This article was originally published by NPQ online, on August 14, 2018
Historic Federal Law Gives Employee-Owned Businesses Access to SBA Loans
by Steve Dubb
As we noted in NPQ [Nonprofit Quarterly] last fall, nearly half of US small business owners are baby boomers, aged 53 to 71. Collectively, they own 2.34 million businesses, employ 24.7 million people, and have combined sales of $5.14 trillion. It is estimated that 80 percent of these businesses lack a plan for what they are going to do when their owners retire or, if misfortune falls, die unexpectedly.
In short, people’s livelihoods across the nation are at stake, as hundreds of thousands of companies are likely to shut down in the coming decade due to the failure to develop adequate business succession plans. Some have labeled this pending crisis a silver tsunami.
One step to address this situation is to make it easier for the people who work at these companies to buy the businesses where they work. Already, as of 2015, through pension-financed employee stock ownership plans (ESOPs), 10.8 million employees own all or part of 6,669 companies nationwide. Why not make sales of existing business to their own workers easier, thereby preserving jobs while garnering workers a share of company ownership (and profits) at the same time?
Still, the odds of passing federal legislation seemed low. Congress hadn’t passed a law to support employee ownership since the last century—1997, to be exact. Yet now, for the first time in 21 years, a new employee ownership bill is the law of the land.
The bill, called the Main Street Employee Ownership Act of 2018 (S 2786 and HR 5236), has been advancing since NPQ wrote about it passing in committee last March. It was tucked inside the $717-billion, Fiscal Year 2019 John McCain National Defense Authorization Act, which was signed into law yesterday. Nestled in that law is Section 866, which makes employee-owned businesses eligible for Small Business Administration (SBA) section 7(a) loans for the first time.
- Updates SBA’s lending practices to better serve employee-owned businesses.
- Empowers the SBA to assist small business owners in converting their companies to employee ownership through outreach and training programs.
- Directs the SBA to coordinate with funds licensed as SBA Small Business Investment Companies and its microloan program to consider employee ownership as an area for investment and lending.
But access to the Small Business Administration (SBA) section 7(a) guaranteed loans is surely the bill’s most important provision. For the uninitiated, section 7(a) enables banks to issue loans for up to $5 million, of which the government insures 85 percent of the loan, to help finance small business expansion. With the new law now in place, these loans can help finance the transition of family-owned companies to worker ownership as business owners retire and sell their businesses to their employees.
On an annual basis, the amount of lending that occurs through the 7(a) program is significant. According to a US Comptroller of the Currency report, in 2013 alone the 7(a) program helped 46,399 businesses obtain about $17.9 billion in loans. In short, while the law provides no new public funds to employee-owned firms, it could facilitate billions of dollars of loans to finance the transition of firms to employee ownership.
The bill, notes the American Sustainable Business Council, also mandates that the SBA work with the nation’s network of 900 Small Business Development Centers “to provide transition-related technical training, executive education, and one-on-one consulting.”
The cost of the bill for the federal government is miniscule. A Congressional Budget Office (CBO) estimate written in June suggests that over five years, the bill’s cost will be $6 million, a tiny portion of the multi-trillion-dollar federal budget. According to CBO, the $6 million includes “about $4 million for the SBA to provide funding for small business development centers (SBDCs) to provide employee ownership training and services to small businesses and $2 million for the SBA and federal agencies to update SBA program rules and issue a report, develop outreach materials, and to convene an interagency working group and issue reports.”
The CBO expects the bill will increase the volume and gross cost of SBA 7(a) loan guarantees, since employee-owned businesses will now be a new clientele base for these loans, but the estimated net subsidy cost is expected to be negligible because the SBA can raise fees on the loans if necessary without any new government authorization to cover any added costs.
Earlier this year, in the House of Representatives, Rep. Nydia Velázquez (D-NY), the bill’s lead sponsor, said, “As baby boomers near retirement, the country faces a substantial dilemma: Roughly half of privately held companies are owned by baby boomers, and fewer than 15 percent have a formal exit plan in place. And while it is wonderful to think that family members will take over the business, this is a relatively rare occurrence. Some will be bought out; others will close. This will have significant secondary economic impacts that will ripple through our local communities.”
Also speaking on the legislation’s behalf on the House floor, Rep. Jared Polis (R-CO) remarked that, “The SBA Loan Guarantee Program is often the only financing that many small businesses can get early on to get off the ground… This bill also creates a small business employee ownership and cooperative program, which helps employers and employees understand how to create employee-owned businesses, providing some of the help for succession planning, coordinating with other programs to help employee-owned business succeed.”
In the Senate, Kirsten Gillibrand (D-NY) was the lead author. There were six Senate cosponsors. Democratic cosponsors were Ben Cardin (Maryland), Cory Booker (New Jersey), and Jeanne Shaheen (New Hampshire). Republican cosponsors were Todd Young (Indiana), James Risch (Idaho), and Susan Collins (Maine). Gillibrand has been a vocal advocate, visiting employee-owned businesses in her state even before submitting legislation to drum up support.
The law’s supporters also included a broad cross-section of the worker co-op and employee stock ownership plan (ESOP) world. In addition to ASBC and NCEO, this includes the US Federation of Worker Cooperatives, the Democracy at Work Institute, the ESOP Association, the Employee-Owned S Corporations of America (ESCA), the National Cooperative Bank, regional nonprofit employee ownership centers in Colorado and New Jersey, and advocacy nonprofits.
In a press release issued from Gillibrand’s office in June, the senator notes that companies whose owners who are at or near retirement employ one-in-six workers nationwide. In New York alone, this includes an estimated 181,370 businesses employing 1.6 million workers. As Gillibrand’s office writes, “As these business owners retire, local economies will experience a massive shift that could trigger the closure of small businesses and loss of jobs and investment. This looming crisis can be turned into a unique opportunity to strengthen small businesses, reward workers, and invest in our Main Street economy by helping these companies transfer ownership to employees.”
Of course, no single loan program—no matter how helpful it may be in preserving businesses, saving jobs, and helping more employees become company co-owners—will be sufficient by itself to meet all the needs the generational shift in business ownership will require. Additional legislation being advocated by the employee ownership community includes the Worker Ownership, Readiness, and Knowledge (WORK) Act (S 1081, HR 2387), which, among other things, would providing funding for state-based technical assistance centers to help shepherd conversions, and the Employee Ownership Bank Act (S 1082, HR 2357), which, in addition to creating a dedicated lending facility for employee ownership conversions would also provide employees of facilities being offshored a “right of first refusal” to purchase the operation via an ESOP or worker co-op and would provide Community Reinvestment Act credit to banks for participating in employee ownership conversion deals.
Still, the passage of the legislation, by putting the federal government back in the game of promoting employee ownership, marks an important step. As Hammad Atassi, CEO of the American Sustainable Business Council, notes, “Giving worker-owned companies better access to funding and educational programs will both strengthen existing businesses and create more jobs. Crucially, it will drive local economic activity and generate more wealth and retirement savings across all income levels.”