ARLINGTON, Va., Sept. 12, 2018 /PRNewswire/ -- According to a new report, succession planning for small businesses when owners near retirement is critical and conversion of these businesses to an employee-owned model is a solution for building wealth, retaining jobs and expanding economic opportunities, especially for women and minority employees.
A newly released report from Capital Impact Partners and ICA Group, with support from Citi Community Development, identifies key sectors, regions and strategies for converting business ownership to employees using a cooperative model helps transform the lives of economically vulnerable communities, especially those in urban areas. "Co-op Conversions at Scale: A Market Assessment for Expanding Worker Co-op Conversions in Key Regions & Sectors" illustrates how conversions can anchor successful businesses, build assets for employees, retain quality jobs, and drive local prosperity.
The study finds that childcare, home care, food manufacturing, grocery, and residential care businesses provide higher wage, sustainable jobs and are primary industries to focus on for employee conversions. Nearly half (42 percent) target companies are valued over $800,000, demonstrating market opportunity for lenders who are eager to invest and achieve tangible impact.
In a cooperative conversion, owners sell their businesses to their employees. The employee-owners share an economic stake in and control of the venture and are thus guided by a concern for the common welfare of that business.
"As a mission driven organization focused on social and economic justice issues, the market for converting small businesses into employee-owned enterprises is incredibly promising," said Ellis Carr, president and CEO of Capital Impact Partners. "This has the potential to be a transformative model for communities of color, and I am thrilled this report lays out the pathways to take it to scale."
To date, there has been very little quantitative analysis examining the market opportunity. This report is meant to be the first step in bridging this gap. It examines the market potential for converting firms with 20-100 employees by looking at the actual transfers and closings of businesses that are high-potential targets for successful transactions.
"Industries like food manufacturing, child care and home care are cornerstone services for many vibrant neighborhoods," said Natalie Abatemarco, Managing Director of Citi Community Development and Inclusive Finance. "These findings reveal industries where employee ownership can provide an economically viable alternative for retiring entrepreneurs, enabling businesses to stay open and build wealth for employees and the neighborhoods where they operate."
Using a proprietary longitudinal database, the ICA Group examined the strongest market potential for conversions in five industry sectors across five geographical regions, namely New England, New York Metropolitan Area, Mid-Atlantic Cities (Philadelphia, Baltimore, Washington, D.C.), Chicago Metropolitan Area, Los Angeles and the Bay Area. The five industries identified include: Child day care services, home health care services, nursing care facilities, grocery stores, and food manufacturing. The key findings of the survey – which can be read in full online – are below.
The ratio of small business closures to business sales among independent firms operating for more than 25 years was 9 to 1, creating huge gaps in those communities they serve. When you consider that these firms employ 17 percent of all workers in the United States, the impact of business closure is profound for communities and their local economies.
- The child-care industry is growing rapidly while older firms continue to close.
In 2017, the child-care industry had 755,457 businesses in the United States, earning an annual total of $4.7 billion in profits on $47.8 billion in sales revenue. From 2012-2017, the industry experienced a growth rate of 1.3 percent and is projected to grow at 2.1 percent over the next five years. Between 2009 and 2013, however, 211 older target firms closed—an average of 42 per year.
- The home-care industry experienced growth but sales are limited.
The home-care industry experienced significant growth from 2011 to 2016, growing at an annualized rate of 4.5 percent and is expected to experience increased growth over the next five years with an annualized growth rate of 6.7 percent. As a service industry, wages are the largest segment of the home-care industry's costs at 47.1 percent of revenue. Since 2004, the total number across the five regions has not exceeded five sales per year.
- In the food manufacturing industry independent firms make up the majority of firms but are underrepresented in sales. As of 2017, the food manufacturing industry earned $37.4 billion in profit on $797.3 billion of revenue per year. Like other sectors, independent firms make up a larger portion of all firms but a smaller percentage of sales. In food manufacturing overall, independent firms make up 80 percent of all firms but only 34 percent of the total sales that occurred between 1991 and 2013.
- There is an estimated market of 159 potential conversions (representing 5,724 jobs) per year for the industries and regions examined.
- 74 target companies are sold each year and 85 companies that have been in business for more than 25 years close each year for the industries and regions examined.
- The percentage of firms that close as a result of retirement is rising. Between 2000 and 2010 the proportion of firms that closed that were likely the result of a retirement hovered between 15 percent and 25 percent, between 2011 and 2013, the percentage was between 29 percent and 33 percent. Between 2000 and 2014, across the five regions, of the 842 target company businesses sold, only 133 business (16 percent) had been in operation for more than 25 years. In contrast, 1,195 target businesses that had been operating for 25 years or more closed – 42 percent more older businesses closed than the total number of target businesses sold. Based upon census data, ICA estimates that fully 83 percent of businesses that closed due to an owner's retirement.
- Firms across the five regions range from $600,000 to $1.1million in value. Across the five regions the median estimated value ranges from a low of $600,000 in the New York Metro region to a high of $1.1 million in Chicago. Food manufacturing businesses have the highest estimated value, while child care businesses have the lowest estimated value. Firms with an estimated enterprise value of more than $800,000 (excluding real estate) represent 42 percent of all target firms and 53 percent of the target firms that were sold.
- There is enormous opportunity to increase transaction activity with independent business market. Corporate firms – those that are part of a business with 10 or more affiliates – are much more likely to be sold than independent firms. Independent firms, which are most likely to seek out employee ownership, make up the vast majority of all firms with 20 to 100 employees, yet only 16 percent of the businesses that are sold each year. So, 67 percent of the business transactions occur within only 16 percent of the market.
About Capital Impact Partners:
Through capital and commitment, Capital Impact Partners helps people build communities of opportunity that break barriers to success. We champion social and economic justice for underserved communities to foster good health, economic opportunity, and interconnectedness. Through mission-driven lending, incubating social impact programs, impact investing, and policy reform we partner with local communities to create equitable access to health care and education, healthy foods, affordable housing, and dignified aging for those most in need. We have disbursed more than $2.5 billion to revitalize communities over the past 35 years. Our leadership in delivering financial and social impact has resulted in Capital Impact earning a "AA-" rating from S&P Global and being recognized by Aeris since 2005 for our performance. Headquartered in Arlington, VA, Capital Impact Partners operates nationally, with local offices in Detroit, MI, and Oakland, CA. Learn more at www.capitalimpact.org.
About Citi Community Development
Citi Community Development leads Citi's commitment to financial inclusion and economic empowerment for underserved individuals, families and communities across the U.S. Through innovative collaborations with municipalities, community groups and leading nonprofit organizations, we harness the institution's expertise, products and services to help expand opportunity for all.
Additional information may be found at http://citicommunitydevelopment.com | Twitter: @Citi | YouTube: www.youtube.com/citi | Blog: http://blog.citi.com | Facebook: www.facebook.com/citi | LinkedIn: www.linkedin.com/company/citi
SOURCE Capital Impact Partners