Why businesses should consider employee ownership

As business founders retire and close up shop, they’re inflicting what’s being called a “silver tsunami” on the economy. Communities lose revenue and employees lose jobs, when selling the business to employees might be a better alternative. The Rutgers School of Management and Labor Relations has opened the New Jersey/New York Center for Employee Ownership. Its Executive Director Bill Castellano sat down with Senior Correspondent David Cruz.

Cruz: So, let’s talk about the New Jersey/New York Center for Employee Ownership. Is that as it sounds?

Castellano: That’s correct. It’s based on the School of Management and Labor Relations within Rutgers University. We’ve been researching the benefits of employee ownership for quite some time. Last year, we partnered with the National Center for Employee Ownership to establish the New Jersey/New York region. Primarily, we’re a center that’s promoting the advantages of employee ownership by communicating our research, providing training and conferences.

Cruz: Now, you’re talking about employee ownership as opposed to what would have been privately owned or held by a group or partnership?

Castellano: The common strategy is an ESOP where companies sell their company to employees.

Cruz: ESOP? Which is an acronym for?

Castellano: Employee Stock Ownership Program. Companies, very large companies like Prudential and J&J, may have equity compensation programs where they share stock with their employees. So, we’re primarily helping those companies think about expanding employee ownership within the state of New Jersey. In our research, we’ve seen that this promotes productivity, the longevity of these companies or the survivability of these companies are much higher, so that’s good for the economy of New Jersey as well.

Cruz: But stock options are a little different than employee ownership, right? I mean, they’re technically kind of the same thing, you own a little bit of the company, but employee ownership suggests the employee is buying the company lock, stock and barrel, as it were.

Castellano: In ESOPs, that’s usually the case, and the other, where they aren’t getting stock and stock options, we promote broad-based ownership where they’re offering those kinds of equity shares broadly to employees and that they have a stake within the organization.

Cruz: So who’s taking advantage of this? Who’s doing this? Is it mom and pop laundry, something like that?

Castellano: The ESOP option, where an owner would sell the company to their employees, typically it’s a company between 50 and 500 employees. We have about 155 types of those organizations within the state of New Jersey, and they’re all types. They’re professionally managed companies, engineering and architectural firms, some manufacturing firms as well. That’s more on the ESOP side. The equity and compensation strategies, as I was saying before, the very large Fortune 500 companies like J&J and Prudential also offer those types of programs.

Cruz: What’s the benefit for me if I’m an employer, I own this company, I have 58 employees and somebody makes me an offer that looks pretty good to me. Why should I not take that offer rather than sell it to my employees?

Castellano: If you do sell it to your employees, you’re still getting compensated for that, so it’s very comparable to selling it to a competitor or selling it to private equity. The big difference is when you do sell it to your employees, most likely these employees are going to remain within that company and that company is going to remain within New Jersey, so it’s very good for the employees. It’s a succession for the owner. They could also stay a little bit more active with the company, so they may partly sell to employees for a period of time. So for those that are looking to sell and still remain intact, and take care of their employees, it’s a great option.

Cruz: And depending on the company that you’re in, it really helps for continuity for a community, as well.

Castellano: Exactly. The survivability rates for these companies are much higher than their competitors. We’ve done studies over the last two recessions, they had significantly less layoffs than their competitors. Their growth rates are much higher, so it’s good for the company, it’s good for the employee as well as the economy.

Cruz: This is also a reaction to a phenomenon called the “silver tsunami”?

Castellano: The “silver tsunami,” about 50 percent of privately held companies nationwide, and particularly in New Jersey, are owned by 50-year-old-plus baby boomers who we anticipate over the next 20 years will be looking for options to sell their companies. Nationwide, you’re looking at over $5 trillion worth of assets that are going to be exchanged, so this option of selling to your employees is something that we would highly promote.

Cruz: Not often happening in our area though, why is that?

Castellano: No, New Jersey is not one of the most well-known states within the U.S.

Cruz: Is it something about the laws in New Jersey, the economic conditions in New Jersey?

Castellano: No. It would be nice if we had laws that could provide greater tax incentives and there are those kinds of policies being considered in New Jersey. It’s just more indicative of the types of organizations. You see smaller firms and rural-type areas in many parts of the country that have really adopted this type of a strategy. But those small companies, as I was saying, the 50 to 500 employee companies are also becoming pretty dominant in New Jersey. So we are expecting, over the next 20 years, many more companies looking at this option.

Cruz: A way to keep local companies local. Bill Castellano is the executive director of the New Jersey/New York Center for Employee Ownership at Rutgers. Thanks very much for coming in.

Castellano: Thanks for having me. It was a pleasure.