Zingerman’s: This is Ownership

The following video, if I’m not mistaken, was produced to coincide with the recent BALLE conference in Grand Rapids, which, to a great degree, revolved around the subject of employee ownership. In this video, Paul Saginaw explains why, ten years after the launch of Zingerman’s Delicatessen, he and his co-founder, Ari Weinzweig, decided upon an unorthodox model for growth, which had at its core the novel idea that employees could, if they wanted to, launch collaborative businesses of their own, beneath the Zingerman’s umbrella. That philosophy, over the past several years, has given rise to over a half dozen new companies, including a creamery, a coffee roaster, a bakehouse, and an award-winning restaurant, that now collectively employee over 500 people. And, as Paul notes in the video, they’ve done it without franchising, or sprawling across the map, in hopes of a big liquidity event. Their intention, as Paul notes, has never been to cash out, and sell the brand, but to create an entity that empowers its people to have decent lives, and enrich the community in which they live. I know I’m biased, as Paul’s a friend, but I think it’s pretty awesome stuff.

Here, for those of you who won’t watch the four-minute video, is the quote that sets it in motion.

Business shouldn’t exist in order to create wealth. It should exist in order to give people better lives.” – Paul Saginaw

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10 Comments

  1. Posted June 5, 2012 at 12:14 am | Permalink

    Thanks a bunch for sharing my photo-film! It really was an amazing experience at Zingerman’s Community of Businesses. I hope I can some day make it back to Ann Arbor…

  2. Alpha
    Posted June 5, 2012 at 6:19 am | Permalink

    It always amazes me when people give Zingerman’s shit. On one hand, there are those who like to complain about the cost of their sandwiches, and, on the other, there are those who say that they’re being naive for not franchising, spreading across the country, and maximizing their potential in a classic capitalistic sense. I don’t feel as though they get the appreciation that they deserve. Instead, it would seem, people would rather talk about app companies that employ 5, and have the potential of making a few people wealthy.

  3. Edward
    Posted June 5, 2012 at 6:44 am | Permalink

    A lot of good liberals, for all their talk about how businesses should pay a living wage, would rather pay less at the register, even if that means the person taking their money is making minimum wage, and dependent upon the government for health insurance. You need to look at the whole system. When you do, you realize there’s no such thing as a cheap sandwich.

  4. Posted June 5, 2012 at 7:04 am | Permalink

    Edward, Phil Ochs had it right with

    http://www.youtube.com/watch?v=u52Oz-54VYw

  5. Brainless
    Posted June 5, 2012 at 9:25 am | Permalink

    “I don’t feel as though they get the appreciation that they deserve.”

    LULZ – That’s a good one. Don’t get me wrong, I love Zingermans, but I don’t think there’s a single restaurant in the area that has had more love heaped upon it (except maybe the fucking food carts).

  6. Watching Laughing.
    Posted June 5, 2012 at 5:47 pm | Permalink

    Edward, dude, Fox news can be changed on the remote. GEEEEZZZZ!!!
    You Millionaire/Billionaire, you.

    WL.

  7. Watching Laughing.
    Posted June 5, 2012 at 5:48 pm | Permalink

    I’d put money down, you’re getting some sort of disability.

    WL.

  8. Edward
    Posted June 5, 2012 at 7:10 pm | Permalink

    I wasn’t aware that Fox News was among the Zingerman’s community of businesses.

  9. Dug Song
    Posted June 6, 2012 at 12:02 am | Permalink

    I’m probably nitpicking, but Paul’s quote here is bizarre, and I worry, misleading – of course *businesses* exist to create wealth, hopefully for everyone involved. Great organizations are indeed mission-driven, but absolutely no business survives if it fails to create wealth (Zingerman’s open-book finances probably help align the company with this reality).

    As Paul says, their business reached a point of stagnation *for the founders*, where their ambitions (and/or opportunity) outgrew the confines of their operation. They could have stayed small, excellent, and had “enough”, joie de vivre be damned (incidentally, I met Chip Conley, Joie de Vivre Hospitality founder last year, a remarkable entrepreneur in his own right!). Instead, they chose to invest / partner in other businesses, with what sounds like much more operational involvement (and fun! but maybe the same kind of screening) than arms-length investors.

    That is to be seriously commended! Growth! Business and adventure! A pirate model of organization: http://www.crashdev.com/2008/01/pirate-ship-as-organizational-model.html Have fun storming the castle! Who has time for boring shit like golf, anyway?

    I’m curious, though, about the distribution of Zingerman’s ownership and profits (cap tables, dividends / profit sharing), and the legal structure of its community of businesses (entities, partnerships, governance, etc.). Is it one holding company with Ari and Paul as king (through a manner of servant leadership) with lords tied to Zingerman’s estate, or are the operating companies (mostly) independent, with non-binding agreements for founders (how can they divest, if ever)? Do Zingerman’s/CoB *employees* (not just founders) generally have ownership stakes?

    In tech startups, the cultural expectation is that *all* employees have ownership – but without liquidity, earlier employees (who may not actually have had as much impact as a later employee) get disproportionately rewarded for incurring more risk (maybe fair to the former, but probably not to the latter).

    I first learned of an interesting model to deal with this from one of the investors in our oversubscribed Series B at Arbor: SAIC, one of the world’s largest military defense contractors ($10B+ annual revenue) – and a pioneering employee-owned company for over 40 years. Founder Bob Beyster, a major UM benefactor (see his namesake buildings on North Campus), wrote some interesting books on the subject of employee ownership, “ownership culture” and started the National Center for Employee Ownership and the Beyster Institute dedicated to the same, focusing on stock options and ESOPs as the concrete vehicle for employee ownership (not some hand-wavy anarcho-syndicalism of century prior, e.g. Leland Stanford). In a post-409a world, I’m guessing the transference of ownership in internal transactions is much more complicated/costly, but maybe that’s why SAIC is mostly a public company now, to achieve employee liquidity.

    I remember having dinner one night with the head of their Casciano group (seriously, that’s what they called themselves, after the head of the business unit) and realizing that he was the progenitor of the Predator UAV program, among other less savory dinner topics. Regardless of ownership structure, founders have the responsibility to set the culture of an organization (and kudos to Paul and Ari for doing so) – or else you end up making baby-killing machines!

  10. Paul Saginaw
    Posted June 7, 2012 at 11:38 am | Permalink

    Dug,
    I was hoping that no one would notice that unfortunate statement. I cringed when I first saw the video. I misspoke when that quote was recorded. The interview went on for several hours over a couple of days – starting and stopping while I was at work. I meant to say that I believe the real purpose of business is not to create the “maximum profit” but rather to help improve people’s lives.

    I also said in regards to “wealth” that business should work to create real “community wealth”. A wealth not measured in dollars alone but in diversity, clean air and water, safety, joy, the number young people who stay or return after college and open businesses, block parties, a thriving local economy, hours of volunteerism, the degree to which a community is self-reliant for its basic needs (food, energy, shelter, clothing, etc,), community celebrations, how well its most vulnerable members are cared for, etc.

    I am happy to sit with you and go over how we are structured legally and spiritually. But it is a long conversation and it will generate many more questions. Here is a simple overview.

    Ari and I have a holding company, Dancing Sandwich Enterprises, Inc., wherein resides all of our interest in the other businesses. All of those businesses (currently 8 with 2 more in the pipeline) are separate legal entities. The older ones ( Deli, Bakehouse and ZingTrain) are C Corps and the rest are LLC.’s.
    Each business has at least one managing partner. There are currently 16 managing partners spread among those 8 businesses. The Zingerman’s Community of Businesses is not a legal entity, but we behave as a single company. All the partners meet every two weeks for 3 hours. We report out on all of our 3 bottom lines, great food, great service and great finance. We also make all decisions at this meeting that affect all the businesses. Because in the eyes of the IRS we are a single employer and in the eyes of the public we are one company there are certain areas where we need to all be on the same page – benefits, marketing, training standards, quality, look and feel, etc. All decisions are made by consensus.
    We do not vote. You are in consensus if you are 80% ok with a proposal and its language and willing to support it 100%.

    Ari and I own anywhere between 30 to 80% of each business. We also own the intellectual property, which we essentially license to the businesses. That is how we receive income. We do not take a salary out of any of the businesses. All of the managing partners run their respective businesses. Because Ari and I are partners, we participate in approving the annual plans, which are also a consensus decision. The annual plan for each business includes a salary and bonus plan for the managing partners and a gain-sharing plan for all of the employees. After all of that is paid out we then deal with Net Operating Profit. 10% of all profit is distributed to the non-profit sector with over 95% going to Washtenaw County. 5% goes into a relief fund for our employees where staff members who are experiencing a financial crisis can apply for funds. Another 10% goes to our support services company, Zingerman’s Service Network, and that money is used for bonuses and capital expenses. 20% can be distributed to the businesses’ partners according to % of ownership. The rest will be held as retained earnings to fund capital expenses, growth and tough times.

    Buy-sell agreements, succession planning, transfer of ownership and employee ownership are all issues that we are sorting out. We have had an adhoc governance committee working on all of these for a couple of years and we feel that we are close to delivering a proposal to the Partners Group that will set the course for the foreseeable future.

    I hope that answers a good deal of your questions. If you have an interest in knowing more about us, just let me know and we can get together.

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  1. […] on employee ownership and the meaning of wealthBy Mark | June 7, 2012A few days ago, I posted a video in which Zingerman’s co-founder, Paul Saginaw, said the following. “A business shouldn’t […]

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