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December 11, 2017 Ask ACE

Things to consider before transferring your business to a worker cooperative

Q: I own a small business and want to retire in a few years. I would like to see the business continue, and my employees keep their jobs. I keep hearing about worker cooperatives. What's involved in transferring my business to a worker cooperative?

ACE Advises: Your employees have an interest in seeing the business continue. Sales to insiders typically have lower transaction costs. The buyers are on your doorstep. Employee ownership conversion is certainly an option to consider.

Transfer to a worker cooperative involves transfers of 1) ownership; 2) governance; and 3) management.

1. Ownership transfer begins with a letter of intent between the owner and employee representatives. The parties then negotiate a sale agreement, establishing price, assets to be transferred, non-compete obligations, etc. Homework is critical: no transfer should occur without a business plan demonstrating that future cash flow will cover both operating expenses and the owner's buy-out.

2. Governance transfers when the newly formed coop and owner sign the agreement. A coop is formed by filing articles of incorporation and adopting bylaws. The coop's bylaws establish membership rights, dividend rules and board size, composition and authority.

Each worker-member of the cooperative has one share and one vote. Members do not vote on every business decision; members-owners exercise authority indirectly by electing the board.

The bylaws may also define management positions. Worker-members should assess their collective skill set. Do they have the financial, legal, and operational expertise needed to run the business? Can they fill gaps by appointing outside board members or hiring managers?

3. Management transfer requires significant consideration of who will be responsible for day-to-day management decisions, defining individual managers' responsibilities, and ensuring that those responsible have adequate training and expertise. This may include a consulting arrangement with the exiting owner to maintain access to expertise.

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