Over the next decade, millions of small and midsize US businesses representing trillions of dollars in enterprise value are expected to change hands as baby boomer owners retire. This “Great Ownership Transfer” presents a pivotal choice: whether these companies will transition to new owners or shut down.
McKinsey Partner JP Julien recently sat down with Philip Reeves, the managing partner and cofounder of Apis & Heritage Capital Partners, an investment firm focused exclusively on employee ownership in the United States. In this McKinsey Institute for Economic Mobility interview, Reeves discusses the opportunities that can arise when converting founder- and family-owned businesses into employee-owned companies, and how employee ownership of businesses can be a mechanism to drive economic mobility. The following transcript has been edited for clarity and length.
JP Julien: Tell us a little bit about your background. How did Apis & Heritage get started?
Philip Reeves: I’ve spent a lot of time working in or around small businesses. I worked for the DC government’s small-business economic development department and for an accelerator called 1863 Ventures, which helped support underrepresented founders. I had been an entrepreneur myself, and I was not really familiar with employee ownership.
But a college classmate of mine, Todd Leverette, worked in the space, and he was trying to figure out how to get more people of color into employee ownership. The key was capital. Todd and I connected, and we were able to formulate a model whereby we could bring capital to the communities that needed it most. In 2021, that became Apis & Heritage.
Apis & Heritage is an investment firm focused exclusively on employee ownership. We find lower-middle-market companies all over the country—think janitors, landscapers, and farmers—and convert them from founder- or family-owned companies to employee-owned companies. They shift from a wage-earning path to a wealth-building path because they’re holding one of the most powerful things in the American economy: equity or an equity-like stake in a growing, profitable, long-standing small business.
The entire workforce is now bought in, which translates into better investment outcomes, too. It’s accretive for everyone around. So far we’ve helped create more than 1,500 worker–owners across six portfolio companies. Eighty-nine percent of workers in our portfolio were low to moderate income during the time of ownership transition.
JP Julien: What’s the meaning behind the name Apis & Heritage?
Philip Reeves: “Apis” is the Latin name for the honeybee. If you think about a beehive, every bee has a different job, but they all share in the honey. It’s a metaphor for a well-run employee-owned business, where everyone has a role, but everyone’s working for the benefit of the collective. Also, the National Negro Business League—which was started by Booker T. Washington in 1900—had a beehive logo. It promoted business as a means to uplift communities of color. We also want to uplift working people who need it the most.
“Heritage” is a nod to legacy business owners. We let them know we’ll keep the business name the same and won’t ship jobs elsewhere. It resonates with people: The business is their baby, and we see ourselves as its stewards.
JP Julien: There are a lot of different business transition models out there. How does employee ownership work in practice?
Philip Reeves: We focus on employee stock ownership plans [ESOPs]. It’s like a leveraged buyout, but instead of the company being owned by a private equity firm, the equity is owned by a trust, and the employees are beneficiaries of that trust. The trust holds shares in the business, and every year, shares get doled out to employees.
Employees don’t have to buy in. They simply get shares for being there and working, so it’s almost like sweat equity. It’s a “get rich, slow” approach. The longer you’re an employee, the more shares you get, and hopefully those shares are increasing in value. When an employee leaves the business, they swap shares for cash in a retirement account. That’s the opportunity. People can save for retirement without putting in capital up front.
JP Julien: In our research on the Great Ownership Transfer, we estimate that by 2035, six million small and medium-size businesses will be up for grabs because baby boomers are retiring. We also estimate that up to $5 trillion in enterprise value could be at stake. What role might employee ownership play in this transition?
Phil Reeves: I think this is the greatest opportunity of our lifetime. You have an entire generation that needs to transfer assets. And they can do it multiple ways: private equity, management buyouts, passing the family businesses to the second or third generation, or whatever.
Now, employee ownership is on par with these other options. At Apis & Heritage, we provide the investment capital that allows an ESOP to happen. With capital providers involved, the economics of ESOPs can be similar to those of a private equity sale, hopefully on a similar timeline. But the outcome is that employees become the ultimate beneficiaries instead of another firm, or a competitor, or, even worse, no one at all if the business closes down. That option is more viable now in a way that it wasn’t several years ago.
JP Julien: There’s a misperception among some people that employee ownership is good for employees but may not be as good for investors. Can you talk about the risk/return profile for capital providers?
Philip Reeves: A new study came out by a group called Stout, which looked at the performance of the S&P 500 relative to the performance of ESOP-owned companies they work with. The ESOP-owned companies outperformed. It’s not hard to imagine why. They had employees bought in. There are a ton of tax advantages around ESOPs that are very accretive to companies. The value creation strategy is built in, but you just need to get employees to feel like owners, which is a lot of the work that we do postclose.
Some traditional private equity firms are also using employee ownership-like models in their own portfolios. They’re seeing real value creation at scale by getting employees involved and giving them a voice, which we think is critical.
JP Julien: What does an employee ownership model look and feel like for working-class employees and their families? What’s different for them?
Philip Reeves: It’s seeing people in a real way, particularly in our industries. We have a janitorial firm where people work at night. We have plumbers who are on the road, construction guys, and farmers. They’re not always seen in business. If you can get the voice of the worker and get them bought in, you will see change.
I’ll give you an example. We have an investment in a landscaping firm in Texas. A job site would call for 100 trees, but they would bring 120 trees. After the job was done, they would leave the 20 extra trees on the side of the road. After the ownership transition, an employee came up to one of the crew leaders and said, “Hey, if we take those trees back to the supply house, won’t we get a refund?” It made a difference to the employee and to the company. Examples like these may be tiny, but they all add up, particularly when compounded over the years.
JP Julien: How does the employee ownership model translate to rural places or other areas with different economic environments?
Philip Reeves: We have an investment called Blooming Nursery, a plant nursery in rural Oregon. It was our first time doing a rural transaction. What attracted us to it was that it was obviously a good business. But that area had seen nurseries close. The idea that we could keep one stable for a long time was meaningful. We think about generational timelines, so this nursery could exist for 100 years. There’s now a father–daughter duo who works there. If the daughter stays for long enough, there could be a very meaningful outcome. Those kinds of stories happen best in local places like that.
JP Julien: What makes employee ownership challenging?
Philip Reeves: In traditional ESOPs, owners have to go out and raise capital. These are regulated transactions; there are trustees, evaluators, third-party accountants, and lawyers. Complex M&A transactions are not cheap. For a lot of people, it’s too much, so they think a simpler way is to sell to a competitor or a traditional private equity firm.
But firms like ours understand these transactions. We can help shepherd them, bring in our capital, and take board seats postclose so we have a good transition. When you put all this together, employee ownership can compete against some of the other models.
JP Julien: What makes employee ownership transitions hard? What are some lessons you’ve learned or stumbling blocks you’ve experienced in shepherding these transitions?
Philip Reeves: The cultural part is the hardest. During one of our early investments, I remember realizing we had spent all this time in the transaction building trust with the owner and how we needed to do the exact same exercise with every single employee there.
It’s a jarring thing for a small business when an owner signals they’re on their way out. You have to take time, build trust, bring more voices into the room, and get employee buy-in in a real way. In some companies, employees have been in the business for decades but previously had no idea what top-line revenue was. Now they’re owners, and they need to feel ownership.
For our companies, we do something every year that we call “Statement Day,” which is a celebration where our CEOs stand up in front of the employee base and talk about the financials. Employee owners get a piece of paper with their name and their account value—money they earned that’s going to their retirement. People go home and tell their wives about it. They tell their husbands about it. They tell their kids about it. That, I think, is what’s making people feel ownership. It takes time. It’s a long-term process of cultural change. But people start to reap those benefits. That, to me, is what’s been most transformative.
JP Julien: What inhibits employee ownership from scaling given the dynamic economic landscape?
Philip Reeves: The biggest hindrance to employee ownership right now is lack of awareness. Private capital and public markets are oriented toward large transactions. They’re built out and robust, whereas the employee ownership market is much more nascent. But now people are talking about it. Large private equity firms, foundations, high-net-worth investors, insurance funds, and pensions are now starting to tune in. Everyone’s recognizing that this is a viable and risk-adjusted competitive way to invest.
JP Julien: You’ve spent your career serving small businesses in the public sector, the private sector, and even the social sector. What brought you to this work? Why are you so invested in this?
Philip Reeves: I love small businesses. I’ve worked in a small business. I worked in a government office on small businesses. I’ve been accelerated by my own small business because I think it’s so powerful.
When I first came to Washington, DC, I got plugged in with a lot of Black business owners in the city. I could see how business ownership and entrepreneurship had changed their lives. They had built these great enterprises. They had sent their kids to amazing schools. They became pillars in their community. And I knew the model worked, even in my own family.
Every time I see one of those entrepreneurs, I recognize they have beaten amazing odds. Most people are not going to beat those odds, but everyone goes to work every day. If we can take something you do every day and give it that same kind of opportunity, that’s when you start to see the same kind of mobility that working people can have on a larger scale.
Dr. Martin Luther King Jr. talked about the dignity of work. That’s real. That’s people’s identities. How do we pull that forward? How do we give better benefits? How do we give more cash bonuses? Those are the kinds of things we’re thinking about. We recognize that when you make people feel seen and heard, it’s dynamic on so many levels.
JP Julien: How can employee ownership translate into different economic mobility opportunities for people?
Philip Reeves: If you are a worker and you live paycheck to paycheck, it could be very challenging to contribute to a 401(k) and retire well. But long-term employees who are in employee-owned firms have an average account value of about $144,000. If employee ownership spreads more broadly, more people will have that nest egg. They’ll be set up for retirement, or they can be an angel investor, or help their kids go to college, or make a down payment for a house.
There have even been studies that people in employee-owned businesses vote more. They have a stake in their community. They know how to use their voice. That’s an amazing outcome for civic engagement. That’s the opportunity we’re playing for here.
JP Julien: Ten years from now, what do you hope Apis & Heritage will have achieved?
Philip Reeves: I hope we show people the art of the possible. This doesn’t have to be a niche strategy. We’re trying to change the narrative around employee ownership in concert with a whole community of practitioners who have been doing this way longer than we have. But the whole concept is showing people that this works on every level. It works for the business owner who’s trying to think about what’s next. It works for the employee who’s trying to have a strong retirement. It works for the investor who’s trying to generate a return.
What success looks like is having more workers being impacted. That’s our number one priority. We obviously also want to see more businesses being transitioned, but we have to do it in a way that maintains our values and ensure that we don’t get consumed by the financialization of it all.
