Legal Case Study: Colorado Recovery

Background

In 2006, Dr. Richard Warner founded Colorado Recovery Center, a Boulder-based residential treatment facility for adults suffering from serious mental illness. Dr. Warner founded the Center to create an ideal environment for patient recovery, in which patients would be respected, encouraged, socialized and empowered. Currently, the Center has over 40 employees, and provides psychiatric services and therapy as well as daily outpatient services for over 100 patients in the Boulder area.

Two years after opening the Center, Dr. Warner was diagnosed with terminal cancer, and realized that he would eventually have to either close or sell the Center. Because the Center boasted a highly motivated staff, and because so many Boulder residents had come to rely on the Center’s services, Dr. Warner decided to sell it and ensure that it remained in operation. But Dr. Warner did not want outside investors to purchase the Center and treat it merely as a means of acquiring a return on investment.

To ensure that the Center continued to fulfill its mission, Dr. Warner decided to sell the Center to interested employees, who would exercise voting power on the Board, and to interested patient families. It took three years from the time that Dr. Warner decided to convert his business into an employee-owned business to the time when the first employees gained an ownership stake in the business.

Key Personnel

Converting Colorado Recovery Center into to an employee-owned business required a great deal of professional assistance and internal support from individuals with crucial business knowledge and acumen. Warner worked with two attorneys, Jason Wiener, who joined the board as a founding member and consultant, and external counsel Maureen Eldredge. Throughout the entire process, external board member R.C. Mercure helped structure and navigate the conversion, drawing upon his 57 years of experience in business management and investing.

Determining the Sales Price and Incorporating

In order to create transferable equity interests, Dr. Warner converted Colorado Recovery Center from an LLC into a Colorado Corporation. The new corporation included a board of directors, which included Dr. Warner. The board needed to determine a sales price for the business, but decided that an external evaluation would be cost prohibitive. Thus, the board’s finance committee decided to conduct its own valuation. The finance committee came up with a price, about $100,000, that they thought would enable the transaction to move forward.

Corporate Structure and Financing

To structure the sale of the business, the board created three classes of shares. Class A shares would be the common voting shares. Class A shares would be restricted to employees, who would be restricted to ownership of one Class A share. Class B shares would be preferred, nonvoting shares sold to interested patient family members who were interested in ensuring that the Center would continue providing high quality care to their loved ones. Although Class B shareholders did not have direct voting rights, they were able to select two Board seats indirectly through a nominating committee. After determining the sales price, the board sold the Class B shares to patient family members through a private placement. This provided the board with sufficient capital to proceed with the sale of Colorado Recovery to the Class A shareholders.

In order for an employee to obtain a voting Class A share and become an owner, he or she would be required to purchase a predetermined number of Class C shares. In order to ensure that all employees would have the option of assuming an ownership role, the board created a novel, income-based share purchase plan for high-income employees, middle-income employees, and low-income employees. High-income employees, such as psychiatrists, would be required to purchase more class C shares relative to lower income employees in order to obtain one Class A share and become an employee-owner. Low-income employees were afforded the option of purchasing the required class C shares over the course of three years.

In December of 2014, one third of the employees at Colorado Recovery became worker owners. While Colorado Recovery does not necessarily plan for every employee to become an owner, the owners and the board have resolved to ensure that the potential for ownership remains open to all employees.