Can Employee Ownership Meet Its “Silver Tsunami” Moment?

For years, employee ownership advocates have called attention to what is known as the “silver tsunami”—an impending wave of business owner retirements affecting US businesses with tens of millions of employees.

As business owners retire, employees could potentially buy these businesses and become owners themselves. This happens—sometimes. But not often enough. For this to change, there must be a fundamental shift in how transitions to employee ownership are financed.

What Are the Stakes?

Today, over 32 million Americans—close to one-fifth of the nation’s entire labor force—work at businesses whose owners are over the age of 55 and who will likely want to retire and sell their businesses in the next five to 15 years.

Most owners have no heirs in the waiting and no succession plans. What will happen to these businesses and their employees? Will competitors or private equity buy them? Will communities lose these businesses—and employees lose their jobs—as they close? Or might employees become owners of their places of employment?

There have been some employee ownership gains. Worker co-op numbers have grown rapidly, although numbers remain small—an estimated 10,000 member-owners nationwide. New investment funds to support transitions to employee ownership have formed. Policy gains have been significant, especially at the state level. Philanthropic investments have become more common.

Nonetheless, according to the National Center for Employee Ownership (NCEO), which tracks numbers for employee stock ownership plan (ESOP) companies—the most common form of employee ownership—overall numbers remain flat, with about 10 million employee-owners. If we stay on the present path, the likelihood of getting to 50 million employee-owners by 2050, as one group has sought, gets slimmer by the day.

In 2020, the most recent year available, the same NCEO report notes that 225 companies with a little over 41,000 workers became employee-owners. That’s a lot better than zero—but it is a lot less than is needed if ownership of capital is to be redistributed to workers at scale.

Understanding the Role of the SBA

The leading source of small business financing nationally is federally guaranteed small business loans through the US Small Business Administration. The employee ownership field, of course, knows this. Six years ago, Congress passed the Main Street Employee Ownership Act, which was supposed to make these loans available to employee-owned businesses. But there have been numerous bureaucratic obstacles—these center on a requirement for a “personal guarantee.” When a single family owns the business, they often provide the personal guarantee, which typically pledges their home as collateral. But if you have 100 owners, whose home is put at risk?

There is considerable advocacy to change this requirement—advocacy we support—but in the meantime, we believe there are workarounds. We know this because we use them at Concerned Capital to support transitions to employee ownership ourselves. With more support from philanthropy and impact investors, we believe this work—not just by us but by the field as a whole—could be radically increased.

How to Increase Field Capacity to Finance Employee Ownership

How do workers buy businesses from retiring owners? To make the purchase, workers generally use bank debt secured with a Small Business Administration (SBA) guarantee. A typical deal structure looks as follows:

• Senior (lower risk) bank debt: 60 percent
• Subordinated (higher risk) debt—that is, CDFI funds, owner carry-back note, public money, or philanthropic investment—20 to 30 percent
• Equity investment from the borrower—that is, employee(s): 10 to 20 percent

If private equity swoops in or no buyer is found and the business is shuttered, this impacts not only workers but entire local economies.The guaranteed portion of the senior debt is sold on the SBA secondary loan market. This market allows lenders to sell the guaranteed portion of the loan (about 75 percent), getting the loan off the books and increasing their liquidity, which enables them to make more loans.

Typically, in a year, the SBA lends about $6 billion for around 5,000 business ownership transitions. If 5 percent of this market could be captured for transitions to worker ownership, then an additional 250 businesses would transition to employee ownership each year.

How would this work? Investment officers at foundations, nonprofit endowments, pension funds, and other impact investors would offer to buy SBA government-guaranteed loans for a small 1 percent premium above the going rate, on the condition that the loans are used to finance conversions to employee ownership. The ability to earn a rate premium on low-risk government-guaranteed loans incentivizes actors throughout the business lending system to find more of these deals.

This small tweak to the already existing secondary market for SBA loans creates an immediate win-win. For foundations that support employee ownership, this is a low-risk opportunity to scale their investments (including, possibly, program-related investments) and thereby scale impact. More legacy businesses would survive outside of the reach of private equity, good jobs would stay in the community, and workers would gain both greater control over the future of their workplaces and a greater degree of financial security.

Mismatch of Skills and Culture 

Above, we noted the stakes. If private equity swoops in or no buyer is found and the business is shuttered, this impacts not only workers but entire local economies. The livelihoods of millions of employees and thousands of communities are at stake.

The employee ownership field understands that it is far easier to turn an existing profitable business into an employee-owned business than to launch a startup. But employee ownership advocates are hardly the only ones in this game: Wall Street and private equity have created a $3 trillion merger and acquisition market (M&A).

How well do employee ownership advocates compete in this game? Not well enough. The M&A market draws well-trained MBAs who have the accounting, finance, and legal skills to move quickly to acquire firms through leveraged buyouts. As has been well documented, these buyouts are often disastrous in the long term, leading to consolidation, bankruptcies, and job loss. But for the retiring owner, they offer a quick path to financial security. If we’ve learned anything over the last decade at Concerned Capital, it’s that owners may very much want to secure the legacy of their enterprise, but first and foremost, they want a secure retirement. 

This is the field on which the employee ownership movement is playing. Small nonprofits must compete with a highly sophisticated industry, most often without the skills or resources necessary. These organizations tend to lack needed business, finance, or lending experience, and they typically don’t have the resources to hire MBAs who see the riches that can be earned in the financial sector.

In addition to the skills gap, there is a “cultural” gap between grant-funded nonprofits and business owners. Because nonprofits depend on funders who often value immediate results, they are incentivized to share the stories of transitioning businesses. But private, for-profit small businesses, especially small manufacturers, are highly sensitive about what information they disclose. Trust and secrecy are often crucial to protecting the business’ proprietary knowledge and its client list.

The goal of our proposal is to incentivize existing SBA lenders to find, screen, and lend to more employee ownership conversion deals.

Nonprofit advisors and employee ownership advocates often feel the need to tout and promote each transaction they work on—to gin up interest among funders, policymakers, and the public. But early public disclosure can result in a deal being lost to a competitor—or inflict other damage.

We learned the harms of press exposure the hard way. One of our early deals was reported by foreign press in Latin America after it closed, and we issued a press release to our local Spanish-language newspaper in Los Angeles. The Latin American relatives of the US-based owners we had assisted were threatened by kidnapping plots once their newfound good fortune was touted in foreign media. (As a result, we no longer rush to issue press releases anymore, even with permission.)

Concerned Capital is a social benefit corporation focused on private-sector financing. We, too, believe that the ultimate outcome of more employee ownership will be a more equitable economy. The strategy we are proposing aims to take advantage of SBA infrastructure that already supports most small business acquisitions—tapping into a network of existing lenders, brokers, borrowers, and advisors to increase the scale of employee ownership buyouts.

Building on the Existing SBA Lending Marketplace

The goal of our proposal is to incentivize existing SBA lenders to find, screen, and lend to more employee ownership conversion deals. In our experience, the principal motivation of most actors in the existing network is to make more money; furthering a social justice ideal may or may not be desirable to many in the existing system. But impact investors and philanthropy could take advantage of this desire for greater profit to leverage significantly more private investment for employee-ownership buyouts.

The advantages of using an existing network and delivery system are obvious.

For example, in fiscal year 2023, SBA debt financed 5,037 ownership transfers, for a sum total of nearly $5.5 billion, through SBA’s largest lending program, the 7(a) loan guarantee program. Most of these SBA-guaranteed loans are sold into the secondary market, allowing lenders to expand their lendable pool of capital.

If mission-aligned institutional investors paid a premium of 1 percent and captured a 5 percent market share of these existing SBA loans used for business acquisitions, the results would be dramatic. By our calculations, investors could buy a pool of guaranteed loans that financed employee ownership conversion deals for around $250 million plus a 1 percent additional premium of $2.5 million. This virtually risk-free investment could replace some of their investment in other government notes and convert 250 companies per year. Loan originators would be incentivized to find deals as they are now encouraged to identify and find deals that support a range of social investments.

The SBA secondary market program is a well-established mechanism for incentivizing this sort of lending. Florida has already demonstrated how similar secondary market incentives can work for economic development purposes. In April 2023, the Federation of American Scientists recommended a similar strategy for various social impact investments in an article, “Increasing Access to Capital by Expanding SBA’s Secondary Market Capacity.”

The advantages of using an existing network and delivery system are obvious. Critically, the strategy:

• Is capable of producing quick and dramatic results
• Eliminates the need of reinventing what already exists
• Augments and works with an existing active M&A marketplace to find more deals
• Aligns with the current investment policies of foundations and other social impact investors that routinely invest in other types of government bonds

Ramping Up the Employee Ownership Game

Employee ownership advocates face major constraints. Private equity is ready and waiting to grab any business it sees that could turn a profit. Being quick and nimble is essential: employee ownership advocates must craft solutions that build field infrastructure and tweak existing tools, policies, and processes. What is being proposed here—using the SBA secondary loan market—has been done in areas as diverse as carbon reduction tax credits, solar energy, and bottle recycling.

Increasing employee ownership is a worthy goal. At scale, it could dramatically impact economic and racial wealth equity, and diversify ownership across the economy. The federal small business support system is large, but to date, it has not been used to support conversion to employee ownership. A modest intervention by philanthropy could change this—accelerating the growth of employee ownership nationwide.