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Caution Urged as Workers and Management Look to Buy Failing Firms

May 1, 2009
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Workers and supervisors thinking about buying out their companies shouldn’t let emotions overrule good sense in today’s tough economy.

Employee and management buyouts of struggling firms rarely succeed, said Bernard Jacques, a labor and employment attorney at law firm Pepe & Hazard.

“In a distressed situation, it’s usually just a last gasp before it goes under,” said Jacques, whose firm has offices in Connecticut and Massachusetts.

It’s difficult to get a precise figure on the number of employee and management-owned businesses in the United States. The National Center for Employee Ownership research group estimates that there are some 11,400 companies that have employee stock ownership plans, stock bonus plans or profit-sharing plans primarily invested in employer stock. That number is up from just 1,600 in 1975, according to the Oakland, California-based center.

Companies that share ownership broadly with employees are less likely to go out of business, said Corey Rosen, executive director of the center. Such firms also generate more jobs and create on average three times more retirement benefits than nonemployee ownership companies, he said.

“But the success these companies have is not simply a matter of sharing stock,” Rosen said. “To work, employee ownership companies have to set up a culture of high employee engagement in decisions affecting their work.”

Rosen said most employee buyouts of companies occur when a stable firm is sold by private owners to the employees, who borrow money against their stock ownership plan. Of the thousands of companies with significant employee ownership, 100 or fewer are the result of workers buying a troubled firm, he estimates.

“It’s not the way it’s typically done,” he said.

In March, a management buyout resulted in a new firm called Global Steering Systems. Managers from a unit of manufacturer DriveSol Worldwide teamed up with outside investors to buy DriveSol’s global steering division, headquartered in Watertown, Connecticut. The operation was slated to shut down and eliminate about 240 jobs, according to the Connecticut Development Authority, a quasi-public agency that loaned the new firm $2 million.

The unit was hit hard by the auto industry crisis last year, said Joseph Harpie, chief lending officer of the agency.

But Global Steering Systems’ management had a good business plan, which included funding from sources including a Chinese company, says Marie O’Brien, president of the Connecticut Development Authority. The agency, whose funds were slated for additional machinery and the purchase of intellectual property, expects 135 jobs to be saved.

O’Brien’s agency aims to spur the state’s employment and intellectual capital through favorable loan terms.

Connecticut officials are open to helping with other employee or management buyouts. But long-term viability is key.

“It has to make good business sense,” O’Brien said.

—Ed Frauenheim

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