Employee Ownership News has been keeping a watchful eye on the rollout of the State Small Business Credit Initiative (SSBCI), a $10 billion program being launched by the Biden administration as part of its American Recovery Plan. SSBCI specifically created an opening for states to use their programs to finance employee ownership transitions. In the first in a series of state-based case studies, we report on how the Vermont Employee Ownership Center, one of the oldest employee ownership centers in the country, is working with the state’s finance development actors to ensure that its financing initiatives will be inclusive of employee ownership.
How the Vermont Employee Ownership Center is engaging the state’s economic development agencies
By Matt Cropp
Since the enactment of the State Small Business Credit Initiative (SSBCI) as part of the American Rescue Plan Act (ARPA), the Vermont Employee Ownership Center (VEOC) has been strategizing to ensure that the program includes an opportunity to accelerate employee ownership conversions in our state. Vermont will be receiving about $57 million in capital (not including additional funds for technical assistance activities), half of which will go to an equity fund and half to enhancing the availability of credit for small businesses.
On average, Vermont sees two to four transitions to employee ownership annually. The pandemic has increased interest in this succession strategy. We believe that, with equity investments and more accessible credit, the number of deals could potentially more than double, and their average size could also increase as additional funds expand the “loan ceiling” beyond what has been available through existing capital players.
The key to the state getting its allocation of funds out the door effectively will be increasing deal flow. That creates an opening for VEOC.
A Seat at the Table
Vermont is a small state, and over the years our center has built strong relationships with the state’s economic development agencies. As a result, the Vermont Agency of Commerce and Community Development (ACCD) invited VEOC to the state’s first meetings on SSBCI, along with local Community Development Finance Institutions (CDFIs) and the Vermont Economic Development Authority (VEDA), the public financing agency tasked with managing the program.
The theme that emerged during those first conversations was that local lenders were already well-capitalized—the key to the state getting its allocation of funds out the door effectively would be increasing deal flow. That creates an opening for VEOC: as a state employee ownership center with strong ties to business leaders and business service providers, co-op developers, and underserved communities, we are well positioned to take on the role of identifying businesses that would make good candidates for employee ownership transitions. Our hope is that we will be able to access some of the technical assistance funds associated with the SSBCI program to increase our capacity to reach out to business leaders, develop the pipeline, and provide support to under-resourced employee groups to access legal, valuation, and business advising services.
Key Role: Educating Decision Makers on Employee Ownership Conversions
Since that first meeting, we have met with VEDA several times to ensure that its team is familiar with the employee ownership conversion process and the unique considerations in lending (such as the obstacle created by the personal guarantee requirement). We’ve highlighted that the only M&A deals allowed by the program are ones that convert businesses to employee ownership, and we’ve also introduced VEDA loan officers to a potential partner—the Cooperative Fund of New England, a regional co-op-focused CDFI loan fund.
We have met with the Vermont Economic Development Authority several times to ensure that its team is familiar with the employee ownership conversion process and the unique considerations in lending.
To help VEDA and its partners become more familiar with employee ownership conversions, we used one meeting to talk through a possible case-study deal that was in our pipeline that would most likely be seeking financing in the second quarter of 2022. Getting into the specifics of the possible deal provided excellent context for unpacking some of the nuances of how the agency intended to go about deploying the funds, with topics of discussion including how the organization would work with participating lenders and the potential impact of the new capital on underwriting standards and requirements.
Equity Financing Opportunity
In addition to discussing how the loan fund portion of the state’s allocation can best be deployed to benefit employee ownership, we’ve also had our eye on opportunities for the equity side. A successful equity program requires experience, and VEDA has issued a Request for Proposal for an institution to manage the $28 million pool of equity capital. When that fund manager is announced, we intend to engage with both VEDA and the fund manager to encourage allocating some of the equity financing to employee ownership. In particular, Vermont is lucky to have a co-op equity fund, which is managed by the Vermont State Employees Credit Union; it could provide a ready-made vehicle for investing capital. Its current assets of $3 million, however, are tiny compared to the $28 million in equity financing from the SSBCI program.
Relationships Are Key
While we are still waiting for final details on the SSBCI TA program, and time will tell how the “pilot” deal we’re exploring will turn out, we feel optimistic that the work that we’ve been doing over the past year has positioned SSBCI in Vermont to provide support to expanding employee ownership. Essential to achieving that, in our opinion, has been the work we’ve done over the years building relationships with key economic development players in our state.
While we were initially brought into the conversation more as a possible TA provider than for input on the lender side, we have been able to leverage our inclusion in the discussions along with our organizational relationships and credibility to ensure that the employee ownership opportunity inherent to SSBCI has remained on the radar of the relevant decisionmakers in Vermont.
Matt Cropp is the executive director of the Vermont Employee Ownership Center.
Using funds from the State Small Business Credit Initiative, states could accelerate transitions.
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.