Author: Elena Galevska
There are several significant long-lasting issues that every society faces, and the difference between various societies is the extent to which they have found ways to minimize the negative outcomes. An example of such persistent societal challenges is business succession.
Namely, in 2020, the European Commission put business succession as the main challenge facing the SME sector – a sector that is employing 100 million people in Europe. Unsuccessful succession does not only threaten jobs but also the wellbeing of local communities, leads to rural depopulation, decreases tax income, and increases social welfare transfers.
Around 150.000 enterprises in the EU are threatened each year due to lack of early preparation, difficulty in finding a successor, as well as unfavourable tax and regulatory measures. Eastern Europe is especially sensitive to the silver tsunami since many SMEs had been established by the baby boomer generation in the 1990s when the ex-Yu countries started with privatization. To be more precise, only in Slovenia, where SMEs employ approximately 400.000 people, 25% of owners are above the age of 55, and 80% are not planning the succession.
The options for business succession in the EU are rather limited – currently, they consist of family succession or external investors.
However, with new generations desiring to follow their own professional development and oftentimes moving abroad to do so, family successions are becoming a less popular option in the last decades. In Slovenia, family succession is relevant for less than 10% of cases.
At the same time, selling the business to competitors, outside investors, or other external owners doesn’t provide the most responsible solution for the employees and local communities. External owners are only interested in investing if they recognize that the return on investment will be high, which typically means channeling the value added out of the local community, or if they see an opportunity to consolidate the market thus gain market power, or if they want to get the know-how such as R&D and intellectual property.
All these options are suboptimal for the local community. On the contrary, employee ownership anchors the capital in the local community and naturally prevents eventual shutdowns and job losses. The Employee Share Ownership Plan is a highly effective and socially responsible tool for addressing the silver tsunami. The ESOP model in the USA is considered the “ultimate succession tool”.
As the name suggests, the ESOP model allows employees to become co-owners of the companies they are working for. Therefore, the Employee Share Ownership Plan is a sustainable ownership structure, saving family businesses from either ending their operations or having to sell to external investors with likely different priorities.
Facing the challenge of succession, the family business Ward Lumber has decided to convert into a cooperative in ownership of the workers. Established in 1890, the family business has successfully transferred the ownership to the next generation for four generations. However, after four generations of successful operations, the daughters of the latest owner strongly believed that their interests and talents would be more useful in other industries, yet felt emotionally connected to the business and did not want to see it closed.
Since no adequate successor could be found, the owner proposed employee ownership to the workers. They were excited to be given the opportunity to continue the business’ operations and stated that “though ownership doesn’t stay within the Ward family, the business will stay within the Ward Lumber family”.
Transferring the ownership to employees not only helped 50 workers retain their jobs but it also enabled 50 families to stay in the region, which was very meaningful for the local community. Besides keeping the jobs, transferring the ownership to workers aligned their personal interests with the organizational goals, resulting in better job satisfaction and higher levels of dedication and motivation. In the end, selling to workers is oftentimes the most viable option, as employees know the business the best, they are familiar with the customers, and all the daily processes.
Ward Lumber hopes to inspire other businesses in the area facing similar problems to consider and eventually choose the employee ownership option, instead of going for liquidation by default.