Common Trust, offering an employee ownership buyout option for small business owners, raised $2.6 million in seed funding.
Crossbeam Venture Partners led the round with participation from Schmidt Futures and a group of additional unnamed investors.
Zoe Schlag and Derek Razo founded the company in 2022 after working in the shared ownership space at Schmidt Futures and Purpose Foundation, respectively. Common Trust works with business owners to design, finance and execute an employee ownership buyout so that owners or investors can access liquidity by exiting to employees.
Three in five small businesses will seek to sell their business over the next decade, and the current market of buyers, including private equity and private buyers working with a broker. For example, Teamshares has made a business out of acquiring companies that don’t have succession plans.
However, those types of buyers will only be able to buy a small amount of those businesses, according to Schlag. In addition, the sale may not be in the best interest of the employees or the company’s established culture.
“Employee ownership is the most scalable approach to serve this market, preserving generational businesses and quality jobs in cities and towns across America, and can be achieved at a fraction of the cost that brokers are charging, typically 10% of the transaction,” Schlag said in an email interview. “By using employee ownership trusts, our approach allows businesses to become employee owned up front and stay independent, as opposed to being rolled up into a holding company for 20 years before eventually becoming employee owned.”
Schlag explained that employee ownership isn’t a new concept in the United States, but exists in other forms, including stock options. However, some other forms have failed to scale due to high regulatory complexity and come at a cost that most small businesses either do not want to, or cannot, take on, she added.
To facilitate its buyouts, Common Trust uses a unique legal vehicle called a perpetual purpose trust that is customized for an employee ownership buyout, called an employee ownership trust. This enables small businesses to exit while also remaining independent.
In the past year since its founding, Common Trust has worked with dozens of business owners, management teams and investors. One customer, family-owned auto shop Clegg Auto, used the company to finance its buyout. In the first year since the transition to employee ownership, Clegg Auto doubled profits, recorded its highest customer service ratings in company history and shared record profit-sharing with employees, Schlag said.
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