Should the SBA Provide Financial Support to Small Businesses in the Form of Loans to Employee Stock Ownership Plans? (H.R. 5236)

What is H.R. 5236?

(Updated November 15, 2018)

This bill would make it easier for the Small Business Administration (SBA) to help employee stock ownership plans (ESOPs) by allowing the SBA to make loans to intermediaries that can then turn around and make smaller loans available to ESOPs or worker cooperatives. It also allows loans to employee-owned companies to be made under the SBA’s preferred lender program.

Additionally, to help make it easier for retiring business owners to sell to employees, the bill would create an exception to an SBA rule that sellers for a company cannot have an ongoing role in the firm: a measure that recognizes the prevalence of owners exiting in stages when selling to employees.

For similar reasons, the bill would waive the current SBA requirement of a 10% equity investment in a business transaction loan and allow financing (loans) to be used to cover transaction costs and makes it easier to loan to worker cooperatives. In another effort to lower barriers for employee buy in to ESOPs, the bill would enable the SBA to waive the requirement for a personal guarantee (a requirement that is not workable when there are large numbers of owners who all own small shares of a business, a common scenario in the case of ESOPs).

The bill would also require the SBA to coordinate with investment funds licensed through the SBA’s Small Investment Company (SBIC) program and intermediary lenders through SBA’s Microloan program to promote employee ownership as an area to be considered for investment and lending.

To build out the ecosystem for conversions to employee ownership, the bill calls for the creation of a Small Business Employee Ownership and Co-operatives Promotion Program to partner with the United States’ national network of 900 Small Business Development Centers to offer technical assistance and training to support transitions to employee ownership.

Finally, the bill would create an interagency group to 1) develop recommendations on how Federal programs can promote, support, and increase the number of employee-owned business concerns; (2) ensure coordination with Federal agencies and national and local employee ownership, cooperative, and small business organizations; and 3) submit an annual report to Congress.

Argument in favor

This commonsense, bipartisan bill would help small businesses stay open as more than two million baby boomer business owners retire over the next 10-15 years by making it easier for retiring owners to sell their businesses to employees.

Argument opposed

The Employee Stock Ownership Programs that this bill looks to bolster are very complex to administer and aren’t suitable for all small businesses, especially those with volatile revenue streams or that lack sophisticated accounting processes.

Impact

Small businesses and small business owners; small business employees; and the Small Business Administration.

Cost of H.R. 5236

A CBO estimate is unavailable.

Additional Info

In-Depth: This bill was introduced by Rep. Nydia Velazquez (D-NY-7) on March 8, 2018. It passed the House Small Business Committee on a unanimous vote on March 14, in a vote that took under 10 minutes. Velazquez said of her bill:

“The SBA was authorized to loan to ESOPs in 1979… [u]nfortunately, this tool has been rarely used, due to a lack of understanding of the business structure [of employee owned firms] and cumbersome transition requirements.”

Rep. Steve Chabot (R-OH), Chair of the House Small Business Committee and a longtime advocate for ESOPs, bolstered the bill by adding a chair’s amendment and urging other committee members to support the bill:

“H.R. 5236 provides important reforms to how the SBA treats employee owned businesses… [f]rom updating reporting statistics to capturing accurate data, to codifying ownership transition plans, H.R. 5236 will provide clarity to small businesses that truly need it.”

The ESOP Association, which advocates for all ESOPs at the federal and national level, is a supporter of this bill.

Of Note: Congress’ support of ESOPs dates back to 1974, when Congress enacted the first of a series of tax measures design to encourage these plans.

Over the period 1974-1974, ESOPs helped the number of partially- and fully-employee-owned companies in the U.S. grow from ~1,600 to ~8,100. In a 45-ESOP and 238-comparable company study published in the September 1987 issue of the Harvard Business Review, Corey Rosen and Michael Quarrey found that ESOP companies grew faster than comparably-sized businesses and provided meaningful returns to employees who bought into them.

Media:

• Nonprofit Quarterly
  
• ESOP Association (In Favor)