Thousands of companies are facing a wave of retirements. The State and supporting organisations must support ownership models that ensure business continuity in a sustainable way within Slovenian local communities.

A well-known meme presents Western man at a crossroads. One path leads to abundance and happiness, the other to his doom. Less than a year ago, Alpina's owners - a Czech financial fund - announced a wave of redundancies, and a few months ago, the relocation of production to Bosnia. On the other side of the valley, in the municipality of Žiri, stands Etiketa, also an industrial company, where the primary objective of the management is the long-term preservation of good jobs. Etiketa is owned by the workers.

Around half of Slovenian business owners will choose between the "Alpina" and the "Etiketa" model in the next few years. The first results of a University of Ljubljana survey show that around 4,000 Slovenian companies, employing almost 150,000 people, will change ownership in the next ten years. Tens of billions of euros of capital will be redistributed, representing the biggest redistribution of wealth since the denationalisation of the 1990s. Where will these companies end up?

The vast majority of Slovenian companies will necessarily face the question of who will take over the ownership of the company. The first thought of entrepreneurs is usually family succession, but SPIRIT Slovenia data shows that family succession is only suitable for 9% of all businesses. Only a quarter of all owners have a clear succession plan, which means that a silver tsunami - a wave of silver hair - is threatening the economic activity and jobs of thousands of businesses. What does the future hold for them, what is in store for the workers of these companies, what can the local communities in which they are embedded expect?

At the moment, a lot of political (and financial) capital in Slovenia is focused on setting up alternative financial funds to buy companies from their departing owners. The Slovenian Development Bank, together with the European Investment Fund, has earmarked €50 million for two alternative finance funds to address the succession issue. The succession funds, MS PE and Prva Capital Partners, which combine state and private funds, will finance buyouts of companies that, as the newspaper Delo reports, "face challenges in transferring ownership, especially family-owned companies that are looking for sustainable solutions for their survival and further growth". It is estimated that approximately 20% of all companies in the Slovenian economy are suitable for this transition.

Overseas, private equity alternative funds are most present in the large-cap markets, but are increasingly active in smaller markets - for example, a few days ago KKR, the second largest fund manager in the US, announced a new succession fund, where they have already raised $4.6 billion in capital for buyouts of small and medium-sized companies. The business model of alternative funds is quite simple. Alternative funds buy companies on a leveraged basis, which means that they obtain credit to buy the target company, which they repay with the profits that the company generates. Over a few years, the fund repays the loan and keeps the company without using its own funds to buy it - when it sells the company, the entire purchase price is a net profit for the fund's investors.

Although in Slovenia, in the case of MS PE and Prva Capital Partners, we are talking about succession, these funds will not really address the problem of succession - their strategy states that they will hold the companies for between five and ten years and then sell them to investors. The question of development importance for Slovenia is who will be the next buyer of these companies? The objective of the alternative funds is a return for the investors - the funds will sell the companies to the highest bidder, with a 'subsidy' from the state, regardless of the social consequences of the transaction.

There are, of course, other succession routes. The Brookings Institution 2024 in the US has studied the success of ownership transfer in the case of different succession models. They found that ownership transfers tend to be very stressful for workers, but that some succession paths are more difficult than others - in the case of employee buyouts, 80% workers stayed with the company for the next 5 years, while in other succession strategies only 60% employees stayed. The worst was for employees in companies bought out by funds or competitors. While financial acquirers focused on high returns on exit and pursued aggressive strategies to increase profitability, employee co-ownership models were less aggressive, focusing on improving incentives for employees.

Employee ownership is proving to be a successful and more succession-friendly route abroad, so far mainly in the US and the UK. At the Congress for Economic Democracy in October, the keynote speaker, James Bonham, one of the most prominent advocates of the ESOP model and a very influential figure in Washington, highlighted employee buyouts as a development strategy that deserves more political attention in Slovenia and Europe.

In most cases, workers do not have sufficient financial resources to give them a realistic chance of buying the company when the owner leaves. However, as mentioned above, alternative funds do not buy companies with their own money - they buy companies with leverage, i.e. they obtain a loan which is then repaid from the cash flow of the acquired company.

Leveraged buy-out is an innovation underpinned by the ESOP model of employee co-ownership. The mechanism was developed in the 1950s by Louis Kelso, a political conservative and economic liberal - he observed that market class workers were being wronged because they lacked creditworthiness or other financial resources, making it harder for them to access the ownership of capital assets that build wealth for the middle and upper classes. Even if they lack financial resources, workers have their own labour, on the basis of which they create surplus value in enterprises - this promise of profits can be used by workers collectively obtaining credit to buy out the enterprise, and then paying the loan out of the surpluses they generate. It was in this reflection that the ESOP model was born.

ESOP model is the most common form of employee ownership in the world today. In the US, it was enacted in 1974, and today nearly 7,000 companies are owned by 14.7 million workers (about 10% of all private sector workers!). In the UK, the ESOP law was enacted in 2014 - to date, there are nearly 2,000 ESOP companies, while in 2023, employee buyouts were the second most preferred succession route for UK business owners. Canada adopted an ESOP law earlier this year, and in the EU, Slovenia and Denmark are currently the first Member States (after the UK) to announce it.

Key to the ESOP model is a dedicated fund that buys ownership and holds it in the hands of each generation of employees. Each year, the ESOP company sets aside part of the surplus to repay the purchase price - either to the owner or to the bank if the ESOP borrowed the money to buy the company. Under the ESOP model, ownership is anchored in a special fund - workers who leave the company are automatically paid out, and those who are newly hired are gradually absorbed into the ownership. ESOPs allow for a localised vision of ownership.

Employee co-ownership leads to better business results than we usually assume. Employee-owned businesses tend to be more productive, grow faster, enjoy greater job stability in times of crisis and reduce voluntary turnover. Even alternative funds, including the two largest in the US, KKR and Blackstone, have started to take advantage of this, distributing a smaller share of ownership to all employees in order to improve business results.  

Employee ownership is not only a good business model, it is also an extremely socially responsible form of ownership. Decommodification means taking a company out of the market, while employee ownership means that stakeholders who are also residents of local communities are usually in a position of decision-making and local interest. Employee-owned companies are therefore not primarily driven by the objective of business performance, but business performance is usually a means of caring for workers, the community and the environment.

In these companies, workers come first - during the Great Recession, which led to 25% unemployment in Spain, they Mondragon Cooperatives collectively financing the retraining of workers in companies at risk and transferring them to other cooperatives, which has rarely resulted in anyone losing their job in Mondragón. There is a strong concern for the community - in the recent floods in northern Italy, cooperatives deliberately diverted flood water onto their farmland and protected the assets of the local population. Localised businesses are also a source of stability and prosperity - in Slovenian municipalities where the main employers are employee-owned businesses (Žiri and Železniki), residents enjoy a high, if not the highest, relative standard of living.

The results of the University of Ljubljana survey tell us that at least one quarter of Slovenian business owners are already open to the possibility of selling their companies to employees in a retreat, while another quarter are undecided about this succession route. This means that there is the potential for thousands of companies in Slovenia to be co-owned by employees over the next 10 years. The survey shows that interest among owners would be much higher if they had more information, if the ESOP model was supported by legislation, and if there were dedicated financial instruments available to finance these buy-outs.

Municipalities, employers' organisations and trade unions must take a leading advocacy role in this area. After all, employee ownership policy is in the direct interest of the stakeholders they represent.

The Slovenian government has already shown its will and this summer Adopts the ESOP law as a starting pointwhich is necessary for tax relief and regulatory certainty. We need a law and further guidance from the European Union on the taxation of localised forms of corporate ownership.

A financial infrastructure needs to be developed to put ESOP buy-outs on a more equal footing with alternative funds or competing companies. The European Investment Bank and the Slovenian Development Bank, as well as private financial institutions, can play an important role in this issue by investing in employee co-ownership to ensure ESG funding standards.

Perhaps even the new alternative funds we are setting up in Slovenia can help on the path to localised ownership. While these do not logically solve the succession challenge, they could help the transition to employee ownership - the companies they hold could be gradually sold to workers through ESOP mechanism. This strategy might slightly undermine investors' expected returns, but it would allow alternative funds to fulfil their stated mission of helping to resolve ownership succession.

The generational ownership transition raises an important development question for the Slovenian economy - what kind of ownership model do we want for Slovenian small, medium and large companies? Will we follow the Alpine model, where owners decide on the location of production according to the tax policy and environmental regulation of individual countries - and thus hold political decision-makers hostage? Will we be able to avoid the trend towards social dumping and anchor ownership in local communities by promoting employee ownership, as Etiquette does? Which path will you take, Western man?

The article was published in the newspaper Delo on 7 December 2024.