Deal Structure Overview

The LaborShares framework provides a model for structuring shared-ownership business acquisitions. It brings together three parties:

  • Searcher (Entrepreneur) – makes the offer, purchases a stake, and becomes the new manager of the business post-sale.
  • Seller (Current Owner) – exits operational control, receives both cash at close and a seller’s note.
  • Worker Cooperative (Employees) – gain ownership through a subordinated seller note, with no upfront capital required.

Unlike traditional search fund models, this structure encourages the entrepreneur’s incentives to be aligned with workers from day one, since both are buying in together at the same valuation, and both benefit proportionately if the business succeeds.

Deal Modeling and Compiling an LOI

In addition to this documentation, the key elements of the LaborShares framework are our Excel model and Letter of Intent (LOI) template. These work hand-in-hand throughout the deal-making process, which works like this:

  1. A searcher identifies a business (whether through outreach or because the business is openly seeking a buyer under this framework).
  2. Using the LaborShares Excel model, the searcher determines the right mix of inputs:
    • Business valuation
    • Percentage of the business they intend to purchase
    • Percentage of the business to be vested into the worker-owned cooperative (at least 30% to take full advantage of the framework)
    • (By implication) Percentage of the business that the seller retains, if applicable
  3. The searcher then compiles these terms into a Letter of Intent (LOI) using the provided template.
  4. The LOI is submitted to the seller, who may accept or negotiate the terms, guided by the LaborShares framework.

The critical point: the searcher is always the one making the offer.

This ensures that the co-op’s purchase is pegged to an independent, arm’s-length valuation. If employees later question the fairness of the price, the seller can point to the fact that an outside entrepreneur purchased at the same terms and with significant relative downside.

Core Financing Structure

Each of the parties finance their part of the deal in different ways, and that financing follows these principles:

Searcher’s Portion

  • Funded through a combination of the searcher’s own capital, investor equity, and/or outside debt financing.
  • Determines the seller’s cash at close, less any operating capital set aside for reinvestment.

Worker-Owned Cooperative’s Portion

  • Always financed entirely through a seller’s note, subordinated to any outside debt used by the searcher.
  • Allows employees to gain ownership without providing upfront capital.

Seller’s Compensation

  • The seller necessarily receives both:
    1. Cash at close (from the searcher’s financing sources), and
    2. A subordinated note (to cover the worker-owned cooperative’s stake)

30% Co-op Ownership: The Magic Number

While we believe that more employee-ownership is a good thing, the 30% minimum under the LaborShares framework is not strictly altruistic in nature. The single most powerful feature of this framework is that when the worker-owned cooperative reaches or exceeds a 30% stake in the business, it unlocks unique tax benefits for the seller.

Under IRS Code Section 1042(b)(2), any sale where a qualifying worker co-op acquires 30% or more of the business is eligible for tax deferral if proceeds are reinvested into Qualified Replacement Property (QRP) within 12 months.

Because of the IRS’ step-up in basis rule, if the QRP is passed down to heirs, capital gains are effectively erased for the seller.

Why sellers care

For starters, the LaborShares framework cements a seller’s legacy by ensuring the people who helped them build their business own a significant stake in that business going forward. Further, the framework enables the seller’s net after-tax outcome to be significantly higher than in a traditional sale, even if part of the consideration comes in the form of a subordinated note (as is often the case in such sales, anyway).

Why search entrepreneurs care

As acquisition markets become increasingly competitive, search entrepreneurs must find ways to differentiate themselves from the crowd. The LaborShares framework enables them to do just that by offering a unique combination of emotional appeal to sellers and superior after-tax outcomes.

A note on SBA financing considerations

If a searcher intends to utilize Small Business Administration (SBA)-backed debt for any of their portion of the purchase, two additional requirements apply:

  1. The searcher must be purchasing a controlling stake in the business, at least 51%.
  2. The searcher must inject at least 10% equity into the “total project cost” (their ownership share x valuation + operating capital investment).

These rules are not a centerpiece of the LaborShares framework, but matter if SBA financing is being pursued. Crucially, they constrain the amount that the worker-owned cooperative can own to 49%.

Summary

The LaborShares business acquisition framework aligns incentives across entrepreneurs, sellers, and employees

  • The searcher validates fair market value, purchases a stake, and runs the business with incentives aligned to the workforce.
  • The seller receives both cash and a note, with a cemented entrepreneurial legacy and unique tax advantages.
  • The worked-owned cooperative gains sustainable ownership, financed without upfront worker capital.