Employee Ownership Could Help Solve a Manufacturing Crisis

American manufacturing faces mounting challenges. In the wake of the pandemic and with new waves of disruption from tariffs, supply chains are more fragile than ever, and workforce shortages continue to grow.

What is less well-documented is that both of these existing challenges could be made much worse by a looming wave of retiring owners with no clear succession plan. Over 128,000 U.S. manufacturing companies have owners at or near retirement age, threatening the future of businesses with an estimated $670 billion in revenue and 2.6 million jobs.

The current business environment is unstable. Imagine being one of those tens of thousands of retirement-aged business owners—the majority of whom do not have an exit plan. It’s a very difficult time to value, let alone sell, a business.

Employee Ownership as an Alternative Succession Strategy

For owners looking to sell the business and retire in the near term, one important path to consider is selling to employees, whether partially or fully. Employee ownership (EO) models like Employee Stock Ownership Plans (ESOPs), Employee Ownership Trusts (EOTs) and worker-owned cooperatives offer a compelling succession strategy that can offer flexibility during difficult economic times. Even small shops with 15 employees or fewer and an EBITDA of $250,000 or higher could be good candidates for EO.

What Is EO?

There are many forms of EO, from 100% employee-owned companies to management buyouts to phantom stock programs. Project Equity defines broad-based ownership as any ownership structure where employees own at least a 30% stake in the company and have some level of governance rights and financial benefits from ownership.

EO doesn’t mean that your employees must have the capital to buy your company. Instead, the business will use a leveraged buyout with financing from specialized lenders. Additionally, the management structure stays in place, and the day-to-day decisions continue to be made by the existing management team.

Here are some of the advantages of employee ownership as a succession strategy versus selling to an outside buyer. 

A Trusted Buyer

Selling to employees means you know exactly who is taking over—unlike selling to an individual or a private equity firm. You will be involved in the succession process, including identifying leaders to take over the facets you handle and additional management responsibilities.

Legacy Secured

Your business continues operating as it always has, preserving its staff, mission, values and identity. When you sell to an outside buyer, it is common for long-term employees to be let go or choose to leave because of leadership changes.

Attract, Retain and Reward Employees

The U.S. may face a shortfall of 1.9 million manufacturing workers by 2033. Employee ownership helps solve manufacturing’s ongoing retention and recruitment crisis. Workers will be attracted to your business because they can obtain long-term financial rewards linked to company performance and have more of a voice. They’ll stay because they can build equity over time, plus have enhanced job satisfaction, more financial security and a better work-life balance.

A Smoother Transition

Selling to employees is flexible, owner-friendly and can be less stressful than selling to an outsider. Owners can reduce their involvement at their own pace, allowing for a gradual exit that aligns with personal preferences and business needs. 

More Than Just ESOPs

It’s a common misconception in the manufacturing world that ESOPs are the only option for EO transitions. While becoming an ESOP brings many benefits (equity price at market value, a flexible structure, significant and unique tax benefits, etc.), ESOPS aren’t for everyone—especially since they’re highly regulated, more complicated to create and maintain and require a larger staff of 40 or more employees.

Beyond ESOPs, options like cooperatives and EOTs offer flexible succession solutions. Worker cooperatives have the lowest set-up costs, are the easiest to implement and ensure strong employee engagement. EOTs, meanwhile, offer a line of sight to succession management, a flexible structure that can meet the needs of different types of companies, and low set-up and maintenance costs.

An Ownership Culture

We’ve found that as workers become more educated about EO, they become more interested and engaged in the process. Employee-owners become more invested in the bottom line of a business and more engaged in process improvements, growing sales and improving operations. 

Evaluating Your Succession Strategy

If you are wondering whether EO would make sense for your business, ask yourself these questions:

1. Do you have any family members who want to inherit the business? If not, you’ll have to look at an outside option or consider a management buyout. 
2. Where do you see yourself in five years? Do you plan on retiring? Have you started looking at your succession strategy? It’s wise to begin planning at least five years prior.
3. What matters to you? Does preserving your legacy matter? Do you want to ensure your business carries on, stays rooted in the community and even potentially maintains the same name after you exit?
4. What do you want to happen to your employees after you exit? Do you want them to keep their jobs?
5. Do you want tax benefits? If you sell to a private equity firm, it’s up in the air if you will receive tax benefits, whereas you most likely will with certain types of EO.
6. Do you want to get a market value for your business? You may not if you sell to an outside buyer, but will if you transition your business to being employee-owned.
7. Has your business been profitable for 3+ years? Then employee ownership could be a viable option.
8. Do you have minimal debt to support a transition? If so, that ensures that your business can take on any necessary financing without extending itself.

Choosing the Right Succession Path

EO isn’t the right fit for every manufacturing business, but it could be a strong option depending on your company’s size, financials, values and long-term goals. If your family doesn’t plan to inherit the business and you’re nearing retirement, transitioning to EO can help preserve your legacy, ensure a smooth exit, and provide financial security for your employees.

Ultimately, the decision is yours, but the key is to plan ahead. Understanding the different succession strategies, weighing their pros and cons, and having a clear exit plan can prevent last-minute decisions that might jeopardize your business’s future. No matter the path you choose, being proactive about succession planning will help secure the future of your company and the livelihoods it supports—and help solve a hidden manufacturing industry crisis.