Roughly 10,000 baby boomers turn 65 every day in the United States. They don’t all own small businesses, but their aging presents an opportunity for more workers to get the chance to own businesses and even build some wealth.

Baby Boomers own the majority of small businesses, but only 17 percent of them have a formal exit plan for when they want to retire. Shutting down is the first option, even in cases where the business might be doing well. The consequences can include the disappearance of the lifeblood of any neighborhood or the soul of any street and a significant loss of jobs. Such changes would most negatively affect those who earn and own the least. While each business may employ a small number of people, small businesses provide the vast majority of employment within low-income urban areas.

Selling to investors, or to a competitor, provides another common option for retiring business owners, especially if they’re successful. That may preserve some jobs, but a sale to a larger competitor or someone outside the community comes with the threat of downsizing or maybe a total overhaul of the business. Firing longtime workers and hiring all new employees may mean losing the connection between that commercial space and neighborhood residents.

A report published today, “Co-Op Conversions at Scale,” takes a deep dive into another option: retiring small-business owners selling to their employees.

Using data from the National Establishment Time Series (NETS) database — the same database that many banks use to predict lending risk for businesses — the report’s authors make a case that significant potential exists to finance the conversion of businesses with 20 to 100 employees into worker cooperatives.

In a worker cooperative, in addition to sharing ownership, workers share collective responsibility in managing the business, often using the principle of “one worker, one vote” to govern decisions like hiring management or delegating management responsibilities to each other. According to the Democracy at Work Institute, which supports worker cooperatives across the United States, the typical worker cooperative employs 9-10 worker-owners earning an average hourly wage of $15.82, each working an average of 30.35 hours a week, bringing in an average of $3.9 million in annual revenues at an average profit margin of three percent. Under a worker co-op, profits are typically also shared equally among worker-owners.

The benefits of small businesses becoming employee-owned may go beyond preserving jobs or maintaining the connection between a community and its local businesses — it may also represent a significant transfer of wealth from mostly white-owned businesses to workers of color. For all these reasons, NYC, Cleveland, Rochester, Austin and other cities across the country are finding ways to encourage worker-ownership.

Congress has explored supporting worker cooperatives too, and has several initiatives on the table. A law enacted in August could help the Small Business Administration expand support and lending for employee ownership conversions.

“Co-Op Conversions at Scale,” from Citi Community Development and Capital Impact Partners, a nonprofit that provides capital for community development, started out as an internal discussion at Capital Impact Partners about whether there was any potential market demand in the worker co-op conversion space for the organization. (Next City receives funding from Citi Community Development for The Bottom Line series.)

Since its founding in 1982, Capital Impact Partners has provided $20 million in financing for establishing and expanding worker cooperatives, but none of that has been for the purpose of converting existing businesses.

“We knew instinctively that there had to be [demand for worker co-op conversions], and we knew there was data on baby boomers retiring but there really hadn’t been a lot of data out there with this segmentation,” says Alison Powers, program officer for strategy, innovation and impact at Capital Impact Partners, about the level of detail the new report considers.

To be convinced that it should move more intentionally into worker co-op conversions, Capital Impact Partners wanted information about retiring owners with businesses at least 25 years old, and independent businesses whose owners would be in a position to sell to employees.

The community development lender wanted to assess five key sectors that are essential to its mission of supporting communities through living-wage jobs with benefits as well as high-quality services: grocery stores, food manufacturing, home-care agencies, residential care facilities and child-care centers.

Powers says they wanted to keep the focus on small businesses with 20 to 100 employees because Capital Impact Partners is a larger lender with a portfolio of nearly $1 billion in loans. The nonprofit is part of an informal group that includes smaller community development lenders that support worker cooperatives, including Cooperative Fund of New England, Local Enterprise Assistance Fund, Shared Capital Cooperative and The Working World.

A new report reveals the potential of converting small businesses to worker cooperatives when the owner is retiring. These graphics show the number of businesses considered, number of employees and more, for (from top to bottom): the Chicago metro, Los Angeles and the Bay Area, and the New York City metro. (Credit: “Co-Op Conversions at Scale,” Citi Community Development and Capital Impact Partners)

The lender also didn’t want to focus on businesses larger than 100 employees. At that size, the more popular employee-stock-ownership plans (ESOPs) are more feasible, given the expensive legal and administrative burdens required to pursue that option. There are currently more than 6,000 companies around the U.S. with ESOPs in place, covering some 2.1 million employees — at an average of around 343 employees per company. The sweet spot, 20 to 100 employees, was where Capital Impact Partners felt it could meet a need that neither the smaller lenders nor ESOPs were meeting.

The report examines five regions where there’s already local or national support helping with the non-financial side of worker co-op conversions. That includes education and outreach to owners as well as significant training and technical assistance for workers to assume ownership and management responsibilities. The areas are: New England, the NYC metropolitan area, the mid-Atlantic (consisting of Philadelphia, Baltimore and Washington, D.C.), the Chicago metropolitan area, and California (consisting of the Bay Area and Los Angeles metropolitan area). Data for Miami was also included in the report, which notes that there isn’t yet a strong technical assistance ecosystem for worker cooperatives in that region.

“Funding for technical assistance is something that we really look for as a lender,” says Powers. “We know that technical assistance is absolutely critical, both during the conversion process but also ongoing, especially in the three to five years after conversion. As a lender, we really know that mitigates risk — knowing there are trusted [technical assistance] partners, sources of funding for those partners, whether that’s through the municipality or state or foundations.”

Of the companies that met the report’s criteria (size, location, etc.), from 1991 to 2014, 159 were sold or shut down per year, affecting 5,724 employees. A majority, 85 of those companies each year, shut down, despite most being profitable businesses.

“For me, the biggest aha moment was that more long-standing healthy businesses close than are sold,” says Powers. “That hit me over the head as an immediate crisis.”

As Powers also points out, the report shows there is a significant market for worker co-op conversions even within its limited geographic and industry scope. There’s still unstudied market potential out there in other regions and other industries.

ICA Group, a Boston-based nonprofit consultancy that assists worker-owned companies, was the primary author of “Co-Op Conversions at Scale.” One of the key services ICA Group offers in its own work is determining the market value of businesses that are interested in worker co-op conversions or other worker-ownership structures. ICA Group estimated that the median value of the businesses studied was around $777,000. Median values ranged wildly between sectors and regions, from $240,000 for a child-care business in the Miami area to $3.73 million for a California food-manufacturing business

Knowing the range of values for these businesses is essential. Workers generally won’t have all the cash they need to pay owners what their businesses are worth, Powers explains. That’s where community development lenders like Capital Impact Partners can step in and provide a loan on favorable terms. At a median value of $777,000, a projected 30 worker co-op conversions per year of businesses in the 20 to 100 employee range would require $23 million in capital, according to the report.

But even with a favorable loan from Capital Impact Partners, a bank or credit union, or some combination of all the above, workers will still have to come up with at least a small down payment, which may pose another barrier. The recent changes at the Small Business Administration may help reduce the down payment needed, but they won’t eliminate the barrier.

“It can be especially tricky when you have an industry where not all workers have a lot of income,” says Powers. “We’re not exactly sure what [a solution] could look like, but we know it’s a problem.”