Southwest Detroit Construction Cooperative (SWDCC), Painting and Plastering and Janitorial Cooperatives – to be sustainable most (but especially inner-city) worker co-ops need a supporting joint business resource or community support organization. That is why the Mondragon, Emilia Romagna, Evergreen Cooperatives in Cleveland, WAGES and the Arizmendi Co-ops in Berkley have all created mutual support organizations for back office and business development functions. SWDCC’s story explains why that is.In 1985, Ed Bobinchak, then executive director of WARM Training, created Southwest Detroit Construction Co-op (SWDCC) to create a worker co-op as an employment mechanism for neighborhood residents who were trainees of WARM. People who took the training would join the co-op and begin paying their membership share through payroll deduction. The early organizing group agreed on a $1,000 membership. Members felt it was reasonable.WARM as a non-profit had a lot of relationships with non-profit housing groups as a market for co-op. Ed became a licensed builder so they could bid on contracts. Ed did the outreach and bidding on most of the contracts. Co-Founder of WARM, Michael Laughlin, a college grad, teacher who had done home repair work also became a licensed builder and served primarily as the initial crew leader for the co-op. He subsidized the co-op with his own labor. WARM subsidized it with Ed’s work and the back office accounting and reporting on taxes, filings on the state, putting together the monthly financial statements for the members. WARM raised some grant dollars for training and workshops in management and business training for members.During the first year of the weatherization contracts, Atty. Deb Olson structured a Mondragon style co-op structure. Ed and Mike sought the co-op structure because they were doing most of the work. The trainees would show up irregularly when it was part-time employment. WARM wanted the workers as co-op members to enable them to help the workers learn bidding and take on more responsibility.The co-op worked up to about $50,000 in year one gross revenue and $300,000 gross in year two. Work in the 1st year was weatherization contracts funded by the utility companies for around $50,000 total. Second year WARM bought a building on Michigan Ave. The City of Detroit provided facade improvement federal block grant (Neighborhood Opportunity Fund) funds to renovate the building. In year 2 the revenue of $300,000 was for the WARM facade renovation and similar facade work for local non-profit Michigan Avenue Community Organization (MACO). The co-op bid and won contracts on other facade renovation for MACO members.Although the original co-op idea was around weatherization, the members did not want to stay with weatherization, which is a dirty, messy job, crawling around in cellulose powder. The more skilled members wanted to get into more skilled and interesting work. WARM recruited several people who had more construction experience. There were now 3 different crew leaders. SWDCC began bidding on contracts through non-profits MACO, Church of Messiah Housing Corp. and other non-profit housing groups were getting city contracts to do home repairs. Co-op bid on and got many of those contracts. Ed and Mike were doing most of the bidding. There were a couple co-op members who, within their expertise, did the costing and bidding on those contracts.At the end of 2nd year there were 5 or 6 full time employee owners, and 6 trainees who came into contracts as needed. They were not invited to become members until they proved their reliability and skills. A number were invited into membership. Some early members left and joined the carpenters union as apprentices. Another went back to school. The overall level of proficiency didn’t grow. SWDCC started bidding on kitchen and bathroom rehab that had higher profit margin and required more skill. There were fewer new trainees joining the co-op. The number of skilled and semi-skilled trainees decreased. SWDCC wanted the people with greater skills to have dependable full-time employment. WARM continued to bring in trainees.By the end of the 3rd year the co-op was not making enough money to employ people full time. SWDCC needed the more skilled work to support co-op, but the members’ skill was not growing. The members went through a planning process to figure out what to do about it. They felt they needed to offer membership to more experienced and skilled workers and couldn’t continue to have 6 full-time members. WARM and SWDCC didn’t want to treat people as contract workers we would pull in when there were jobs. SWDCC did not have contracts enough to pay full-time wages and benefits for 6 members. The non-profit housing groups were SWDCC’s primary source of income and they were less dependable. There were a lot of roofing contracts. SWDCC bid in the spring and often didn’t get the work until November and were roofing in the snow. The work would bunch up in a few months of the year. With lulls in the winter.WARM Training funding and the co-op profitability was not enough to keep employing all the members. A lot of the trainees who became members were basically looking for a job and accepted ownership as a necessary requirement. They were not joining as entrepreneurs. Without that entrepreneurial sense we could not get people to seek contracts or get work done quickly and effectively. There were a lot of callbacks and need for repairs that ate into the company’s profit. Ultimately, the bills put the company out of business. We had too many debts and not enough income. The company downsized from 6 members to 3 members who had more skill. They kept it going at a much reduced level. The members decided to do other things. Jim Sweeney started teaching at a vocational technology school. Michael went back to teaching. Several guys kept the insulation machine and continued doing insulation contracts. Jerry Jackson continued to do insulation jobs on his own. Former co-op members bid for jobs on their own, not as a co-op. No one got back their co-op share, but we distributed tools in lieu of co-op share. The insulation machine was in one person’s garage and when they got contracts the individuals could use it. The company did not go bankrupt legally, but the assets were distributed as fairly as possible.WARM set up a painting and plastering co-op and a janitorial co-op both had similar fates. WARM provided the back office for these 2 co-ops. They never got the contracts consistency needed to have more than one or 2 members. When one lost interest they tended to fall apart. The janitorial co-op ran into hard times not having consistent contracts. There were accusations of theft from a well-placed customer, although we think there was not really theft. The janitorial co-op did not survive that.Ed and another employee were doing the back-office for the co-ops throughout.Dave Horning who worked w/ ch of mess did Painting and plastering and wanted to organize the painting and plastering. He did the costing and bidding. Pastor Ron Spann worked in the co-op and later wanted to become pastor. Horning late went to seminary and became a pastor too. The other 2 members never did any of the costing, bidding or creation of a business plan.Recommendations from Ed Bobinchak: Look for people with entrepreneurial drive and experience who appreciate the need for efficiency and keeping within budget. It doesn’t come naturally and it is hard to create it.There never was a business plan before we started and what we came up with turned out not to be the right market. Neither Ed nor Mike had previous experience running a company. Dave had never had full time employees before. We never thought it would make sense to hire the members as contractors. That seemed to go against the idea of creating decent full-time employment to support a family.Ed realized he was not the right person to move the company forward. WARM hired Karen Brown, who had managed Cass corridor Food co-op to work with the co-op in the last year, as they needed someone with more experience. Working for the non-profit was a real benefit and a limitation. WARM and SWDCC chose contracts with non-profits because it was easy to get the contracts, but it was limiting due to timing of payments and timing of the contracts themselves. There should have been a lot more market research done before starting a company.
Franklin Forge: Full Case Study
Unprofitable SubsidiaryUnprofitable subsidiaries are often offered for sale to employees. Employees should approach such opportunities with care and predicate their actions on feasibility studies conducted by skilled consultants who know when to say no to a bad idea. The feasibility and success of the Franklin Forge worker buyout depended on a number of factors including strength and skill of both the workers and management, the community's need for ht plant, the fact that the workers initiated the buyout, and the parent corporations' motivation to sell at a low price and make the deal work.Located in West Branch, Michigan, Franklin Forge was a subsidiary of Capitol Manufacturing, a company in the oil field equipment business. Franklin was and continues to be one of Capitol's suppliers. During most of the years it was owned by Capitol, Franklin lost money. These losses resulted mainly from Capitol's cost structure and lack of experience in the forging business. Yet because Capitol was quite profitable prior to 1982, Franklin's losses did not become important to Capitol until 1983 and 1984.In early 1984, Franklin Forge employees sensed that the company's continuing losses threatened their future. The union, International United Automobile, Aerospace and Agricultural Implement Workers of America (UAW) Local 1874, organized a jobs committee to explore how they could save their jobs. After investigating Franklin's financial condition, the employees determined that purchasing the company was the best way to protect themselves.At the same time, Harsco Corporation, which owned Capitol Manufacturing, decided to sell Franklin due to the increasing significance of Franklin's losses. Harsco could not close Franklin without a buyer because it had a take-or-pay contract with the gas utility that ran a gas line to Franklin. Since the contract was in effect for at least another year, and no buyer seemed interested in the less than desirable West Branch manufacturing location, Harsco knew that the employees' offer was the best it would get.The employee effort to buy Franklin began in earnest when UAW International Representative Jack Laskowski sought assistance from the Michigan Employee Ownership Center (MEOC). The employees subsequently formed a buyout association, retained Groban Olson and Associates as counsel, and commissioned a feasibility study. The employees recognized that they needed strong management to make Franklin profitable and asked the company's former manager to be the plant's new manager and chief executive officer. He had managed the plant for several years, was well-acquainted with the forging business, and was well-respected by local businesses and lenders.Franklin's recent losses made it difficult to raise the money to finance the buyout. Union members made numerous calls to lenders and worked hard to raise funds from employees and various government bodies. The perseverance and positive attitude of the buyout association impressed the lenders. The National Bank of Detroit (NBD), for example, became involved in finding other lenders to join it in financing the deal.In addition to raising money, the buyout association worked hard to educate themselves and the community on the concept of employee ownership. Aided by MEOC, the association developed its own employee ownership education program. As a part of this program, the Industrial Cooperative Association (ICA), MEOC, NBD, and the Michigan Department of Labor, led education sessions attended by those involved in the buyout and interested community members.As a result of the buyout association's efforts, Franklin Forge became a worker cooperative. Each worker owns one voting membership share and a proportionate share of capital in the company's internal equity accounts. The workers were able to purchase their membership shares, which initially cost $5,000 with loans primarily from the Industrial Cooperative Association Revolving Loan Fund and the Farmers and Merchants Bank of Hale. These loans required down payments of $250 and payments of $1 per working hour for 3 years to settle the $4,750 balance. Other lenders whose help was essential to finance the buyout included the State of Michigan, Ogemaw County, the National Bank of Detroit, the seller, and Franklin's chief executive officer. In the fall of 1986, employees invested an additional $2,000 each to cover working capital costs caused by a rapid increase in business.In 1984, when the employees first contemplated a buyout, Franklin employed 20 people and had 82 on a seniority list. At the time of the buyout, management projected that Franklin would employ 38 workers by the end of the first full year of operation. After six months of operation, Franklin already had 38 employees, and by the end of 12 months, it employed 54 people. By December of 1986, Franklin employed 68 people. The 1988 employment averaged 82. For the year of October 1988 through September 1989, the average employment is expected to be approximately 100.
Frida, Inc. - Full Case Study
Frida, Inc.
business succession of substantial social enterprise using a worker co-opFrida Inc. is a real client for whom Atty. Olson is working, for which the company name may not yet be revealed. This company is owned by two partners, now in their 60’s, who have built up a very successful business over 30 years. They have several hundred employees. They run a highly participative workplace and the company is well known for its high standards for quality, customer service, and community involvement and charitable support. Over the years the owners have helped many of their employees create businesses that collaborate, but are not franchises, because they provide different products and services that are used by all the businesses.These businesses have had a highly organized consensual joint decision-making structure which is not a legal entity. Now that the partners are considering retirement, they are seeking a way to provide broad ownership for all of their employees who are willing to make a small investment, but need to include other investors in order to get their money out of the business.Like many other successful social entrepreneurs, these partners want to:
- get their investment out of the businesses, at least for their estates
- ensure that the businesses continue to operate in their hometown
- maintain their financial success, quality, customer and worker friendly atmosphere
- enable all interested workers to buy into the company, and
- maintain the company’s role as a model corporate citizen.
Having carefully reviewed the options, they have determined that an ESOP is not for them and a worker co-op to own a portion of the business is the way to go forward for these reasons:
- They want the employees to have “skin in the game” by making a modest investment (which can be done by payroll deduction). But they do not want to give away ownership simply as an employee benefit to everyone. Under state securities laws, there is a simple exemption for such investments in a co-op, and no such exemption for hundreds of “unsophisticated investor” employees to make such investments without prohibitive securities costs.
- They want the company to stay true to its local origins and social values. A key difference between ownership by an ESOP and co-op ownership is the ultimate ability to keep the company independent. In an ESOP the workers are beneficiaries of an ERISA pension plan (covered by federal tax and pension law) that is controlled by a trustee (who may be appointed or elected). The Trustee’s duty is to the beneficiaries as retirees, who may be legally forced to sell the business if s/he gets a good enough offer or face expensive litigation for breach of fiduciary duty. Co-op members are actual equity owners of their co-op interests. They have the final decision on any possible sale which usually requires a supermajority vote.
- They want one vote per person and allocations based on work, rather than investment. This can be accomplished in either a co-op or ESOP.
- They want responsibility for carrying on the business and social values of the business to be controlled by current employees who been have and will be trained in their participative system. This can be done to some extent by an ESOP, although a co-op is a stronger mechanism. A co-op, which is intended to operate for the mutual benefit of its members, can have requirements that the business remain in its hometown and serve social purposes. However, any worker control mechanism that involves voting of stock must be done through the trustee, who is subject to ERISA fiduciary obligations. These obligations are focused on the needs of the employees as retirees, and not in their role as employee owners.
- They also want non-voting equity investors whose stock will appreciate in value. This is being accomplished by the co-op being a member of an LLC, where the preferred non-voting stock can appreciate in value. However, all the voting stock is owned by the co-op.
