Employee Ownership News spoke with several organizations that advocate for and support employee ownership through Employee Stock Ownership Plans (ESOPs). When asked about SSBCI funding, they focused their comments primarily on the $500 million in technical assistance. These funds, all agreed, could be used to grow outreach to business owners, state and municipal economic development leaders, and the business services community. Below, we have edited comments from Corey Rosen, founder of the National Center for Employee Ownership; Steve Storkan, executive director of the Employee Ownership Expansion Network; and Jim Bonham, president and CEO of The ESOP Association (TEA).
Corey Rosen: What states can do
Close to half of all privately held companies in the U.S. are owned by baby boomers, meaning 2.7 million American businesses are owned by someone age 55 or older. In the coming decades, all of these businesses will either change owners or disappear. The median state has 34,000 businesses approaching an ownership transition. The effects of this generational shift will be felt in cities, small towns, and rural areas.
Addressing the knowledge gap can be a relatively cost-efficient way for states to preserve jobs, address wealth inequality, and increase retirement security.
If even a fraction of these exiting owners pursued an employee stock ownership plan (ESOP), worker cooperative, or other employee ownership model as their business exit strategy, the potential positive impact on workers, communities, and state economies would be substantial. Yet, many business owners are not even aware of employee ownership as an option. In light of this knowledge gap, many of these businesses will instead shut down or sell to outside investors who may not be interested in preserving and growing local jobs.
Addressing this knowledge gap can be a relatively cost-efficient way for states to preserve jobs, address wealth inequality, and increase retirement security, especially if paired with a program that can leverage private investment to make the deals that might be very feasible, but that need additional financing to take place. Specifically, states or local nonprofits at a state or regional level could set up outreach programs to inform and educate business owners about employee ownership as a transition strategy and to identify, where appropriate, additional capital sources. Locally based outreach programs can draw on existing networks of experts and infrastructures, such as colleges, universities, and successful employee ownership companies.
What States Can Do
To increase the effectiveness and penetration of local outreach and education, states could create an Office of Employee Ownership with a dedicated staff person or, alternatively, issue a request for proposals to house the office in a private nonprofit or at a university.
These organizations could run an outreach program by holding seminars statewide in conjunction with professional, business, and trade publications and organizations; publish and disseminate brochures and other material; and work with the media to encourage stories on local employee ownership companies.
If there is adequate funding, it would also be very helpful for the programs to provide limited ($10,000 to $20,000) subsidies for feasibility assessments. Many business owners may be reluctant to pursue an employee ownership plan because of the initial cost of a study with an uncertain outcome. States might also develop or contract for an online tool to help companies do this on their own.
By leveraging existing state or federal loan guarantees for broader business development purposes, the office could seek out impact investment funds, small business lenders, pension funds, private equity funds, insurance companies, endowments, or other funders to help finance those transactions that need this kind of financing.
Many employee ownership transitions can be funded in conventional ways, but for a variety of reasons, some transactions are only possible with supplemental financing, often in the form of subordinated—and expensive—debt. The most common problem is that sellers often want to sell most or all of their stock, not do a series of transactions over many years. Banks generally will not loan more than 50% of the value of a sale, and often less. Sellers have to make up the difference with seller notes or subordinated debt, both of which can impose risks. Given this problem, they may choose to sell to another buyer. Lower cost subordinated debt could help resolve this. By providing this kind of linkage, the state programs could fall within the requirements for the SSBCI program’s technical assistance requirements.
There are pros and cons to the various approaches to setting up a state program:
- An office within the state government provides more of a direct opportunity for oversight and reporting. On the other hand, it could add additional overhead and regulations.
- Funding a nonprofit through a request for proposals could be cost-effective in that overhead could be lower, the nonprofit could seek additional sources of funding, and the nonprofit may have existing resources and expertise. The nonprofit could be a local organization or a national organization with the capacity to set up a local operation.
- Funding through a university could link to existing outreach programs through university extension programs and could leverage existing university business and research expertise.
Whichever model is chosen, it would be important to do an assessment on an ongoing basis of how effective the programs are.
Each of these models currently exists, with state-funded programs in Massachusetts and Colorado; staffed nonprofits in Pennsylvania, Vermont, Minnesota, and North Carolina (plus several more centers that operate on a very limited volunteer basis); and a university-based center in Ohio.
James Bonham: Three principles for allocating TA funds
Recognizing the complexity of ESOP transactions, TEA makes three recommendations concerning the deployment of technical assistance funds associated with the SSBCI program.
Funds should go to organizations with a track record of providing educational content on a large scale.
First, a multidisciplinary approach is critical to the success of this effort. Companies looking to either set up an ESOP or convert to an ESOP model have significant technical and regulatory requirements. They require advice that incorporates corporate finance and banking, long-term business modeling and forecasting, retirement fund administration, firm governance and management, business culture, fiduciary responsibilities to plan beneficiaries, and other areas. Also, ESOPs have different needs and face different regulatory issues than other companies. So while the employee ownership approach has been tested for decades since its passage into law by ERISA in 1974, establishing or converting to an ESOP does require a broad base of significant technical expertise, often acquired through experience in the industry. Understanding this important dynamic will lead to greater success for this program.
Second, to help protect taxpayer interests, these funds should go to organizations with a track record of providing educational content on a large scale. TEA would encourage the Department of the Treasury to allow states to award funds directly to or partner with external nonprofit organizations with an existing state or regional infrastructure in place. Entities already providing the educational and technical assistance needed on a large scale are likely best equipped to help quickly and efficiently deploy these needed funds designed to help our economy recover.
Third, states should be encouraged to administer the technical education funds through a grant application process. Business practitioners and professionals are the best resource for real-world, hands-on technical education for small business owners. As such, TEA encourages the use of a grant program to private entities capable of providing such education. TEA would suggest that factors such as prior experience providing technical education programming, existing professional resources, professional credentialing and content or curriculum accreditation, and a demonstration of historic and current financial capacity of grant applicants. Grant applicants should be allowed to partner with other organizations that may bring specialized knowledge or expertise.
Steve Storkan: Fund state centers to develop the employee ownership ecosystem
Editor’s note: The following comments are from an edited conversation.
Treasury has allocated $500 million for technical assistance, and they have made it clear that they feel technical assistance must be tied to the capital being deployed in a state’s SSBCI program. If you cannot tie the technical assistance being provided to the business receiving the loan, Treasury seems to imply that it is not within their definition of technical assistance.
We need to build a pipeline
That may work for typical small business lending where business owners know what their capital needs are, but for employee ownership transitions, most business owners have little knowledge or understanding of what such a transition might look like. If the SSBCI program is going to finance employee ownership transitions, we need to build a pipeline of businesses interested in pursuing that option.
For employee ownership, we don’t yet have the ecosystem necessary for deploying large sums of capital with technical assistance. State centers could create that ecosystem.
The reality is we do not yet have the ecosystem necessary for deploying large sums of capital without educating and supporting many more business owners in exploring employee ownership as a succession strategy. Lenders are not going to create that ecosystem. Currently, most banks don’t take part in employee ownership transactions because they don’t understand the concept. Someone must create the pipeline of businesses, and it is logical for that to be state-based nonprofit organizations whose focus is on education, outreach, and connection to technical assistance resources on employee ownership. That is the mission of state centers for employee ownership, which are active in California, Colorado, Florida, Georgia, Indiana, Massachusetts, Minnesota, Missouri, New York/New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Texas, and Vermont. New centers are about to launch in Connecticut and Washington, DC.
We could double number of employee-owned firms over a decade
We would like to see state-based nonprofit organizations like state centers or cooperative development centers receive funds to:
- Deliver outreach and education about employee ownership, particularly in the context of succession planning; this could be specifically tied to the lending available through SSBCI.
- Create funding pools for feasibility studies, business valuations, legal/tax assistance, or whatever the next step is for a small business that has expressed interest in employee ownership. Often the $10,000 to $25,000 that is needed to take that next step is a barrier, especially for a business with fewer than 50 employees.
State centers could be instrumental in educating state governments and Small Business Development Centers on structuring lending for employee ownership transitions. Centers could also educate the Community Development Financial Institutions (CDFIs) that have not done this type of lending in the past and help them build pipelines. We project that a highly active state center could bring together private technical assistance resources to facilitate up to 10 to 12 transactions per year, with many of those deals between $5 and $10 million. If all 50 states were doing that, we would be looking at around 750 businesses a year becoming employee owned. That may be a lofty goal but let us not limit our thinking. We could double the number of employee-owned firms over 10 years.
Eligibility for SSBCI should include businesses transferring ownership to low-income or workers of color
A final important point. This program prioritizes “socially and economically disadvantaged individuals” (SEDIs). Many nonprofit organizations in the employee ownership space, including certain state centers, cooperative development centers, CDFIs, and the Democracy at Work Institute already focus on business owners from the SEDI community, and they will continue to do so. However, Treasury should also allow and encourage business owners who are not from the SEDI community to take part in the SSBCI program if they are interested in selling their business to their employees. In many businesses, the large majority of the workers who will benefit from an employee-ownership transition fit the Treasury’s definition of “disadvantaged.”
With 2.4 million baby boomer business owners seeking to transfer ownership and a renewed concern about social and racial injustice and the growing wealth gap in our country, we are at a significant crossroad. Through employee ownership transitions, regardless of the socioeconomic status of the business owner, significant wealth can be transferred to workers of all different races and ethnicities, including marginalized and low-income workers. The SSBCI program, if done correctly, could help to build wealth in communities that have been left out for too long.