$10 billion program allows for employee ownership investments
by Marjorie Kelly and Karen Kahn
An unusual provision in the Department of the Treasury’s guidance for the State Small Business Credit Initiative (SSBCI), a $10 billion program included in the 2021 American Rescue Plan Act (ARPA), creates a specific and promising opening for employee ownership. The guidance explicitly allows states and lenders to use the financing to support transitions to employee ownership, laying the groundwork for potentially millions of dollars to flow into employee ownership deals.
States could work with mission-oriented financial institutions to create Local Economy Preservation Funds (LEPFs), which use their capital to finance conversions of businesses to employee ownership.
The SSBCI program was created to increase access to capital for small business, to benefit state economies. Congress, in a floor dialogue, directed Treasury to include employee ownership transitions in the program. The final language reflects input from a number of employee ownership advocacy groups, including the National Center for Employee Ownership.
The Treasury guidance says that SSBCI loans cannot be used to “Purchase any portion of the ownership interest of any owner of the business, except for the purchase of an interest in an employee stock ownership plan … worker cooperative, or related vehicle,” provided that the transaction results in employee owners holding a majority interest in the business. [U.S. Department of Treasury State Small Business Credit Initiative Capital Program Policy Guidelines]
In short, SSBCI funds can be used to finance employee ownership transitions, if majority employee ownership will be the result.
SSBCI funds will flow to state development finance agencies, which then will distribute the funds to banks, credit unions, CDFIs, and eligible venture capital funds. States could work with mission-oriented financial institutions to create Local Economy Preservation Funds (LEPFs), which use their capital to finance conversions of businesses to either Employee Stock Ownership Plans (ESOPs) or worker cooperatives. By helping to facilitate employee ownership transitions, the funds can keep businesses locally owned—rather than seeing these small businesses close their doors or sell to outside investors likely to extract wealth and move on.
The Treasury guidance for SSBCI funds also carves out $2.5 billion in capital for businesses owned and controlled by socially and economically disadvantaged individuals, $500 million for very small businesses, and $500 million for technical assistance funding. LEPFs that target disadvantaged populations could apply for these special funds.
In our 2021 report, Opportunity Knocking, The Democracy Collaborative (TDC) identified organized capital as the key to accelerating employee ownership transitions, which have been stalled for decades. Traditionally, the employee ownership advocacy community has focused almost exclusively on educating exiting owners about employee ownership in the hope that they would choose this path to sustain their legacy. Yet ESOP transitions are complex transactions—and for many business owners seeking to exit, it’s simply easier to say “yes” to a sale to a competitor or private equity firm than to find the experts and the financing to successfully implement an employee ownership transition. To compete, TDC argued, communities need investment funds that handle the transition and relieve the owner of this complexity. Funds also simplify the process for investors, who lack the capacity to take on deals one by one.
SSBCI funding offers states the opportunity to seed these investment funds, which can be run by CDFIs or other financing organizations. Municipalities could work with their state development finance agency to obtain allocations for their area. Treasury dollars can help funds attract private capital and could potentially become permanent capital for local or state funds. The result could be that the tidal wave of business closures known as the “silver tsunami” could be stemmed, and local economies could emerge more vibrant and just—with shared ownership at the heart of Main Street.
In a short video, Marjorie Kelly, senior fellow at The Democracy Collaborative, explains how the State Small Business Credit Initiative can be leveraged for employee ownership transitions.
A federal loan guarantee program of $100 billion per year would permit policymakers to grasp how employee ownership could truly address the problem of economic inequality on a national level.
The reauthorization of the State Small Business Credit Initiative (SSBCI) could offer a timely answer to the down payment dilemma.
State Centers for Employee Ownership could ramp up their education and outreach to business owners, business service providers, and state leaders with SSBCI technical assistance funds.
Could SSBCI 2.0 provide the capital to begin to significantly redistribute business ownership?
As a field we will need to work hard to build the pathways for capital and technical assistance within the SSBCI program.