Lt. Gov. Sabina Matos is seeking to encourage employee ownership as a succession plan for small-business owners, but collaboration with the business community and improved workforce education are critical for success, observers say.
In March, Matos announced the launch of the Rhode Island Succession Planning Task Force, a working group developed to guide the state through what’s been called the impending “silver tsunami” of retiring baby boomers.
“There’s going to be a huge transfer of wealth happening in this state and in this nation in the next 15 years,” Matos said. "And many businesses are not ready for that.”
While some aging business owners have family members who are willing to step into their shoes, she said, owners oftentimes have no plan, leading to the dissolution of iconic Rhode Island businesses such as the now-defunct retailer Benny’s Inc., which shuttered all locations in 2017 when the Bromberg family decided to close on its own terms.
For retiring business owners without a succession plan, selling the company to their employees can allow them to continue their legacy while giving back to the state and community, Matos said.
While lack of awareness is one of the biggest roadblocks currently in place, the state also lacks resources, Matos said, noting that even business owners interested in pursuing an employee-owned model can have difficulty finding lawyers, accountants or lending institutions equipped to support their vision.
Robert Mastin, founding owner of Custom House Coffee in Middletown, knows these obstacles well. Mastin successfully began transitioning the business to employee ownership in 2017, but he said the process required significant time, money and legal knowledge — an area he hopes the state government can address.
“I had to pay my attorney a lot of money to set this thing up,” Mastin said. “Maybe there are ways of making it a lot simpler at the statewide level ... I had to do a lot of paperwork for each person to become a shareholder, but that’s something my attorney came up with to make it all legitimate.”
But Mastin, who considers himself “semi-retired,” remains pleased with his decision and says he’s glad to see the state encourage employee ownership succession plans.
“I think for the right kinds of businesses, it can really help,” Mastin said, highlighting a team-oriented atmosphere at Custom House Coffee as a major factor in the business’s success.
Mastin also had the type of mindset the task force hopes to encourage. He knew he wanted to begin stepping back, but “I couldn’t see just shutting the place down when I no longer wanted to do it,” he said.
“That would have been so difficult and unfair to all of these loyal employees I’ve had,” he said. There were more than 25 workers, and more than half of them had worked at the coffee shop for at least 10 years.
In addition to addressing regulatory hurdles, Mastin said financial incentives can help to offset legal costs associated with the transition.
The task force is also considering this approach, Matos said, and looking to other states that have already implemented similar programs.
In Colorado, for instance, the Employee Ownership Tax Credit to Establish or to Expand provides eligible businesses with a tax credit that covers up to half of their conversion costs for use on state income taxes. A 2021 state bill also allocated $10 million annually in tax credits that fund professional service costs associated with employee ownership conversion.
The task force is also talking to universities, Matos said, with a goal of creating education and training opportunities that equip graduates with the skills to help more companies navigate employee ownership transitions.
More than 20 other states have measures in place to encourage employee ownership, Matos said, and the task force is seeking to learn from their successes and failures.
Despite her own interest in employee ownership, Matos said the task force is not looking to put state government in the position of picking winners and losers in succession planning.
“We don’t want to dictate that the [task force] is just going to work [on cooperatives] or [employee stock ownership plans] or profit sharing,” she said. “We want to make sure that we’re providing all the resources so that businesses can decide what model makes the most sense for them.”
(Editor's note: Providence Business News is part of Iowa-based Woodward Communications Inc., an employee-owned company that operates under an employee stock ownership plan.)
Matos' spokesperson David Folcarelli said, "It’s critical that the state get involved in succession planning overall because keeping our businesses open preserves jobs, our economy, and our tax base. Employee ownership has additional, significant benefits for our economy – including a both 33% higher income from wages and 92% higher median household wealth for worker-owners."
Monika Zuluaga, CEO and president of the Northern Rhode Island Chamber of Commerce, agreed that many business owners are unaware of employee ownership as a succession plan, but sees the concept as a positive option for those nearing retirement.
"From the Chamber's perspective, it's encouraging to see the state is taking a proactive role in exploring [employee ownership] options and educating the business community on what that looks like," Zuluaga said.
But there's work to be done in broadening the business community’s involvement, Zuluaga said. "While we've had surface-level conversations about the initiative and the mission behind the task force, we haven't sat down together and realized how we can be of value to the task force," she said.
