Getting more co-op deals to the finish line

In a rather unwelcome reminder that summer is soon over, our intern Matt Cleary resumed his accounting coursework at Champlain College last week and will no longer be joining us for regular hours in the office. Besides reducing VEOC staff from 50% people named Matt to only 33%, his departure marks the completion of several projects, including one that made full use of his numbers know-how: enhancing a financial modeling spreadsheet used to determine viability of a worker cooperative conversion deal for a given business.

Financing a worker co-op conversion can be tricky. The conversion to worker ownership usually means providing a path to wealth beyond market rate wages, but it takes years of profitability for workers to grow their wealth. At the time of conversion, they’re usually not in an ideal personal financial position to buy out the existing owners. Further complicating things, conventional lenders may worry over which employees will guarantee the loan’s balance and with which assets in case of default. A mix of seller financing, non-voting equity investments, and co-op friendly debt is therefore often critical to make a deal workable, leading to some difficulty for both sellers and buyers in understanding how the terms of the deal fit together and impact the company’s overall financial picture.

Our conversion financing modeling template was originally adapted from a real estate investment modeling calculator several years ago and had become progressively more complex and more unwieldy in the time since. That is, until we welcomed Matt as our summer intern in late May and set him to work on it. Matt being an accounting major, his work on the project served the dual purpose of acquainting him with the various worker co-op accounting considerations as well as polishing up (and in some cases repairing) the conversion calculator. Given the need for more professional service providers who understand the unique attributes of employee-owned businesses, the first point is not insignificant, but his help in bringing the calculator from its rough form at the start of summer to its current state will be of both immediate and long-term value for our work.

What it does

In the case of a business owner exploring whether a sale to employees through a worker co-op is a viable option, we can use the spreadsheet to estimate whether a co-op deal is financially feasible based on the sellers’ asking price and potential financing terms. After inputting realistic amounts and terms for funds coming from member shares, seller financing, outside investors, and debt borrowed, the spreadsheet generates a debt service coverage ratio (DSCR) for the potential deal. Lenders generally like to see a DSCR of 1.2 or better, so if the number comes in low, the variables such as the sale price, interest rates, etc., can be adjusted to demonstrate what would be needed to make the deal work financially.

Assuming a steady rate of growth, the template projects 10 years out into the future to offer a reasonable picture of what the co-op’s finances could look like based on the numbers provided. Both business owners and employee groups can use the tool to better understand a deal’s financial implications and find terms that both seller and buyers can feel comfortable with. This has the additional utility of providing an opportunity to build financial literacy for employees considering taking on ownership together. Stronger financial literacy on the buy side can also prove helpful in securing financing; the better grasp the future owners have on the business, the more likely they are to succeed.

Additionally, Matt worked on a “scenario dashboard” that displays three different conversion scenarios, all for the same business with the same sale price and earnings. The dashboard allows users to compare how relatively minor changes, such as increasing or decreasing the seller note interest rate by one point, can change the overall financial picture for the company down the line. The dashboard is made to be simple enough for someone to use on their own with little training, while the template spreadsheet offers the ability to play with many different variables.

Departing thoughts

Matt has offered the following reflections on his brief time learning about Employee Ownership and working at VEOC:

As someone with an accounting background, it was really interesting for Matt Cropp to come to my class and give an overview of employee ownership, which introduced me to the concept. I remember talking to him and my professor about it after class, and it sounded so interesting to learn about these different forms of ownership, especially coming from my personal background at a family run business that had recently been sold to a big corporation.

I was really thankful for this opportunity to work here this summer and learn from everyone and was amazed by how collaborative the economic development community is in Vermont and how much of a welcoming community it is based on my experiences at the conference and with the VEOC board members as well, who were all very kind and willing to chat about things. Both from the professional services side of things and among the established firms, it was cool to see how much of a social environment the business community has, and how people are really passionate about employee ownership. Coming from the corporate side of things in my previous work experience, it’s really interesting to be in a work environment where people are passionate about their jobs. Because that can be kind of rare.

Overall, I learned that employee ownership is not a fit for everyone but is a really good fit for a lot of companies. It’s unfortunate that they may not be aware of those possibilities. It would increase employee engagement and satisfaction working for that company knowing they have a level of agency as employee owners. I’ve had some bad jobs where you’re just sitting at a desk doing what you have to do just to get paid, but if you have a stake in the business and a common goal with your colleagues, that changes things.

I don’t know if I’ll have the chance to work for an employee-owned company in the future, but I’ll definitely be an advocate for it in professional and social circles. Even if it’s not in the cards for me, it could be in the cards for someone else. In fact, I just spoke with one of my friends who works in an industry that could definitely benefit from employee ownership one day down the road.