Certified EO highlights that fewer than 1 in 200 American businesses are employee-owned (which represents 1% of the workforce). There are likely many overlapping and reinforcing reasons why historically employee ownership has not become more commonplace, and well known, in the US. Many of these factors are changing today, but it can still be helpful to identify some of the barriers that employee ownership is still overcoming today:
- Awareness and Understanding: limited awareness and understanding of employee ownership models, particularly among business owners and advisors, might be a significant factor. This might mean EO is overlooked when business succession is being considered, or can sometimes mean business owners are misinformed by advisors who do not understand EO. Jared Bernstein cites a survey revealing that only 24% of respondents were "very familiar" with ESOPs and 43% "somewhat familiar." This implies that a significant portion of decision-makers possess limited knowledge about EO. Formal education can be a barrier as well, as business schools and educational institutions rarely incorporating EO into their curricula.
- Cost and Complexity: Another prominent barrier commonly identified in research is the cost and complexity associated with establishing and operating employee ownership structures, particularly ESOP's. Certified EO emphasizes the substantial transaction cost and complexity involved in establishing ESOP's. It's important to note that though ESOP setup and administration costs are comparable to or sometimes lower than investment banking fees for alternative ownership models, they can be prohibitive for many businesses with under 40 employees. Rutgers University corroborates these findings through interviews with business owners who considered but ultimately chose not to sell to an ESOP. Many cited cost as a primary concern, specifically the initial setup costs and the ongoing administrative expenses. The complexity of ESOPs, particularly regulatory compliance requirements, was also a significant deterrent, particularly for smaller companies.
- Limited Financing Options: Certified EO points to limitations in financing options as another factor potentially hindering the growth of employee-owned companies. Traditional lenders may be hesitant to invest in worker co-ops and EOT's due to unfamiliarity with the model and perceived diffuse accountability. Many worker co-op members also lack access to personal wealth or funding from friends and family, further exacerbating the challenge of securing financing. EO conversions often involve seller financing, posing challenges as the seller doesn't receive immediate payment but is paid out over time, typically over 10 years. This can be less appealing than options like private equity or selling to a competitor, which often provide more of the purchase price upfront. Rutgers research supports this, indicating that several sellers, though interested in ESOPs, opted out due to requiring more upfront cash than these models typically provide.
- Cultural barriers: For worker co-ops in particular, the perception that democratic management hinders growth, and the association of worker co-op with niche ideologies creates cultural barriers. This can deter individuals from pursuing this model, even when its benefits are evident, particularly among small businesses.