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Velázquez Looks to Address Issues Facing Employee Owned Small Businesses

Washington, February 12, 2020

Washington, D.C.— Today, the House Small Business Committee, under Chairwoman Nydia M. Velázquez (D-NY) explored the benefits and challenges facing small businesses that utilize Employee Stock Ownership Plans (ESOPs) and other types of employee-owned business models. Worker-owned business have been steadily increasing in popularity over the years, with 12% of the workforce currently employed by a company using that business model.

“At a time when income and wealth inequality are at record levels, real wages for middle class workers are nearly stagnant, and retirement security is no longer guaranteed, one way to combat these problems is through the employee-owned business model, said Chairwoman Velázquez. “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.” 

Studies show that employee-owned businesses tend to offer higher wages, greater firm longevity, and be more resilient during economic downturns. Employee owned companies also have a positive impact on local economies as they rarely uproot to different locations and more frequently reinvest in the community. Firms with employee ownership have emerged as partial solutions to problems like income inequality and the coming wave of retirements for the 2.3 million business owners that are at or near retirement age. 

Though the business model has grown over the years, small businesses looking to employ the model still face unique barriers. Many employee-owned businesses are unable to participate in the SBA 7(a) lending program due to the requirement of a personal guarantee from anyone who owns 20% or greater share of a business. In 2018, the Main Street Employee Ownership Act, authored by Chairwoman Velázquez, was signed into law as part of the National Defense Authorization Act for Fiscal Year 2019. The measure eases the lending issues facing employee-owned businesses by helping firms access capital to cover the cost of transitioning to an ESOP.  However, in contravention of congressional intent, the SBA has yet to open up the 7(a) program to businesses seeking to transition to ESOPs or cooperatives. This decision leaves many small businesses unable to access the benefits provided by ESOPs and older business owners unable to prepare to transition their business when they retire.

During the hearing, representatives from employee-owned business and the lending industry testified on the challenges that these businesses face, and steps congress can take to ensure they have access to the same resources as their peers. 

“A total of 6.6 percent of the U.S. workforce has ownership in an ESOP—more than 10.6 million employees. In context, ESOP employees outnumber the workforce of the entire U.S. auto industry1—by more than half a million,” said Dan Goldstein, President and CEO of Folience in Cedar Rapids, Iowa. “We outnumber the combined workforce of the federal and state governments2—by three million. ESOPs contribute substantially to our economy—and we believe they hold a solution for many of the intractable economic issues facing our nation.”

“Today, I will discuss how a prohibitive policy requirement by the Small Business Administration (SBA) is hindering the growth of the cooperative business sector,” said R.L. Condra, Vice President of Advocacy and Government Programs at National Cooperative Bank. “If this issue is resolved, lending institutions like the one I work for will be able to make loans that will help to grow small businesses, create quality jobs at increased wages, and provide healthy food and grocery options for communities throughout the country.”

“Growing the worker cooperative approach has the potential to positively affect the economy, our democracy, and the quality of working peoples’ lives,” said John Abrams CEO and Co-Owner South Mountain Company in West Tisbury, MA. “It is not a stretch to say that the benefits of the democratic workplace may even aid and influence the essential repair of our battered civic landscape – it could change, in effect, the chemistry of our culture.”

“Despite the proven benefits of employee ownership, and despite our work in the 115th Congress to address some of the obstacles to employee ownership, it’s clear we still have more work to do and progress to achieve,” said Chairwoman Velázquez. “As I did last Congress with the Main Street Employee Ownership Act, I look forward to working with my colleagues from both sides of the aisle to continue minimizing those barriers to employee ownership, help preserve the independence of thousands of small businesses, and save thousands more jobs.”

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