NORTH KINGSTOWN – When a small-business owner retires or steps down, a well-loved community fixture and local economic driver often vanishes with their exit.
Employers who find themselves without a succession plan commonly sell the business to a private equity firm, effectively shuttering the company. A smaller number may have a family member willing to take over.
But those interested in an alternative approach to extending their legacy should consider a less-conventional method, says Jegoo Lee, an assistant professor of management at the University of Rhode Island: selling the business to their employees.
Lee was recently appointed to the R.I. Business Enterprise Succession Task Force, a group established in March by Lt. Gov. Sabina Matos to research and propose policy that encourages employee ownership.
The topic is particularly pertinent in Rhode Island, the task force holds. A 2021 report by employee ownership advocacy organization The ESOP Foundation found that more than half of the state's businesses are owned by an individual older than 55. Meanwhile, a 2018 U.S. Small Business Administration study reported retirement as the fastest-growing reason behind business closings.
Employee-owned businesses aren't novel to Rhode Island, with Lee highlighting local chain Newport Restaurant Group, White Electric Coffee in Providence and Custom House Coffee in Middletown as some examples.
Overall, he said, the state has about 14 midsized to large-sized employee-owned companies.
The idea of employee ownership has gained traction in recent years. Lee, who specializes in strategic and responsible management, began focusing on the concept as the COVID-19 pandemic emphasized workforce vulnerabilities. Prior to this time, he said, limited research existed around employee ownership. Though overall academic interest has since increased, Lee remains the only researcher to focus on this subject in Rhode Island.
“Usually what we teach and what we deal with is mostly about company organization, rather than people,” Lee said. “So we are talking about how companies can be successful and have better performances,” typically through abstract concepts like structuring.
“But we barely talk about employees and people in organizations,” Lee continued. “Even if we have a great strategic plan, if we don’t have people who can implement or drive this strategic plan, we can’t achieve the goal.”
Many business owners think of employees as assets to be eliminated in times of financial hardship, Lee said. But this approach has dismal impacts on laid-off employees and the local economy, and undermines morale among those who remain with the business.
Employee ownership, meanwhile, has mutual benefits for employers and workers, Lee noted.
Under an employee-owned model, worker-owners have the power to implement less individually disruptive measures to address deficits. Instead of layoffs, for instance, they may vote to bridge the gap by decreasing salaries across the board for six months. And employees already know the inner workings of the business, eliminating training costs.
By selling the business to employees, an exiting business owner can meanwhile carry on their legacy and have a positive impact on the community. In addition to promoting employee well-being, Lee's research has found that employee-owned businesses have a greater sense of ethical responsibility and are more likely to implement environmentally friendly policies.
Employee owners "are usually very engaged, very active and very considerate about their own business," Lee said.
"When they feel like they are proud of their own companies, they want to give their companies a better reputation," he added. "They want to protect their communities and they want to make their communities more sustainable."
But challenges remain in place to popularizing this approach, Lee says. Selling a business to employees involves more work and less immediate cash for an exiting business owner, and employees may need to secure a bank loan to afford the sale. Due to a lack of broader awareness, many business owners don't even realize they have this option.
Some business owners may also hesitate to explore employee ownership due to political misconceptions, Lee added, with some viewing it as "this socialist idea." In reality, he said, the idea has long had bipartisan support.
One of the task force's goals is to better publicize employee ownership as an option, Lee said. The group is also advocating for a proposed bill that better defines employee ownership and the transition process, and has released an
active survey to learn more about business owners' retirement and succession plans.
Jacquelyn Voghel is a PBN staff writer. You may reach her at Voghel@PBN.com.
