December 26, 2018; The Intercept
Last year’s Main Street Employee Ownership Act, which authorized firms seeking to convert to employee ownership to access Small Business Administration partially-guaranteed loans of up to $5 million, was the first pro-employee ownership law passed by Congress in more than two decades. But, according to Rachel Cohen of the Intercept, the law may presage a larger wave of congressional support for employee ownership.
Among the reasons to expect further support for employee ownership on Capitol Hill are the following:
• Backing by prominent congressional leaders: Cohen notes that both Senator Bernie Sanders (I-VT) and Kirsten Gillibrand (D-NY) “have worked to advance legislation on employee stock ownership plans, or ESOPs.” Both Sanders and Gillibrand are possible candidates for the Democratic Party presidential primary in 2020.
• A strong track record: Cohen notes that 14 million current and former private sector workers in an estimated 6,669 companies presently own company stock through ESOPs, according to data compiled by the nonprofit National Center for Employee Ownership. Research from Rutgers University released last May estimate that the average worker in an ESOP accumulates $134,000 in retirement wealth from their ownership shares.
Joseph Blasi, a professor who directs the Institute for the Study of Employee Ownership and Profit Sharing at Rutgers University, finds that workers at ESOP companies, have retirement accounts that are, on average, 2.2 times larger than those of workers at comparable non-ESOP companies. ESOP employees, Blasi also points out, are less likely to be laid off during economic downturns; for example, in 2014, 9.3 percent of working adults report being laid off, but only 1.3 percent of working adults who are employed by ESOP-owned companies.
• Rising tide of intergenerational transfer of business assets : As NPQ has noted before, the pending retirement of Baby Boom-generation business owners creates a situation where many people are trying to sell their businesses at the same time—resulting in negative price pressure and increasing the chance of finding no buyers at all. In this situation, selling to employees can be attractive. All told, baby boomers own 2.34 million businesses and employ 24.7 million people, according to the California-based nonprofit Project Equity. This means that a lot of jobs and wealth (an estimated $5.14 trillion) are at stake.
• New policy interest at the state level: This is leading to the creation of new state employee ownership centers in places like Pennsylvania. Rutgers also has supported the creation of a center that focuses on the states of New Jersey and New York.
While prospects for further expansion of employee ownership are good, Loren Rodgers, who directs NCEO, notes that some obstacles do remain.
One concerns the business advising industry. As Rodgers explains to Cohen, an investment banker or personal wealth adviser is likely to take home higher fees if their clients opt to sell their companies to a private equity firm or another corporation, rather than to their employees.
A second barrier is a lack of knowledge of what an ESOP is and how to set them up. Rodgers observes that, “If you, as a CPA, advise a business owner to sell to their employees, you’re probably advising them on something you personally don’t know how to do.”
A third obstacle, as Rodgers points out, is money. Sometimes, an owner can earn more selling to an outside firm. “It’s hard to say no to more money,” Rodgers concedes, “and it certainly can look easier, because you just sell your business and walk away.”
Despite the obstacles, momentum for employee ownership is growing. One reason, Cohen notes, comes back to the basics of demand and supply. While selling to an outside buyer can be profitable, finding an outside buyer can also often be hard to do. Project Equity reports that “one-third of business owners over age 50 report having a hard time finding a buyer for their company. As a result, many just quietly close up shop, often without even considering selling their company to the staff.”
By contrast, business owners who sell to their employees can help ensure that jobs remain in the local community, while still being able to cash out. An added bonus, of course, is that not only are jobs preserved, but the profits earned are shared among the new employee-owners as well.—Steve Dubb