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Small-Business Owners Are Getting an Incentive to Sell to Their Employees

New legislation offers a bipartisan road to economic equality

Published: Thursday, September 6, 2018 - 12:01

T

he federal government just made it a lot easier to form an employee-owned business.

Employee stock ownership plans (ESOPs), created in 1956, by the late political economist Louis O. Kelso, are currently the most common way to do this because it gives regular workers a way to buy companies, and ESOPs have meaningful federal tax incentives. This allows new owners to set up a trust, which secures a loan that the company itself will pay back over several years.

A key feature is that the company, not the workers, steps forward to provide the collateral for the loan, and as the loan is paid down, new shares are distributed to employees and managers. The workers do not purchase the shares with their savings.

Worker cooperatives, on the other hand, have traditionally been employee-owned from the beginning, with investments from staff and equal voting rights in many company decisions. Increasingly, the worker co-op model is being used to purchase companies from retiring business owners.

Employee trusts are a new form of ownership, similar to ESOPs in some ways. Their goal is to ensure a company remains employee-owned in perpetuity by keeping the shares within the trust itself. Employees are beneficiaries of the trust, receiving payouts based on profits.

A few employee-owned companies include grocery chain Publix Super Markets and staffing firm Penmac—the two biggest—as well as food companies King Arthur Flour and Bob’s Red Mill, and breweries Harpoon and New Belgium Brewery.

We have spent the last 35 years researching this phenomenon and pulling together all the empirical studies that have been done to assess the impact, which we explore in our books, The Citizen’s Share (Yale University Press, 2013) and Shared Capitalism at Work (University of Chicago Press, 2011). The evidence shows that employee ownership tends to make companies more productive and stable.

As for their prevalence, based on our recent calculations of all of the 2014 U.S. Department of Labor data on ESOPs, we found that about 2 million workers and managers were invested in about 5,800 closely held companies, with the total employee ownership valued at $255 billion. While the average ESOP worker in these companies has an ownership stake of $134,000, our calculations are this is close to one-quarter of a million dollars for workers who stay with the company for 20 years.

Unfortunately, many business owners aren’t aware this is even an option.

Raising awareness and guaranteeing loans

And that’s where the new law comes in.

The provision, previously known as the Main Street Employee Ownership Act, was written by Democratic Sen. Kirsten Gillibrand and had co-sponsors on both sides of the political aisle. It is the most far-reaching employee share ownership legislation to pass Congress in more than 20 years.

Its most important element involves permitting the Small Business Administration (SBA) to clear away many previous barriers so it can make guaranteed loans of up to $5 million to employee-owned businesses, especially ESOPS and worker cooperatives. This will make employee buyouts easier to do by significantly expanding the amount of credit available and will create more flexibility for sellers so that they can transition out of their businesses over a few years.

The law also tasks the SBA with providing more awareness, technical assistance, and training both to the small-business owners who might be interested in selling to their employees and to the workers themselves.

We’ve observed that past efforts to encourage employee ownership by the federal government led to large growth spurts, such as laws passed 30 and 20 years ago that offered tax incentives. That’s why we would estimate the latest measure to double or even triple the growth of employee-owned companies.

Measuring the wider impact

The legislation’s impact could be far-reaching.

If it’s successful in leading more small-business owners to sell to employees, it could help reduce economic inequality. That’s because the primary beneficiaries would be working—and middle-class employees who would suddenly have a new way to build a substantial amount of capital.

Furthermore, it’ll help preserve local jobs and the tax base because, as we noted, these small businesses often end up closing down because there’s no one to take over. In addition, employee-owned companies have shown greater resiliency in times of economic stress, leading to fewer layoffs. And research shows that these types of companies offer better pay and benefits than other types of businesses.

The ConversationWith real wages for most Americans flat or declining and most wealth in the hands of the richest Americans, broadening capital ownership to the middle and working classes may be the best—and perhaps the only—bipartisan road left to addressing economic inequality in the United States.

This article was originally published on The Conversation. Read the original article.

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About The Authors

Douglas Kruse’s picture

Douglas Kruse

Douglas Kruse is a distinguished professor and associate dean for academic affairs at Rutgers University.