California Business Owners Spread The Wealth By Selling Their Companies To Their Workers
With unemployment rates hitting historic lows and state GDP now eclipsing the UK's, California's economy seems strong.
But many workers are not reaping the rewards. Their wages aren't growing along with their companies, or even keeping up with the rising cost of living. Most workers struggle to save enough for retirement. And they feel unprepared for the next recession.
Some business owners have found a way to push back on these trends. They're selling their companies to their workers.
Employee-owned companies are still relatively uncommon. California is home to 780 companies offering Employee Stock Ownership Plans (ESOPs), covering more than half a million workers, according to data from the National Center for Employee Ownership.
But in recent years, that number has been growing in some industries, including construction.
Inside the fabrication yard of 20/20 Plumbing and Heating in Riverside, workers sort pipes and assemble parts for HVAC systems. They prep everything for installation into new homes and apartment buildings at job sites throughout Southern California.
"What happens is, it all gets bundled up," explained Vice President Mike Mahony, "It gets a job number put on it. All this stuff will be loaded into our delivery trucks this afternoon."
The workers here sawing lengths of pipe and driving forklifts aren't just employees. They're all part-owners of the company.
It all started a few years ago, when Mahony and his business partner realized they didn't have anyone lined up to take over the company.
"We're getting old," said Mahony. "And I just said, 'Hey, what's your plan?'"
Without a successor in mind, they put the company up for sale. But Mahony said they got low-ball offers, including one from a private equity firm.
"They were going to take our company that had no debt and leverage the crap out of it," he said. The deal would "require us to hit record profits just to get the money. So that was a non-starter."
Mahony also worried that outside buyers wouldn't do anything to reward the workers who helped the company succeed. A private equity buyout could even lead to layoffs.
"Then the ESOP option came up," he recalled.
An Employee Stock Ownership Plan is one way for business owners to sell their company to their workers, often without the workers having to pay anything out of pocket. The purchase is typically made through a trust, using the company's annual profits.
Once the buyout at 20/20 is complete, each worker will own a piece of the company, proportionate to their salary. It's essentially a retirement benefit, one that can complement an existing 401K. As the company's stock grows, so will the worker's retirement balance — all without them having to contribute a dime.
Mahony said it's been a win-win for both the owners and the workers.
"It's done very well for me," he said. "And because of the blood and sweat that everyone else put into this thing, why don't I do something for them? I've got enough. By giving it to them, it's bringing everyone up."
"It encourages you to do your job even better," said field superintendent Pete Hernandez. He said owning a piece of 20/20 will make workers more likely to stay and double their efforts to grow the company.
"To know that there's something at the end of the rainbow coming your way, because you put all this work in, it makes your job much more important," Hernandez said.
Construction is the third most common industry for employee-owned companies in California, just behind manufacturing and the broadly defined category "professional services."
And in recent years, the number of construction companies transitioning to employee ownership has been growing. In 2017, the most recent year for which data is available, 13 California construction companies created ESOPs, more than any other year, bringing the total to more than 130.
Marcus Piquet, a certified public accountant with Ambrose Advisors, has guided many Inland Empire companies through the process of setting up an ESOP.
Business owners often come to him through word-of-mouth, having seen an ESOP work out for other companies. Piquet said they're also eager to leave a positive legacy at their company after they leave.
"If they sell to a strategic buyer or a private equity firm, employees get nothing," Piquet said. "The best the employees can hope for is that the business isn't severely disrupted and they don't lose their jobs."
Piquet thinks more financial advisors should be pitching ESOPs to their clients as a way to avoid those outcomes. "Many business owners feel a tremendous duty of loyalty and obligation to the employees," he said.
ESOPs were pioneered in the 1950s by San Francisco lawyer and economist Louis Kelso. Today, they're unique for drawing bipartisan support.
Progressives such as Bernie Sanders like that employee ownership can help build wealth for the working class and distribute profits more evenly. Many Republicans also like ESOPs for the significant tax breaks they enjoy, and how they can encourage rank- and-file workers to think more like entrepreneurial business owners.
Republican state Sen. Scott Wilk of Santa Clarita introduced a bill earlier this year that would have given employee-owned companies a leg up in winning state government contracts. But it has been stuck in committee.
Corey Rosen, the founder of the Oakland-based National Center for Employee Ownership, said research shows workers in employee-owned companies have more than double the typical retirement savings balance, and they're much less likely to be laid off.
"They accumulate greater wealth, and they have greater job stability," Rosen said.
Greater stability is an attractive prospect for construction workers in the Inland Empire. During the Great Recession, more than half of Riverside County construction workers lost their jobs. Employment levels still haven't fully recovered.
But today, Riverside County is home to more construction workers in employee-owned firms than any other county.
Rosen said employee ownership doesn't just benefit individual workers. It also strikes at the heart of California's rising inequality.
"I think it helps address this issue that's deviling the economy and society," Rosen said, "about one small group of people who have most of everything and everybody else who's just trying to run in place."
Rosen admits that employee ownership isn't right for every company. Those that aren't reliably profitable will have a hard time pulling off the buyout. But he thinks it should be a lot more common than it currently.
Isabel Guzman agrees. She directs the Office of the Small Business Advocate under Gov. Gavin Newsom. She said the state's burgeoning senior population will put many companies in a good position for an employee ownership conversion.
"As these businesses in the silver tsunami start to retire, and look for options, we need to get this information out there," Guzman said.
Guzman said the idea is being increasingly discussed at Small Business Development Centers across the state.
But Rosen argues the state should do more. He says for a fraction of what California spends on various employer tax incentives, it could copy what other states are doing to promote employee ownership: hire a small staff to reach out to business owners that might be a good fit for an ESOP and explain its benefits for them and their workers.
Guzman said the state doesn't have plans to do that right now.
"I think it's more effective to work with local partners than it would be to hire state employees to to try to reach the businesses," she said.
Whatever the approach, Guzman said the clock is ticking. According to a U.S. Census Bureau survey, 49 percent of California businesses with paid employees are owned by people 55 and older.
Guzman hopes before those owners step down, they'll consider giving their company to the workers who helped build it.
The California Dream series is a statewide media collaboration of CALmatters, KPBS, KPCC, KQED and Capital Public Radio, with support from the Corporation for Public Broadcasting, the James Irvine Foundation and the College Futures Foundation.