US Business Owners Turn to Employee Ownership as Retirement Looms

As a significant number of U.S. entrepreneurs approach retirement age, many are choosing to sell their businesses to their employees. This trend, sometimes referred to as a "silver tsunami," is driven by the impending retirement of approximately six million American small and medium-sized company owners by 2035, according to a McKinsey report.

This demographic shift represents a "once-in-a-generation wave of ownership transitions," according to Harvard Business School associate professor Ethan Rouen, who notes frequent discussions with owners seeking to sell their companies. Often, the owners' grown children are not interested in taking over the family business, prompting alternative succession plans.

Employee ownership models are seen as a viable solution for many firms, particularly appealing to owners who prioritize the well-being of their staff and are concerned about the potential disruption that could occur if their company is acquired by a larger corporation or private equity firm. This was the motivation for William Stockwell, whose family started Stockwell Elastomerics, a Philadelphia-based manufacturer of industrial components, in 1919. Stockwell decided to sell to his employees after witnessing negative outcomes for other businesses that underwent external buyouts, where operations were moved, shut down, or drastically altered, leaving remaining employees in uncertain positions.

Several employee ownership structures are available in the U.S. Softstar Shoes, for instance, utilized an Employee Ownership Trust (EOT). Under an EOT, a trust is established to acquire the business on behalf of the employees, alleviating the need for them to purchase stakes directly. The trust then fulfills the sale price to the former owner through installments derived from future profits. This arrangement means the seller, like Paul Salcido, bears the risk that the business must remain profitable to ensure full payment.

William Stockwell opted for an Employee Stock Ownership Plan (ESOP) for Stockwell Elastomerics. In this model, the company is also placed under trust ownership, but employees receive shares that they can only liquidate upon leaving the company, rather than sharing in annual profits. Stockwell is receiving payments over 10 years, acknowledging this as a "short-term financial sacrifice" while he continues to work part-time for the company.

These employee ownership pathways offer a method for founders to ensure the continuity of their legacy and protect their workforce, even as they transition out of active management and ownership. The success of these models relies on the ongoing performance and commitment of the employees who now hold a stake in the company's future.