The Searcher Becomes CEO. Why Wait to Make Employees Owners?
A deal can align its backers, its operator, and the people who will make it work. The choice begins before close.
By David Kirubi
I have participated in—and benefited from—the search ecosystem. I know how much work goes into persuading a seller, agreeing on terms, assembling a capital stack, and getting a company across the line. The people doing that work deserve respect. The seller built the business. Investors put capital at risk. The searcher takes responsibility for leading something they did not build.
I have also been in enough conversations to notice what tends to be understated. We know the employees matter. We expect to meet them, retain them, earn their trust, and eventually give them reasons to believe in the new owner. But as we work to get the deal done, their long-term economic place in the deal can be left for later. Later often means a bonus plan, perhaps a grant for a few leaders, and a speech on day one.
By then the cap table may be settled, while the company is still waiting to be won over.
I keep asking a different question: What if meaningful, broad-based employee ownership were considered while the acquisition was being designed?
The searcher could still become CEO. The investors could still earn a return. The seller could still receive supportable value. The difference would be that the people whose work must make the acquisition succeed enter the ownership conversation before the new CEO walks in.
THE GAP AT THE DEAL TABLE
Search has become skilled at aligning two essential parties: the person who will operate the company and the people who will back that person. Their interests never match perfectly. Investors may want liquidity sooner; a CEO may want to reinvest. Still, the structure is built to give both a stake in what happens next. A Yale guide for search fund CEOs [1] captures the moment after close in five words: “It's her company now.”
The new CEO's accountability is real. So is the company's dependence on people who were there yesterday. They know where a quality problem begins, why a customer stays, how a delivery promise is actually kept, and which job only one person knows how to do. They helped create the value being purchased. They will help determine whether the acquisition thesis works.
Moshe Schandelson had spent four years blowing specialized laboratory glass at Adams and Chittenden in Berkeley when its founders began a transition to worker ownership. “The finances are the scariest thing for me,” he told Project Equity inredactedHe was used to living from paycheck to paycheck and had never worked with numbers of that size. Business-planning and financial-literacy classes helped him ask how decisions were made. His company was moving toward a worker cooperative, not through a search acquisition. His account makes the other side of an ownership term concrete: the stake has to become intelligible to the person expected to carry it.
We design alignment for the people who close the deal. What would change if we designed it for the people who must deliver it?
This is an inside question, not an accusation. In conversations I've been part of, some people have treated a workforce stake mainly as dilution of the investor's or searcher's upside. Others have been willing to consider sharing that upside if it gave the whole company a clearer reason to build together. The disagreement deserves a place in the investment discussion. A meaningful workforce stake has a cost. So does leaving the operating team outside the long-term bargain.
The investment question is whether sharing some of the equity can reduce transition risk and build enough additional value to make that choice worthwhile for everyone. It may not. We cannot know by assuming that dilution is always wasteful, or that ownership always produces better performance. We have to price the stake, design the participation, and measure what follows.
START BEFORE THE FIRST-DAY SPEECH
My Enduring Success Blueprint [3] puts discovery and diagnosis alongside the deal. Before close, the fund manager, operating partner, and company leaders consider what the business could become; examine both its financial and human reality; and test the thesis against companies they can learn from. Its second step [4] asks specifically about key people, motivation, ownership mindset, and shared stake. After close, Prepare the Players [5] brings that work to managers and the frontline through financial literacy, a meaningful stake, and an operating cadence. The sequence raises a deal-design question: if ownership is part of the plan for the workforce, why wait until after close to decide what that ownership will be?
I would bring employee ownership into that early inquiry. During thesis formation, ask whether broad-based ownership belongs in the acquisition design. During diligence, learn who creates and protects value, what employees already receive, which risks they would bear, and what the company can afford. Before close, decide the size and form of the workforce stake, who qualifies, how value reaches them, and how leaders will invite their knowledge into the operating plan. Then day one can begin with a real commitment, not an attempt to sell people on a change they had no part in shaping.
The answer need not be 100 percent employee ownership. A fully ESOP-owned company may be the right destination for some businesses; MIAHSTONE is exploring that path for suitable transactions. An investor-backed search deal may instead support a smaller, genuine workforce stake from the start. What matters is whether it is broad enough and valuable enough to change the bargain, with a credible path for employees to benefit. A token pool for a few executives leaves the wider question unanswered.
There are nearby precedents. Mike and Linda Katz acquired Molded Dimensions through a self-funded search in 2001, according to Jim Sharpe's index of the Harvard case [6]. A later Yale account [1] reports that the company became 36 percent ESOP-owned under Linda's leadership and that she sold a majority stake to private equity inredactedA SearchFunder member described [7] building a fully employee-owned acquisition platform. In a public interview [8], Turner Wyatt of Small Capital described offering equity to self-funded searchers on terms intended to convert his firm's investment into employee-owned equity over time, with an investor return built in. Both descriptions are accounts of their approaches, not independently verified deal outcomes. The open question is how deliberately we make workforce ownership part of the initial deal.
WHAT A SERIOUS PROPOSAL HAS TO ANSWER
The seller needs a real price and credible terms. Investors need a return commensurate with risk; the searcher needs authority, compensation, and a reason to give years to the company. Employees need fair pay now and an ownership interest whose potential value is understandable. The structure must also survive debt service, reinvestment, a downturn, and the costs of administering and eventually paying out employee interests.
The dilution is real. In a simplified deal where a broad-based employee vehicle receives 10 percent of the common equity at closing, the other holders together receive 90 percent of the exit equity value instead of 100 percent. At the same exit value, they receive less. For their aggregate dollar proceeds to be unchanged, exit equity value would have to be about 11 percent higher. That is a hurdle to underwrite, not a forecast: real deals also have financing costs, preferences, taxes, vesting, and different risk. The question for capital is whether the proposed stake and operating plan can credibly clear that hurdle.
An Employee Stock Ownership Plan is one possible route. Its trust can hold some or all of a company's shares for eligible employees' benefit, with interests allocated through plan accounts under the plan's rules. An independent trustee evaluates an ESOP purchase for participants, supported by an independent valuation. Employees do not each hold shares directly merely because the trust does. NCEO's guide for selling owners [9] lays out partial and full ESOP transactions, financing, and trustee duties. Other broad-based structures have different economics and governance. The point is to choose one deliberately, not attach the word ownership to an ordinary discretionary bonus.
That distinction cuts both ways. A bonus can be valuable cash when an employee needs it. It can reward this year's work. Beneficial ownership offers a chance to share in value built over time, but it can be illiquid and risky. An employee may already depend on the company for wages; concentrating retirement wealth there adds exposure. The deal must be honest about eligibility, allocation, vesting, dilution, liquidity, and what happens if the company disappoints.
If the proposed stake weakens current pay, loads the company with debt it cannot carry, or gives employees risk without a credible chance at meaningful value, reject that design.
Ownership also needs participation to become an operating advantage. Moshe's concern about the numbers is a reminder that a share of equity can be real on paper and remote in daily life. People need relevant measures, a way to understand them, a regular channel to raise problems, and leaders who respond to what they hear. A board and CEO still govern and decide. The National Center for Employee Ownership [10] describes that distinction in ESOP companies. Research on employee-owned firms [11] examines ownership incentives, participation, and culture together; it does not prove that any particular acquisition structure will outperform the conventional one. The claim should be tested against retention, quality, delivery, customer trust, reinvestment, and actual employee wealth over time.
I am not asking the search community to add an unpriced aspiration to every deal. I am asking us to price the option before the terms harden. If a seller cares about what happens to the people who helped build the company, put a workforce stake in the alternatives shown to that seller. If an investor believes aligned employees improve the operating case, model the dilution alongside the possible gains. If a searcher expects people to think like owners, decide whether the deal gives them a real chance to become owners.
My earlier essay, What Should a Lifetime of Good Work Build? [12], asks the human question. This is the deal question for SearchFunder: At what point in your next acquisition would you decide whether the workforce belongs in the ownership structure—and what would make that stake meaningful enough to matter?
The next search story can still have a remarkable CEO. It can make room for more owners before the CEO's first day.
SOURCES
[1] Yale guide, The Evolution of a Search Fund CEO and Company — redacted
[2] Project Equity, Moshe Schandelson ownership story — redacted
[3] Enduring Success Blueprint — redacted
[4] Know Your Business — redacted
[5] Prepare the Players — redacted
[6] Jim Sharpe, Harvard case histories index — redacted
[7] SearchFunder, employee-owned holding company post — redacted
[8] Turner Wyatt interview on employee ownership — redacted
[9] NCEO guide for selling owners — redacted
[10] NCEO, Working at an ESOP Company — redacted
[11] NBER research on employee-owned firms — redacted
[12] What Should a Lifetime of Good Work Build? — redacted
By David Kirubi
I have participated in—and benefited from—the search ecosystem. I know how much work goes into persuading a seller, agreeing on terms, assembling a capital stack, and getting a company across the line. The people doing that work deserve respect. The seller built the business. Investors put capital at risk. The searcher takes responsibility for leading something they did not build.
I have also been in enough conversations to notice what tends to be understated. We know the employees matter. We expect to meet them, retain them, earn their trust, and eventually give them reasons to believe in the new owner. But as we work to get the deal done, their long-term economic place in the deal can be left for later. Later often means a bonus plan, perhaps a grant for a few leaders, and a speech on day one.
By then the cap table may be settled, while the company is still waiting to be won over.
I keep asking a different question: What if meaningful, broad-based employee ownership were considered while the acquisition was being designed?
The searcher could still become CEO. The investors could still earn a return. The seller could still receive supportable value. The difference would be that the people whose work must make the acquisition succeed enter the ownership conversation before the new CEO walks in.
THE GAP AT THE DEAL TABLE
Search has become skilled at aligning two essential parties: the person who will operate the company and the people who will back that person. Their interests never match perfectly. Investors may want liquidity sooner; a CEO may want to reinvest. Still, the structure is built to give both a stake in what happens next. A Yale guide for search fund CEOs [1] captures the moment after close in five words: “It's her company now.”
The new CEO's accountability is real. So is the company's dependence on people who were there yesterday. They know where a quality problem begins, why a customer stays, how a delivery promise is actually kept, and which job only one person knows how to do. They helped create the value being purchased. They will help determine whether the acquisition thesis works.
Moshe Schandelson had spent four years blowing specialized laboratory glass at Adams and Chittenden in Berkeley when its founders began a transition to worker ownership. “The finances are the scariest thing for me,” he told Project Equity inredactedHe was used to living from paycheck to paycheck and had never worked with numbers of that size. Business-planning and financial-literacy classes helped him ask how decisions were made. His company was moving toward a worker cooperative, not through a search acquisition. His account makes the other side of an ownership term concrete: the stake has to become intelligible to the person expected to carry it.
We design alignment for the people who close the deal. What would change if we designed it for the people who must deliver it?
This is an inside question, not an accusation. In conversations I've been part of, some people have treated a workforce stake mainly as dilution of the investor's or searcher's upside. Others have been willing to consider sharing that upside if it gave the whole company a clearer reason to build together. The disagreement deserves a place in the investment discussion. A meaningful workforce stake has a cost. So does leaving the operating team outside the long-term bargain.
The investment question is whether sharing some of the equity can reduce transition risk and build enough additional value to make that choice worthwhile for everyone. It may not. We cannot know by assuming that dilution is always wasteful, or that ownership always produces better performance. We have to price the stake, design the participation, and measure what follows.
START BEFORE THE FIRST-DAY SPEECH
My Enduring Success Blueprint [3] puts discovery and diagnosis alongside the deal. Before close, the fund manager, operating partner, and company leaders consider what the business could become; examine both its financial and human reality; and test the thesis against companies they can learn from. Its second step [4] asks specifically about key people, motivation, ownership mindset, and shared stake. After close, Prepare the Players [5] brings that work to managers and the frontline through financial literacy, a meaningful stake, and an operating cadence. The sequence raises a deal-design question: if ownership is part of the plan for the workforce, why wait until after close to decide what that ownership will be?
I would bring employee ownership into that early inquiry. During thesis formation, ask whether broad-based ownership belongs in the acquisition design. During diligence, learn who creates and protects value, what employees already receive, which risks they would bear, and what the company can afford. Before close, decide the size and form of the workforce stake, who qualifies, how value reaches them, and how leaders will invite their knowledge into the operating plan. Then day one can begin with a real commitment, not an attempt to sell people on a change they had no part in shaping.
The answer need not be 100 percent employee ownership. A fully ESOP-owned company may be the right destination for some businesses; MIAHSTONE is exploring that path for suitable transactions. An investor-backed search deal may instead support a smaller, genuine workforce stake from the start. What matters is whether it is broad enough and valuable enough to change the bargain, with a credible path for employees to benefit. A token pool for a few executives leaves the wider question unanswered.
There are nearby precedents. Mike and Linda Katz acquired Molded Dimensions through a self-funded search in 2001, according to Jim Sharpe's index of the Harvard case [6]. A later Yale account [1] reports that the company became 36 percent ESOP-owned under Linda's leadership and that she sold a majority stake to private equity inredactedA SearchFunder member described [7] building a fully employee-owned acquisition platform. In a public interview [8], Turner Wyatt of Small Capital described offering equity to self-funded searchers on terms intended to convert his firm's investment into employee-owned equity over time, with an investor return built in. Both descriptions are accounts of their approaches, not independently verified deal outcomes. The open question is how deliberately we make workforce ownership part of the initial deal.
WHAT A SERIOUS PROPOSAL HAS TO ANSWER
The seller needs a real price and credible terms. Investors need a return commensurate with risk; the searcher needs authority, compensation, and a reason to give years to the company. Employees need fair pay now and an ownership interest whose potential value is understandable. The structure must also survive debt service, reinvestment, a downturn, and the costs of administering and eventually paying out employee interests.
The dilution is real. In a simplified deal where a broad-based employee vehicle receives 10 percent of the common equity at closing, the other holders together receive 90 percent of the exit equity value instead of 100 percent. At the same exit value, they receive less. For their aggregate dollar proceeds to be unchanged, exit equity value would have to be about 11 percent higher. That is a hurdle to underwrite, not a forecast: real deals also have financing costs, preferences, taxes, vesting, and different risk. The question for capital is whether the proposed stake and operating plan can credibly clear that hurdle.
An Employee Stock Ownership Plan is one possible route. Its trust can hold some or all of a company's shares for eligible employees' benefit, with interests allocated through plan accounts under the plan's rules. An independent trustee evaluates an ESOP purchase for participants, supported by an independent valuation. Employees do not each hold shares directly merely because the trust does. NCEO's guide for selling owners [9] lays out partial and full ESOP transactions, financing, and trustee duties. Other broad-based structures have different economics and governance. The point is to choose one deliberately, not attach the word ownership to an ordinary discretionary bonus.
That distinction cuts both ways. A bonus can be valuable cash when an employee needs it. It can reward this year's work. Beneficial ownership offers a chance to share in value built over time, but it can be illiquid and risky. An employee may already depend on the company for wages; concentrating retirement wealth there adds exposure. The deal must be honest about eligibility, allocation, vesting, dilution, liquidity, and what happens if the company disappoints.
If the proposed stake weakens current pay, loads the company with debt it cannot carry, or gives employees risk without a credible chance at meaningful value, reject that design.
Ownership also needs participation to become an operating advantage. Moshe's concern about the numbers is a reminder that a share of equity can be real on paper and remote in daily life. People need relevant measures, a way to understand them, a regular channel to raise problems, and leaders who respond to what they hear. A board and CEO still govern and decide. The National Center for Employee Ownership [10] describes that distinction in ESOP companies. Research on employee-owned firms [11] examines ownership incentives, participation, and culture together; it does not prove that any particular acquisition structure will outperform the conventional one. The claim should be tested against retention, quality, delivery, customer trust, reinvestment, and actual employee wealth over time.
I am not asking the search community to add an unpriced aspiration to every deal. I am asking us to price the option before the terms harden. If a seller cares about what happens to the people who helped build the company, put a workforce stake in the alternatives shown to that seller. If an investor believes aligned employees improve the operating case, model the dilution alongside the possible gains. If a searcher expects people to think like owners, decide whether the deal gives them a real chance to become owners.
My earlier essay, What Should a Lifetime of Good Work Build? [12], asks the human question. This is the deal question for SearchFunder: At what point in your next acquisition would you decide whether the workforce belongs in the ownership structure—and what would make that stake meaningful enough to matter?
The next search story can still have a remarkable CEO. It can make room for more owners before the CEO's first day.
SOURCES
[1] Yale guide, The Evolution of a Search Fund CEO and Company — redacted
[2] Project Equity, Moshe Schandelson ownership story — redacted
[3] Enduring Success Blueprint — redacted
[4] Know Your Business — redacted
[5] Prepare the Players — redacted
[6] Jim Sharpe, Harvard case histories index — redacted
[7] SearchFunder, employee-owned holding company post — redacted
[8] Turner Wyatt interview on employee ownership — redacted
[9] NCEO guide for selling owners — redacted
[10] NCEO, Working at an ESOP Company — redacted
[11] NBER research on employee-owned firms — redacted
[12] What Should a Lifetime of Good Work Build? — redacted