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Statement of the Hon. Nydia M. Velázquez on "Challenges and Benefits of Employee-owned Small Businesses"

Washington, February 12, 2020

Our Committee has a longstanding tradition of working in a bipartisan manner on behalf of America’s 30 million small businesses. We work together to make the programs at SBA more effective and seek ways to encourage entrepreneurship and job growth on Main Street.

And because small businesses are such an important part of our economy, what we do here impacts the lives of nearly every American.

At a time when income and wealth inequality are at record levels, real wages for middle class workers are nearly stagnant, retirement security is no longer guaranteed, one way to combat these problems is through the employee-owned business model. Employee-owned companies can take on many forms, but the central premise is that interests of the employees and owners are aligned. As a business generates more revenue and profits, a direct connection is drawn between an employees’ work and how much he or she is compensated, thereby creating a culture of ownership.

This business model helps workers and communities raise their standard of living and quite literally feel more invested in the success of the enterprise. The best-known kinds of employee ownership are the Employee Stock Ownership Plan – also known as an “ESOP” – and cooperatives. There are many benefits to employee ownership that can address some of the economic issues facing workers today. ESOPs report higher wages, better employee benefits, and stronger job security, especially during periods of economic distress.

In addition to better wages and benefits, worker-owned firms are also known for reinvesting more in their local community than conventional businesses, and for democratizing management and decision making. Because the workers themselves make the company’s strategic decisions, there is little danger of a worker-cooperative unexpectedly leaving town or being sold to outside investors. This ensures the economic viability of local communities.

In recent years, the option of converting a business to an employee-owned model has grown in popularity, though there are challenges in financing and completing such a conversion. For example, businesses seeking to transition to an employee-owned model frequently face difficulty in obtaining adequate capital to cover the costs – which are often prohibitive.

That’s why last Congress, I led and helped pass the Main Street Employee Ownership Act, which sought to minimize those capital access barriers and encourage more SBA-backed lending to cooperatives and ESOPs.By easing some burdensome guarantee restrictions, it was my hope that we could continue to make the employee owned model more affordable for local businesses, creating opportunities for more entrepreneurs, while financially empowering employees with a stake in their workplace. The legislation was also intended to help millions of Baby Boomers who own private businesses and plan to retire create a succession plan that helps them “cash-out” while keeping jobs and investment in the local community.

However, we have heard from numerous employee-owned businesses and lenders that accessing the SBA lending programs has been nearly impossible because of current SBA policy. At today’s hearing we will hear about the good work that employee-owned businesses, like the cooperatives who are booming in popularity all over my district in Brooklyn, are doing for their employee-owners and local communities.

We will also explore the negative impact of SBA’s failure to follow Congressional intent when implementing the Main Street Employee Ownership Act. We know there are still many challenges ahead as we seek to encourage greater employee ownership of business – challenges that are often unique to either cooperatives or ESOPs. And as we continue our work here in the Small Business Committee, we need to hear about those challenges, too. So, I look forward to hearing from our distinguished panel of witnesses today about the benefits of employee ownership of business, but also the challenges these unique businesses face in starting up and expanding.

 

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