone else’s. I don’t know who would actually buy it. My home store is nationally-known. I don’t know how easy it would be to get someone to buy it.
And more importantly, I say to myself—because, you know, I looked into ESOPs for two years—Why wouldn’t I try to do something with my employees? Why not? If I can come out okay, I don’t need the last dollar out of it. Even if I don’t get as much, why wouldn’t I want to try to do something that my employees can run? So I’m totally into that. The problem is, I looked into the ESOPs, and there were some things about it that were completely non-negotiable bad. Whereas in our short conversation with the co-op thing, it sounds like those aren’t an issue with this, which is why I’m interested.
Loren Feldman:
I want to go back to John real quick. Before Jay jumps out of his chair, we talked a little bit about democracy the last time you were here, and you made it clear that it’s not a matter of the employees voting on every decision throughout the day. Give us your definition of what role democracy does play in a worker co-op.
John Abrams:
Oh my God, it certainly is not that. So one of the great misconceptions about worker co-ops is that they are these leaderless entities and everybody figures out everything, and nothing could be further from the truth. Worker co-ops need great leadership, just as much as any other company. And the kind of leadership that Jay’s company has had for many years—47, I think I heard you say—is the kind of leadership that would need to continue.
In your situation, Jay, because you don’t have any intention of retiring—which is the best situation—I advocate for early ownership conversions that leave a long runway for the second-generation leadership development. In your situation, you would be selling the business to a group of employees who meet the criteria that you set, and to yourself. And you would become an owner rather than the owner, and the owners would be responsible for those things that are set out in a decision-making matrix that are the province of the owners. And they are their policy issues, whereas management would continue as it is. It may or may not be more collaborative than it is, but that’s a choice to make.
And my sense is that, if you did this, you would go on as CEO, and a lot wouldn’t change, and a lot would: the mentality, the ownership culture that you would develop. And again, I don’t know a lot about your business, but it sounds like you have elements of that already. And those are the ones that make the most successful worker co-op conversions: ones that are already acting like that, in certain ways.
Loren Feldman:
Jay, I bet you have some questions.
Jay Goltz:
Well, I left off the part—my average employee’s been here 12 years. I’ve probably got 20 employees here for more than 20 years. So yes, it does fit that. I’ll just cut to the chase.
John Abrams:
Let me tell you one other thing, Jay, because you mentioned that you don’t need every dollar. So, the way most of these conversions work is a professional valuation is done. That is not necessarily the number that’s agreed on in the purchase and sale, because you’re trying to satisfy the financial desires of the owner and repay that investment that the owner has made. The best situation is if you finance it yourself over, say, 10 years, so there’s a note to you from the co-op. They make annual payments to you, and you want those payments to be structured in a way that they are not going to hamstring the business. So you want to find the price that satisfies you and that satisfies the ability of the business to pay.
Many of these things happen when the founder is ready to retire and goes, “Oh my God. Now what the hell am I going to do?” And then they come up with this, and that company has to deal with the leadership and the ownership at once. Whereas when you disentangle those two, you have a much greater chance of success. So, in a way, what it does to make an earlier ownership conversion, is it reduces risk. You are there. You’re the person that built this and made this happen, and you’re still there, helping your fellow owners, who have been your fellow employees. You’re helping them to succeed.
Jay Goltz:
Is there a limit to how much you can still retain?
John Abrams:
You mean, what share? Yes, there is, because the fundamental part of a co-op is that each = owner has one share. Nobody has more shares. That doesn’t mean nobody has more power. Because there is a hierarchy, and it’s a hierarchy of expertise. And so you’re the CEO. You’re going to be making a lot of the decisions, as you always have. But you know, there is that element.
So when I converted to a worker co-op, it was scary, because I was relinquishing a certain amount of power, and my fear was that this thing that I had created and built, that I loved, would become something that I didn’t love anymore. It turned out to not be that way at all. I loved it even more.
But to me, you’ve got the right attitude, the whole right attitude: no private equity. Because that’s going to make a business something that you don’t love anymore. Whereas in a worker co-op, you’ll still have every bit as much respect as you always had from these people. You’ll still be charting the course, but they will have a say in decisions that affect everybody.
Loren Feldman:
Jay, is that a big issue for you?
Jay Goltz:
I’m struggling with—I’ll just throw it out there. I read your book. There are three things: Each one of them, instead of inspiring me, put me off tremendously to where I think, “God, I don’t know…” The first one is this democracy thing. I think running a business is not a democracy. Someone has to make a decision, and if everybody gets one share, the guy who works on the loading dock is going to have a vote as to whether we open another store. Really? And he has no risk in it.
I believe in capitalism, and capitalism is being rewarded for risks you take and sleepless nights and stress. And I just don’t know how you mix those those two things together. So, democracy—
John Abrams:
What were the other two?
Jay Goltz:
Okay, the other two is the comment in the book about the whole thing with the income inequality in the country. Like, that’s not my fault. That’s not my problem. I’m not going to own that. That’s a bigger picture thing. And then lastly, that CEOs now are making hundreds of times more. Again, that’s a Fortune 100 company thing. My argument is—correct me if I’m wrong—well, no, I’ll ask you this question: Doing what you’re doing, do you believe that you’re an activist, or do you believe you’re an advocate? Which one of those two?
John Abrams:
I’m an advocate.
Jay Goltz:
Very good. That’s what I thought. And my argument is, those three words sound like they’re coming from activists—from people who’ve never owned a business, have never signed a note, have never put their house up, have never maxed out credit cards. So it’s very easy for those people to sit on the side: “Oh, you should be sharing your”—really? Do you want to share the losses I had? When I come up short for cash—do you want to give me $50,000 and borrow against your house?
John Abrams:
That is so true, but I have done all those things in spades.
Jay Goltz:
I’m sure you have. I’m just suggesting that the messaging is—
John Abrams:
And I have found something, Jay, that is counterintuitive, in a way. But when you engage the employees in that way, and that deeply, what you get is, you get all the wood behind the single arrow going in the direction, on the course, that you’ve charted.
Jay Goltz:
I buy that.
John Abrams:
Now, are you familiar with Jack Stack? Are you familiar with Jack Stack, the Great Game of Business.
Jay Goltz:
Sure, absolutely, I’ve talked to him about it. That’s where I got the first idea about ESOPs, from Jack Stack.
John Abrams:
So, open-book management is a form of democracy. You’re sharing it all. You’re sharing it with everybody, but the reason you’re sharing all that stuff is to give them a way to understand what they need to do and how they can help to make the business successful.
Jay Goltz:
And I would argue, substituting the word democratize with participative would solve the problem. Yeah, they should be participating. Absolutely, no problem. I just think there’s baggage with that word.
John Abrams:
Let’s do that.
Jay Goltz:
Okay, good.
Loren Feldman:
Just to be clear, Jay, I think, created a formulation where he suggested that if the business was deciding whether or not to open a store, somebody on the loading dock would have an equal say to Jay. And I don’t think that’s what you’re envisioning, John.
John Abrams:
That’s a great illustration. So you have 130 employees. If this becomes a worker co-op, you will probably decide—I mean, the way you do this is, you create a small steering committee that you choose who are trusted employees and leaders in the company to figure out the nuts and bolts of this transaction. And that group of people is going to figure out: “Well, how large should our board of directors be?” And maybe that’s going to be seven people. Maybe it’s going to be 10 people. Yes, those seven to 10 people would all have an important voice in whether you opened up that next store. But those people are going to be the people that you would want to be involved in that decision. They’re not going to be just anybody.
Jay Goltz:
Okay, no, like I said, I haven’t given up on the concept. I’m just telling you, reading stuff, and being a business owner, when I start hearing some of those words, I think, “Here we go again.”
John Abrams:
Wait a minute, Jay. In the very beginning of this conversation, you attacked big business: “I would never sell to private equity.”
Jay Goltz:
I don’t want to, but I’m not attacking it. I just don’t want to do it. I’m not attacking it. If somebody wants to do that, go knock yourself out and do it. I couldn’t care less. I’m not attacking it.
John Abrams:
I have a different view, but it doesn’t matter.
Loren Feldman:
Jay, I don’t think you’re arguing in favor of pay inequality. I think you’re arguing that small businesses are not responsible for creating that problem—
Jay Goltz:
Correct.
Loren Feldman:
And shouldn’t be responsible for solving it.
Jay Goltz:
Exactly.
John Abrams:
Jay, what’s the difference between the lowest-paid person in your company and the highest-paid person?
Jay Goltz:
Uhh, five times.
John Abrams:
You are a worker co-op. I’m sorry.
Jay Goltz:
No, believe me, I got that. That’s what I’m saying. Those numbers—
John Abrams:
That is the lowest ratio I’ve ever heard—I mean, I’ve heard four to one, five to one, seven to one. So you’re already doing this stuff.
Jay Goltz:
Yes, that’s why I’m talking to you.
John Abrams:
But you could now create a group of owners that could take the company into the future with a structure that will not be violated, because it’s going to be a legal structure.
Jay Goltz:
And I’ll feel great about it, because I have to tell you—
John Abrams:
You’re going to love it!
Jay Goltz:
—one of the greatest things that gives me joy, I’ve helped 10 people buy houses who work for me. And I feel great about that. So, no, I do think I fit this model. And part of the reason why I was turned off of the ESOP thing is there were so many problems with it, including the one that is my biggest one.
And Jack Stack is the one that does speeches on this. So he tells the story of a guy working on the production line making whatever, 20 bucks an hour, and he’s got millions of dollars in his retirement fund. And I say to myself, “That’s great for his kids, but not good for him.” I just went to my high school reunion at 68. 20 percent of people aren’t going to live to retirement. So how about letting the guy take some of that money, woman or man, and go buy a new car, go put braces on their kid’s teeth, all of it. So that’s enough reason not to do an ESOP for me.
John Abrams:
Jay, in a worker co-op, there are dividends, and those dividends—that are tax deductible—are limited by the IRS, and there’s a whole complicated formula about that. But you have to pay at least 20 percent of those dividends in cash. And the reason for that is that that income is passing through to the employee, and they have to pay taxes on it, so you have to give them enough cash to cover the taxes. But you can give them 100 percent if you want. You can give them 70 percent.
Jay Goltz:
But, so curiously, why? I think that’s great. But is the government telling you you have to give some of it in cash?
John Abrams:
Yeah, the IRS. The IRS wants to make sure that those taxes get paid, and so they make that regulation that if you’re going to issue tax-deductible dividends, you have to give the employees enough cash to pay the taxes. But you don’t have to limit it to that.
Jay Goltz:
Okay, great.
John Abrams:
At South Mountain, the philosophy is: We want as much money to go to the employees as possible. And if the company is in a cash position to give more of that in cash and less of it in a set aside, then they do that. And if you’re a very cash-healthy business, you might give out 100 percent of those dividends in cash.
Jay Goltz:
Okay. Whether it’s—
John Abrams:
So they can pay their college bills.
Jay Goltz:
This isn’t a new—whether it’s Small Giants or Conscious Capitalism, I’ve been involved with lots of these things. And they always start to boil down into, like, somehow, “Oh, it’s the right thing to do.” Which I take tremendous exception to. No, it’s a good thing to do, not the right thing to do.
John Abrams:
Exactly.
Jay Goltz:
Like, if someone needs the money, and they’ve got a guy who offered them a zillion dollars, I don’t criticize that. Do what you want to do. It’s a personal choice. I would rather do this. I just think the small business person has taken all the risks, the sleepless nights, their family has paid the price for it. And like in my case, between real estate taxes, payroll taxes, and sales taxes, I pay millions of dollars of taxes every year. So my point is, I’ve got no apologies being a small business owner. I’m not screwing anybody.
John Abrams:
I’m with you. I’m with you.
Jay Goltz:
Right, so I just want to be respectful to small business owners: more teachy, less preachy. No preachy. That’s kind of the point. I don’t want to preach to people that they should be doing this. I’m very interested in it, but I wouldn’t argue with someone who wasn’t interested.
John Abrams:
Here’s another thing you should know: And you can’t necessarily take advantage of this, but you know how with ESOPs, you can defer the taxes, and that’s a big selling point for ESOPs? Well, it’s a little-known fact that you can do that with the worker co-op, that the same 1042 rollover that applies to ESOPs applies specifically to worker co-ops, too, in certain conditions. You have to invest the money that you gain in certain ways. So you can even take advantage of some tax advantages potentially.
Loren Feldman:
Okay, great. I want to talk a little bit more about some of the nuts and bolts of how a worker co-op works. For example, I know one thing that you were wondering about, Jay, is the relationship the company has going forward with a bank. How does that work?
John Abrams:
This is a great question, Loren. So, you know, the problem with personal guarantees—do you have personal guarantees?
Jay Goltz:
Let’s make that clear for the rest of the world: I’ve always had a personal guarantee. And most business owners—most I know, not many, most—frequently, yes, I’ve always personally had to guarantee it.
Loren Feldman:
To make it even clearer, that means you have used your own home as collateral.
Jay Goltz:
Absolutely.
John Abrams:
Yep, so this is a real problem with worker co-ops. South Mountain Company has a large line of credit and no personal guarantees because we worked with our bank for 40 years. It’s a community bank, and they understood what a good business it is. And they went along with it. But this does not happen very often. And so there are loan funds that are set up just for co-ops. A big one is the Cooperative Fund of the Northeast. There are about eight or nine of them in the country, and they respond to this problem. They loan to co-ops without personal guarantees.
Jay Goltz:
I can tell you, knowing I was doing this today, I called my bank that I love, that’s a very entrepreneurial bank and asked about loans to co-ops. She didn’t have a clue what I was talking about. And she said, “Call me back when you figure this out, because I’m interested.” So no, they’re not used to it. So that is an issue.
John Abrams:
It’s a big issue, and it’s an important one, and that’s why solutions have come. So when we converted 40 years ago, in 1987—is that 40 years ago, maybe more?. There was no infrastructure for co-ops. There was one organization, the Industrial Cooperative Association, that helped people become co-ops. There were all kinds of worker co-ops in other countries in the world, but there were only a dozen in the U.S., and there was no infrastructure.
So over that time, it was super exciting for me to see, as I researched this book, how many resources and how much infrastructure now exists. Because now, there are 1,300 of these worker co-ops in the U.S., and they are happening. And that’s the purpose of this book. It’s just to inspire people to do that.
Jay Goltz:
I think with the silver tsunami thing, it’s perfect timing.
John Abrams:
It’s great timing. But in the second edition, I’m going to have to change that word.
Loren Feldman:
All right, here’s another question.
Jay Goltz:
So far so good, yes.
Loren Feldman:
Jay, you’ve helped several other businesses go through a transition, a succession, by having the founders, longtime owners, sell to key employees. And you’ve come up with an interesting structure to do that; you actually call it a We-SOP. My question is: Why would a co-op be better for you than a We-SOP?
Jay Goltz:
That’s an excellent question. I have helped a couple, and it’s worked out beautifully. One is a guy I’ve been mentoring for years. He built a very successful frame business to, like, a million and a half dollars. Two employees work there. He’s ready to retire.
And I said, “Can they buy it from you?” He goes, “They have no money.” And this was a breakthrough for me. He goes, “Well, they could get an SBA loan.” And that’s when the light bulb went on. I said, “Wait, wait, wait. You’re trying to turn a civilian into an entrepreneur taking risks. Let’s take the civilian and turn them into a business person and take the risk part out. Forget about getting an SBA loan. They’re not going to do it.”
So I figured out—and part of this was simply because I had just come off of two years of looking into ESOPs. And I realized three and a half times EBITDA—or four, whatever the number is—if you could just hold on to the company for a few more years, you’d get all your money out.
John Abrams:
Exactly, yep.
Jay Goltz:
He made a deal with them. Here’s the deal: You work for another three years, and after three years, you can buy the business, but at least you’ve got your money out then. And since they took no risk, they don’t get anything if they decide to get out of it in a year or two. They didn’t put anything into it. And you know what? It worked beautifully. He’s already done it. Everybody’s happy. One of the women that he sold it to, the husband, said, “Wow, this is like a gift.” Yes, it is a gift.
Loren Feldman:
Okay, it’s great. Why wouldn’t you do that instead of a co-op?
Jay Goltz:
Okay, that’s a good question, because after talking to John, and after reading his book and after thinking about it, I can’t argue with the idea that people—they’re clearly going to be more invested and more dedicated and put a little bit more into it. Sure, I can’t argue with that.
John Abrams:
Yeah, there’s another thing though, Jay. I mean, you have built something of beauty, and one of your goals is that it will endure. And if you sell it to two key employees, who knows what they’re going to do with it? Whereas this keeps the mission intact.
Jay Goltz:
I’m planning that that little bit of extra energy is going to absolutely be a tangible ROI, that there’s going to be more profit there. And that extra profit will basically be what I’m going to get paid back with. I’m assuming there is going to be some synergy to this whole thing and that we’re going to get more profitable. And then that extra profit is going to help oil the whole big machine. That’s why I’m interested in this. On top of the fact: If you pick out several employees, where’s the line?
John Abrams:
Exactly, yes.
Jay Goltz:
And then, “Oh, why did I not”—it could cause, not could cause. I’m sure it causes problems.
John Abrams:
It can cause resentments. This is broad-based.
Jay Goltz:
Yes, absolutely. No, I got it. This is why I’m talking to you. So far, so good.
John Abrams:
No, no, you tell my story better than I do.
Jay Goltz:
I speak entrepreneur. [Laughter] I know what inspires me and I know what turns me off.
Loren Feldman:
All right, here’s another question. We’re going through really interesting, uncertain times. No business is guaranteed to survive. I’m curious, John, what are the advantages and disadvantages of being a co-op during tough times? How do you think about that?
John Abrams:
I think about it by telling you a story. The second best thing that ever happened to South Mountain company was the crash of 2008. We got beaten so badly, a cascade of cancelations, and we were suddenly facing—we were used to prosperity. We did well for so many years, and all of a sudden, we were facing the unthinkable: that there would not be enough productive work for every person in the company.
And that was the moment when I realized that my job was not to protect people from stress. My job was to engage them in solutions. And we came up with, together as a group, six different strategies that we would engage in: voluntary temporary furloughs; involuntary temporary furloughs; reduction in work hours; reduction in wages across the board. Six of them, and none of them involved layoffs.
It was accepted and assumed that just because somebody hadn’t been there as long, they shouldn’t have as much of a right to their job. And so I will never forget the day that I stood in front of the company and announced that we were going to reduce wages by 20 percent across the board, and we had no idea when we would be able to restore that. And after that meeting, people came up to me and thanked me. And I said, “Wait a minute. Wait a minute. Do you know what just happened there?” And they said, “Yes, but it happened to you too, and you’re losing more than I am, and we’re all in it together.” So that’s the thing, that you have this workforce that doesn’t go home and forget about it. You have this workforce that is engaged in the business and keeping the business intact.
Jay Goltz:
Let me tell you the rest of that story. It happened last week here. Business is off, and I decided we need to do some furloughs—not a lot, only 10 percent. I’ve been through this before.
Loren Feldman:
Wait. You furloughed 10 percent of employees, or 10 percent of pay?
Jay Goltz:
No, 10 percent of their pay. Take a day, leave half an hour, leave four hours early on Friday, whatever. And I’ve been through this. I’ve been through four recessions. I’ve been through September 11. I’ve been through the pandemic, the whole 2007-2008. I’ve been through the whole thing.
And the reaction I got was startling compared to the old days. The young people that work here that have never seen this are looking at me like, “What?” Like, it was the opposite of what you just described. And I realized, we’re in a new world now that they just—I have been funding this business with hundreds of thousands of dollars to get through it. And like, no one knows about it. No one cares. All they know is that I’m driving a BMW. So I understand what you’re saying more than most, because I just lived through that whole thing. And so I totally buy that. I do.
John Abrams:
And you know what we learned from 2008? We decided that we were never going to be in that situation again, and we were going to build a very strong reserve fund, at least a million dollars. And the next time something like that happened, we could coast through it. We didn’t know that it was going to be a pandemic, but the pandemic came, and we kept everybody working and paid even though they weren’t working.
Jay Goltz:
Wait, did you take PPP money?
John Abrams:
We did take PPP money, too.
Jay Goltz:
Well, that helped.
John Abrams:
That helped a lot.
Jay Goltz:
Yes, let’s not leave that off.
John Abrams:
No, no, that helped a lot. But that PPP money didn’t come right away, and we had eight or 10 weeks of being effectively closed. Our job sites were shut down, and people were getting paid, and they were all saying, “Well, what can we do? What can we do to help? Put us to work doing something.”
Jay Goltz:
So that is the answer to Loren’s question: Why am I thinking about this instead of doing a We-SOP? Nothing would make me happier than knowing my employees are—why would I want to go make some guy from a private equity company rich when I’ve got these people who have been with me? Why wouldn’t I want them to be getting the benefit of everything? And that’s just my personal thing. I’m not criticizing someone who doesn’t, but why wouldn’t I want my employees to have that benefit?
John Abrams:
And they also get to—so if they want this company to be more profitable, great. They can do that. They can affect it.
Jay Goltz:
Okay, now here’s the question, though: Walk me through the profitability. Everyone’s got a vote. Okay, how does it work? You’ve got a $300,000 profit. How do you split it up?
John Abrams:
All right, so first of all, you set your wages and salaries in the usual hierarchical way. I mean, just the way you do with your five-to-one ratio, basically. And so that’s how people really get rewarded for their level of responsibility, their talent. Then the dividends get distributed on the basis of hours worked. You’re basically saying: Everybody here is of value. Everybody is contributing. So those dividends, when you’re highly profitable, they can be very substantial.
I’m thinking of a company called Ward Lumber in Jay, New York that converted to a worker co-op about two years ago: 60 employees, a very good lumber yard. It was a fourth-generation family business, and the fourth-generation guy, his two daughters, did not want to come into the business. And so he got enamored with the idea of a worker co-op. And I was up there talking to people, and the operations director said to me, “First-year dividend, it allowed me to buy a house that I thought wouldn’t happen to me for years. It changed my life.” And so, it’s life-changing. And so, companies that actually have some money to distribute, it is meaningful to people.
Jay Goltz:
But you’re telling me, the person who makes $175,000 is getting the same bonus as someone that makes $40,000?
John Abrams:
Yes. Now, you can do your own profit-sharing before the dividends, if you want to. But I think it’s a really good system. I have never had people complain about that because they’re getting paid well.
Jay Goltz:
That surprises me.
John Abrams:
And they like it, that everybody’s sharing it.
Jay Goltz:
I know, but that surprises me that the person making $175,000 who got a $2,000 share is happy with that when they know that the guy who’s making $40,000 got the same thing. So I guess what you’re saying is—
John Abrams:
If they’re unhappy, give them a $2,000 raise.
Jay Goltz:
Right, you bury that in the money. Okay, okay, so there are workarounds to that whole thing. Okay, I got that.
Loren Feldman:
John, I’ve spoken to a lot of owners who’ve gone through some sort of transition to employee ownership, and in many cases, it takes the employees by surprise, and they kind of have to be sold on the idea. Sometimes they’re skeptical. They think more work is being dumped on them or more risk. And they’re wary of it. Did you, when you converted, have to sell your former employees?
John Abrams:
I mean, I didn’t, because it was a very tight-knit small group, but what you’re saying, Loren, happens all the time. At Ward Lumber, there was tremendous skepticism at first. They thought it was a way for Jay [Ward] to get out and leave them hanging. But you have to be very open about it, what it is. You have to communicate really well. They’re choosing to become owners, if they want to. So you got to sell it. You have to make the case that this is good, and it’s good for them.
Loren Feldman:
Choosing as a group or individually? Could some employees opt out?
John Abrams:
Absolutely. You don’t have to buy in. You know, we had a guy for 20 years who would never buy in. And he was a good friend of mine. And I would say, “Bob, you are leaving on the table an annual dividend, and you are not getting the voice that you ought to have.” And he would say, “Hey, I get it, John. I’m just not an owner type. Not for me.” Okay, that’s fine.
Jay Goltz:
I love that. I gotta tell you—actually, that’s a great thing with this. Because I know there are people who—you don’t want to cram this down anybody’s throat. I think that’s a lovely piece of this, that people are opting in and don’t have to be in it, because that’s the way the world works.
John Abrams:
You know what else, Jay? It’s very rare because there are a lot of people who don’t—first of all, they just can’t put the money together, or whatever. Or it just doesn’t appeal to them. But when they see their friends and colleagues benefiting from this and enjoying it and getting a lot out of it, after a time, they come around—everybody except Bob.
Jay Goltz:
Okay, so let’s just summarize what’s going on in my little brain. One, don’t get hung up on they’re all getting the same thing. You can go have a different profit plan if you want to. Okay, great. That solves a huge problem. Two, can’t argue with the fact everybody’s going to be even more invested. I can’t argue. I’m not naive. I’m sure they’ll work a little harder. Great. Three, the government’s not crawling down your throat for anything?
John Abrams:
No.
Jay Goltz:
Right.
John Abrams:
But the other thing is the board has the obligation to hire and fire the CEO, so you could get fired. But who’s going to ever be stupid enough to fire you?
Jay Goltz:
My kids after they take my car keys away. [Laughter]
John Abrams:
It’s your job to set the salary so you can reward people as you feel like you need to. It’s not very democratic, Jay, but hey!
Jay Goltz:
No, I’m telling you, if you do nothing more, if you’ve accepted that. I thank you for that. If you do nothing more but get rid of that word, you’ve done yourself a tremendous service, because that’s the one that I immediately go, “Oh, here we go again.”
John Abrams:
Well, here’s the thing, Jay. I really do want to get this out of the echo chamber. I want to spread it widely, and that means meeting people where they are. So I appreciate that criticism. I appreciate whatever feedback I get that makes it more appealing to people.
Jay Goltz:
All right, so here’s my last question: I wake up one day and I think, “Oh my God, this isn’t working.” Or, and I’m not kidding when I say this, I have a 13-year-old grandson. Maybe in 20 years, I’m still here, and my grandson wants to take it over or something. I don’t know. And I think, “God, I wish I would have—”can you get out of this?
John Abrams:
No, you’re in trouble then.
Jay Goltz:
Okay.
John Abrams:
You can hire him.
Jay Goltz:
Not a dealbreaker. No, no, not a dealbreaker. But okay.
Loren Feldman:
How about selling the company at some point?
John Abrams:
So, Loren, that’s exactly the follow-on question. That’s why it’s good that you can’t get out of it. Because the other thing is that you set up—now you can do this however you want—you set up in the bylaws what it takes to sell the company. And the most common thing is that 85 percent or 90 percent of the owners have to agree to sell. You know, you’ve got people in their 30s and their 40s, their 50s and 60s. When is everybody going to agree, “I want to sell the company and get rid of my livelihood”? So there’s a protection there.
And some worker co-ops—and especially this is true in a network of co-ops in Italy and some here—there’s a company called Equal Exchange, which has been around for 40 years—if the company is sold, half of what’s left over goes to the employee owners and half of it goes to a nonprofit, thereby disincentivizing selling the company. So you can do whatever you want around that. But the normal thing is you don’t want to make it 100 percent of the owners, because you might have a situation where it really makes sense to sell this company, and everybody knows it, and everybody agrees, and you’ve got one person who says no.
Loren Feldman:
Bob.
John Abrams:
Yeah, Bob. So you’ve got to count on there being a Bob, and so that’s why you don’t make it 100 percent.
Jay Goltz:
Okay, again, that’s not a dealbreaker. Because in my situation, my other choices aren’t even close to working. So this one, even if it might not be perfect, it’s close. Whereas my other ones aren’t even on the table. I’m not doing it.
Loren Feldman:
John, do you know of a situation where somebody chose to convert to a worker co-op, and it just was a disaster—for whatever reason, it didn’t work?
John Abrams:
Yep, I do. It was actually a really good friend of mine.
Loren Feldman:
What went wrong?
John Abrams:
So, first of all, you only had to work there for a year to become an owner, and you didn’t have to pay hardly anything. I think it was a thousand bucks or something like that. And there was no kind of education. There was just a tremendous amount of diversity in that company, in terms of people’s points of view. And there was strife going in. I mean, if you take a crappy company and you make it into a worker co-op, you are going to have a crappy worker co-op, right? And this was not a crappy company. It was a good company, but it had some real problems that they didn’t address.
Jay Goltz:
I’ve got to tell you, just you telling me one year—that’s not a good idea. You want people vested. Like, if someone’s been with you five years, they’re probably good employees. They want to be there. You want them to be there. One year? I mean, that’s just a can of worms.
John Abrams:
It’s interesting that you say five years. So, most worker co-ops, it’s either two or three years. At South Mountain, it’s five years. And there have been times when I thought that was too much, because people coming in mid-career, it’s a long time to wait for ownership. But I actually tried to change that once and make it four years, and I got so much pushback. People said, “This is a great system. We have five years of evaluations, we can usher them out the door if they’re not the right material for ownership. It’s a good system.” So, yeah, I think having a long period is not a bad idea.
Jay Goltz:
Okay.
Loren Feldman:
So, Jay, where are you?
Jay Goltz:
I’m, I’m, uh—
John Abrams:
He’s gonna call me on Monday, and we’ll get to work.
Jay Goltz:
Yeah, we’re gonna get to work. No, like I said, I need to do something. Because this isn’t gonna fix itself, and kicking the can down the road is not necessarily going to be helpful. And I’ve had to go through this process of first cycling through my kids to realize this would not be a good idea. My kids are not suited to do this. They don’t want to do this. And that was a tough pill to swallow, frankly, but I swallowed it.
So I’m ready to move on to phase two, which is figuring this whole thing out. And like I said, I accept the fact that having a participative workforce—and what a lovely thing for me to go to employees who’ve been with me for years. The one that’s awkward are the people that have been with me for 30 years who are retiring in a few years.
John Abrams:
Oh my God, they are going to love it.
Jay Goltz:
I know, but they’re leaving. They’re going to think, “Great, I’m glad you’re doing it now. I’m about to retire.” I mean, oops. I mean, it is what it is. But I do have a couple people who are going to be—three people are going to be retiring next year. So they’re going to be out of it.
John Abrams:
But you also could pay them a really nice severance.
Jay Goltz:
Yeah, a gift—not really severance. Okay!
Loren Feldman:
John’s book is From Founder to Future. There are a lot of sources of information out there about employee ownership. Many of them try to sell you on one particular flavor. As you’ve heard here, John discusses them all and tries not to oversell any of them.
Jay Goltz:
The most important part is he owned a business. That’s the most important part to this, because a lot of these people out there have never been in the arena, as Teddy Roosevelt said.
Loren Feldman:
Thank you both.
