Employee buyout: when a failed business becomes a job opportunity
In the ten years since 2008, the first year of the financial crisis, Italian cooperatives – failed businesses taken over by their employees – have increased by over a hundred. These employee or worker buyouts (WBOs). today account for 8,000 employees (15,000 including employment derived from related activities) in Italy, generating revenue of over 200 million euros. There is a prevalence of WBOs in the North of the country, with 43% of the total. Central Italy follows with 30% and the South and Islands hold 27%. “More than four in every five manage to get the business up and running again – in many instances they even reach a point where they can begin hiring more people,” says Camillo De Berardini, CFI Vice Chairman and Managing Director. CFI is an Italian private institutional investor in the form of a publicly owned cooperative that was founded in 1986 to manage the revolving funds of the Marcora Law (49/1985). These funds are allocated for the purpose of protecting employment by means of WBOs. Of these 100 businesses – which take the total since the law was passed to 220 – more than half operate within the industrial sector; the minority are companies in the services and construction industries.
[legacy-picture caption=”” image=”a3dd1f35-bf99-4c11-9a9b-6e28a15233b0″ align=””]More than four in every five manage to get the business up and running again – in many instances they even reach a point where they can begin hiring more people.
But how is a WBO set up? “The typical case involves the employees of a company undergoing insolvency proceedings, who are hard-pressed to make ends meet with just redundancy payments and funds aimed at assisting job mobility. The employees take over the business, forming a cooperative into which they pour their hopes and their own savings,” explains Aldo Soldi, General Manager of Coopfond, a mutual fund run by cooperative federation Legacoop. “The new cooperative, with its new Chairman and Board of Directors, continues with the insolvency proceedings, seeking to recuperate warehouses, tools and machinery at auction and through negotiations with the previous owners where possible.” Coopfond, together with not-for-profit Fondo Sviluppo (promoted by Confcooperative) and General Fund (run by the General Association of Italian Cooperatives or AGCI) are the three mutual funds behind the main cooperatives. CFI, part owned by the Italian Ministry of Economy and promoted by Legacoop alongside Confcoop and AGCI, finances and accompanies WBOs through the process. It often holds shares in the new cooperative and retains them until it is evidently generating dividends, at which point CFI withdraws its capital in order to make it available for future WBOs. The concept is the same as the Rotating Funds in the aforementioned Marcora Law, introduced by the 2014 Ministerial Decree, which has today reached over 96 million euros, with an additional nest egg of 20 million euros. The tools available allow for flexibility in provision that is indispensable for the birth and growth of WBOs.
The employees, who are hard-pressed to make ends meet with just redundancy payments and funds aimed at assisting job mobility, take over the business, forming a cooperative.
“Each worker buyout has its own unique characteristics, but they are all united by the same underlying principles: the ability of the country and of employees to adapt, transforming a defaulting company into a business success story, transforming employees into a businessmen and women. The cooperative formula makes all this possible, it celebrates people’s business skills,” says Maurizio Gardini, Confcooperative Chairman and spokesperson for the Alliance of Italian Cooperatives. “Motivation and unity between the cooperative members – who often give up part of their remuneration and pay into the new coop’s share capital from their own job mobility funds – are the fulcrum of a successful WBO,” adds De Berardinis. All of this, of course, is accompanied by a, “Focused business plan where we ourselves – in supporting the business – must be aware of its effectiveness and, if necessary, help it understand how to take corrective action before it is too late.” The relationship between investment funds and WBOs is intense during the first stage of transition from failing company to cooperative. It decreases as time goes on but never ceases entirely, partly because, when things are going well, the new cooperative can also benefit the business development funds, as the funds begins to flow back into them. Breaking even often happens within a WBO’s second year of business, as in the three examples we are about to give you.
[legacy-picture caption=”” image=”824ee15d-e88e-4dd7-9969-7021e81eb81f” align=””]A few examples? One in the North, another towards Italy’s Centre and a third in the South: here are three WBO examples, by the names of Pirinoli, SolesTech and WBOItalcables.
The papermill, Pirinoli, is based in Roccavione, a small town in the Cuneo Province, just 12 miles or so from the French border. In the area, it is considered an institution. Established in 1872 and among the first multi-ply paperboard manufacturers in Europe, it produces the cases that Italians are familiar with from their panettoni and other cakes and pastries, as well as ice creams. But in 2012, it ground to a sudden halt, leaving 155 employees out of work. “It was not down to a lack of customers but to a liquidity crisis,” says Silvano Carletti, Director of the firm at the time and now Chairman and Managing Director of the WBO cooperative which, naturally, has retained the brand name Pirinoli, giving it a new lease of life. “In fact, within a couple of years of the insolvency, the company re-entered the market and today is generating incredible profits: 750,000 euros in 2017 and certain to increase in 2018, having closed 2016 with more than 120,000 euros after being 250,000 euros in the red in 2015, the first year after setting up the coop.” But most importantly, the company has recently been able to begin hiring again: from the 70 involved at the beginning of the cooperative – the others found jobs elsewhere or did not want to take the gamble of becoming a member – today Pirinoli employees 84 people (72 men and 12 women) with an additional selection of derived employees that means it reaches at least 120 families. “In terms of the company structure, there has been no major upheaval, except of course for it having become a cooperative company which has caused the employee-members to develop a greater awareness of the business, a greater sense of attachment to their own work than before. This gives them more responsibility but also increases their desire to play a leading part,” Carletti, 51, emphasises. Around 40-45% of the cooperative’s clients are abroad, “Particularly in Europe, Turkey and Egypt”, and it has revised its operational process down from two production lines to just one, thereby cutting costs. “CFI has followed us closely from the very beginning and I have to say we’ve also received huge support from the banking institutions to which we’ve turned, from the Piedmont Regional Government and from the Mayor of Roccavione, who played the vital role of testifying to our reliability.”
[legacy-picture caption=”” image=”8b4314a4-6806-43e7-87a6-bfc78a6967eb” align=””]From the Province of Cuneo to the City of Forli, where another interesting WBO is based: SolesTech was established in the 70s as a corporation in the construction and manufacturing industry, with a particular focus on patented systems for seismic upgrades. “The work went well in the first years following the crisis, even after we were taken over by a Venetian Group comprised of other companies within the sector. But in 2013, due to commissions not being accomplished, the company risked bankruptcy and so the employees made the choice: ‘We’ll take over.’ In May 2015, after a complex procedure to establish the cooperative and recover – at auction – our machinery and patents, we set off. It was a sort of miracle, in just a few months were up and running,” says Luigi Patanè, first a company manager and now Chairman of the SolesTech cooperative which has 22 direct employees as well as dozen or so employees derived from related activities and generates an enviable revenue: “We went from 200,000 euros in 2015 to 2.2 million the following year, up to 5.3 million in 2017 and are predicted to take 8.3 million in 2018,” the 55-year-old Patanè confirms. “We have recovered almost all of our clients as well as adding new ones. What surprises me is that when we tell them we have reformed as a cooperative they have more respect for us – to them, we are more authentic and can offer better guarantees. This universal recognition is what stimulates our growth.” Patanè’s first contact with mutual funds, which allowed for the WBO to be born, was with Confcooperative. “In a short time, they supported and relaunched us, allowing us to see that good will wasn’t enough to start again, that we also needed to create a group that had a strong entrepreneurial spirit.” Today, of the various construction companies working in anti-seismic technology, they are the spearhead – “especially in the Macerata area and in Lazio.”
[legacy-picture caption=”” image=”7d1ff98f-94f3-43e9-94d3-90c26d2023a9″ align=””]The last stop on our journey through the diverse world of Italian WBOs is in Caivano, at Naples’ doorstep. WBOItalcables (who, by inserting the abbreviation of workers buyout into their name, further sanction their strong identity as a cooperative), was established in the 70s out of Redaelli Tecna. This producer of steel focused particularly on cables and lines for pre-stressed, reinforced concrete, but the end of 2012 and the beginning of 2013 were dramatic times for the company. “There were 77 employees at the beginning of 2013 who were out of action because the raw materials we needed didn't arrive. It floored us, leaving us with no external solutions – or rather, no buyers. So asked ourselves, “Can this really be how it ends?” explains Paolo Piraccini, who was Deputy Director of the establishment before its failure and is now Chairman of the new cooperative. We contacted Legacoop and, thanks to the support of a Chartered Accountant but especially to that of Coopfond, CFI and the “Banca Etica” Bank and, later, the Bank of Naples – we managed to get the company back off the ground.” Thanks to the Marcora Law funds, the 51 employees who stayed to found the cooperative invested their job mobility funds in the conversion. “For many, who had even used up their redundancy payments, it meant betting everything – they invested all their savings,” continues Piraccini, 49. “But at our side we had those who believed in us and so we managed to progress and it worked: in 2015 we drew up a lease agreement for the machinery and the plant and, if all goes to plan, in 2018 we’ll regain full possession of them.” After the first year’s negative balance of 260,000 euros, they turned things around in 2017 to make 290,000 euros in a total turnover of 18.5 million euros. “And 2018 promises further improvements.” WBOItalcables’ clientele is 65% Italy-based. There are seven people on its Board of Directors and, “All the shareholders have a say in all decisions. It is not easy, but it’s a winning model that encourages us to roll up our sleeves every day.” And just a few months ago, the company had its first retiree.