Common Trust, a company that provides small business owners with the option of employee ownership buyouts, has secured $2.6 million in seed funding. The funding round was led by Crossbeam Venture Partners and saw participation from Schmidt Futures along with a group of undisclosed investors.
Founded in 2022 by Zoe Schlag and Derek Razo, who previously worked in the shared ownership field at Schmidt Futures and Purpose Foundation, respectively, Common Trust collaborates with business owners to plan, finance, and execute employee ownership buyouts. This approach allows owners or investors to access liquidity by transitioning ownership to their employees.
In the coming decade, approximately three out of every five small businesses intend to sell their businesses. Currently, potential buyers for these businesses include private equity firms and private buyers working through brokers. For instance, Teamshares specializes in acquiring companies without succession plans. However, according to Schlag, these types of buyers can only acquire a small portion of such businesses, and their acquisitions may not always align with the best interests of the employees or the company’s established culture.
Schlag emphasized that employee ownership offers a more scalable solution to address this market demand. It helps preserve generational businesses and quality jobs in communities across America, all at a significantly lower cost than what brokers typically charge, which is around 10% of the transaction. Common Trust’s approach involves utilizing employee ownership trusts, allowing businesses to become employee-owned from the outset and maintain their independence, instead of being folded into a holding company for two decades before transitioning to employee ownership.
While employee ownership is not a new concept in the United States, it has taken various forms, including stock options. Some of these alternative forms have struggled to scale due to regulatory complexities and costs that many small businesses are either unwilling or unable to bear, Schlag added.
To facilitate its buyout transactions, Common Trust employs a unique legal structure called a perpetual purpose trust, tailored for employee ownership buyouts, known as an employee ownership trust. This innovative approach allows small businesses to exit while retaining their independence.
Since its inception a year ago, Common Trust has partnered with numerous business owners, management teams, and investors. One notable success story is Clegg Auto, a family-owned auto shop that used Common Trust to finance its buyout. In the first year following the transition to employee ownership, Clegg Auto experienced a doubling of profits, achieved its highest-ever customer service ratings, and distributed record profit-sharing to its employees, according to Schlag.
