Mass. a hotbed for a new kind of employee ownership

Joe Noblit was stunned. Gobsmacked, actually.

It was 2021 and Noblit was looking to sell his mattress business. Over the previous 20 years, Noblit had built Yankee Mattress in Agawam into a chain of four stores across Western Massachusetts, with a staff of 14. Now he wanted to retire and enjoy the fruits of his labor.

But Noblit didn’t know if anyone would bite, well aware that small businesses in the United States often fail to find buyers and simply fold. Then his broker called: Teamshares, a new kind of private equity firm backed by some of the biggest names in venture capital, very much wanted to buy Yankee Mattress.

Not only was Teamshares’ offer “very, very generous,” Noblit said, but the company also wanted to keep Yankee Mattress independent and eventually give the business back to the employees.

“I never heard of anything like that,” Noblit said. “I couldn’t wrap my head around how or even why they were interested in my company. They didn’t even know anything about mattresses.”

Noblit had never heard of Teamshares’ business model because it had never previously existed.

“It’s very unusual,” said Angela Lee, a professor of finance at Columbia Business School in New York.

The New York-based firm says it wants to transform capitalism by spreading more wealth to a bigger group of people outside of Wall Street and Silicon Valley. Today, the wealthiest 10 percent of US households control nearly 70 percent of total wealth, while the bottom half hold just 2.4 percent.

“The current version of capitalism is not working,” said Michael Brown, co-founder and CEO of Teamshares. “It’s not too inclusive.”

But Teamshares’ motives are not completely altruistic. The company, which has raised $245 million from investors, sees plenty of opportunity to make money. How? In part by selling business products such as credit cards and insurance to the small businesses it owns.

It has a longer game, too. Over 20 years, Teamshares will grant dividend payments and stock to the employees, which the company hopes will motivate those workers to boost sales and profits.

But experts say that 20-year promise presents big risk. Anything can happen in two decades, including changing economic conditions that might affect the health of the small business and Teamshares itself. The company’s model is also highly complicated: A lot needs to go right for Teamshares to accomplish its goals.

“It’s a lot of work to make this happen,” Brown admits.

Nevertheless, Teamshares sees untapped opportunity. Small businesses collectively account for 43.5 percent of the $23 trillion US economy. But investors tend to overlook these more modest operations — think auto shops, manufacturers, and cleaning services — in favor of large corporations and glamorous tech firms that often dominate public attention.

The startup has been recruiting big investors to expand its operations. Major venture capital firms, including QED, Khosla Ventures, and Union Square Ventures, are backing Teamshares, which in turn has bought 84 companies since its launch in 2019, including seven in Massachusetts. Among these are Yankee Mattress, Mass Commercial Cleaning in Florence, and Brad’s Service Center in Chicopee. Teamshares’ goal is to buy 1,000 small businesses by 2030.

Tim Boshuyzen replaces rear pads and rotors on a Chevy Camaro at Brad’s Service Center in Chicopee, one of several Massachusetts businesses that have been acquired by Teamshares in recent years.Pat Greenhouse/Globe Staff

Lee, the professor, said she’s “bullish” on Teamshares because the “company is solving a real problem.”

Small businesses — generally defined as those with 500 or fewer employees — account for 99.9 percent of US companies. Yet only 20 to 30 percent of them that go to market actually sell, according to the Exit Planning Institute.

“Why is it so hard to sell a small business?” Brown said. “We became intellectually fascinated by it.”

What’s more, the institute projects 4.5 million such businesses — worth more than $10 trillion in all — will face owner retirement over the next decade. That’s a lot of wealth down the drain.

It’s also why private equity firms have been increasingly focused on acquiring small businesses, said Erin Towery, an accounting professor at the University of Georgia’s Terry College of Business.

“There are likely a lot of investment opportunities that are essentially untapped,” she said. “The heart of the US economy is smaller businesses, and they need capital.”

Typically, private equity firms buy distressed or underperforming companies, or roll up businesses whose owners who are ready to sell. They install new managers to run the business over three to five years and often resell them, ideally for a profit.

But Teamshares isn’t your average private equity firm. The company looks for small businesses that are relatively healthy, with $400,000 to $2 million-plus in annual profits and owners compensation in two of the past three years. And it has a very different long-term plan.

Once Teamshares acquires a business, the company immediately starts to grant stock to its employees, which also carries with it dividend payments. The better the business performs, the more stock and dividends Teamshares pays out.

The whole concept rests on the idea that employees who own a piece of the company will better engage with managers and customers and innovate faster because they directly benefit from the value they helped create.

“When you give people a stake in the outcome, people get more motivated,” said Brown, the Teamshares CEO.

According to numerous studies, companies where employees own at least 30 percent of the shares are more productive, grow faster, and are less likely to go out of business than their counterparts.

And Teamshares doesn’t just give away stock. It offers its employees classes that are essentially Business 101 boot camps, teaching workers know how to read financial statements and comprehend their companies’ strategies and performance.

“We give them the tools to understand their role in the business and how to grow it,” said Adam Miller, the new Teamshares-installed president of Yankee Mattress who previously spent nearly a decade at Yankee Candles (the two companies are not related). “I didn’t know two things about mattresses.”

But Teamshares wanted to send a message to employees that Yankee Mattress was entering a new era in which the business would seek new ideas and ways to grow.

“I was not going to be just the next Joe [Noblit],” the founder and previous owner, Miller said.

The program has already paid off with better performance.

For example, at Mass Commercial Cleaners in Florence, employees had previously shied away from larger projects, said president Katerina Cai, another executive Teamshares recruited and trained to run the business.

Adam Miller is the president of Yankee Mattress. The Western Massachusetts company is one of several here that have been acquired by Teamshares in recent years.Pat Greenhouse/Globe Staff

But now that they own a piece of the business, many employees have realized that larger projects can generate more profits. As a result, the number of such projects Mass Commercial Cleaners nabbed jumped 180 percent quarter over quarter, which earned employees sizable bonuses, Cai said.

Still, Teamshares is buying companies on a 20-year timeline. Will a model of slowly selling the business to its workers over two decades stand the test of time?

“Twenty years is a long time,” said Lee. What happens, for instance, if an outside buyer wants to purchase the small business for a lot of money?

That simply won’t happen, the company says.

“Teamshares will not sell a company for an investment gain,” the company said in a response to follow-up questions. “We promise 80 percent employee ownership within 20 years to the companies. Permanent ownership, instead of selling a company, results in better financial outcomes for everyone involved, including Teamshares.”

That’s partly because Teamshares makes money another way. After purchasing the small business, the company exclusively sells it financial products, including banking services, credit cards, and business insurance. So holding the small business for 20 years gives Teamshares a stable revenue stream for at least two decades.

Not everyone’s so sure about that model. Categorically ruling out potential transactions that could provide everyone (Teamshares and employees) with significant wealth in a shorter time period “doesn’t seem like a prudent business decision,” Lee said.

But that’s the whole point of Teamshares’ mission, the company says — to facilitate long-term employee ownership of small businesses instead of cashing out for a quick payday.

And the idea that Yankee Mattress will continue to exist well into the future certainly appeals to founder Joe Noblit.

“I thought Yankee Mattress would sell and then it would be gone,” he said. “But the idea I could leave a legacy, that’s a tremendous feeling. I’m their biggest cheerleader.”

Billy Lamirande builds a Conway firm hybrid mattress at the Yankee Mattress factory in Agawam.Pat Greenhouse/Globe Staff

Thomas Lee can be reached at thomas.lee@globe.com.

Why one investment firm aims to buy companies, and gradually turn them over to the employees

Founders of firms such as Yankee Mattress have sold their businesses to Teamshares, which promises to transfer ownership to employees after 20 years