Ownership Economy | October 16, 2023

Multiplying transitions to employee ownership with private capital and public policy

Roodgally Senatus
ImpactAlpha Editor

Roodgally Senatus

ImpactAlpha, October 16 — Giving workers ownership stakes in the companies they work for improves employees’ motivation, productivity, retention and drives long-term business growth. In addition, there are dramatic tax advantages for companies with employee stock ownership plans, or ESOPs.

With thousands of baby boomer business owners looking for exits, ESOPs should be having a moment. About half of all private businesses in the U.S. are owned by baby boomers.

Instead, the number of businesses owned by employees under ESOPs has been stalled for more than a decade at about 6,000 companies with about 14 million employees. Less than one-quarter of US employees have even a small ownership stake in the companies where they work, according to the Aspen Institute.

“We’ve had ESOPs for a long time, but it’s been a stagnant field, despite the growing energy and attention,” said Jack Moriarty, who joined Lafayette Square Foundation last month from the nonprofit Ownership America. “Solving the problems of employee ownership is critical and we need policy solutions to help make that happen.”

The foundation is the nonprofit arm of the impact investing platform Lafayette Square, which two years ago helped finance the acquisition by the employees, via an ESOP, of Zero-Waste Recycling in Charlotte, N.C.

Low-cost capital

Joining Moriarty at last week’s Ownership Economy Summit in New York were Common Trust’s Zoe Schlag, Natalie Edwards of Apis & Heritage Capital Partners and Jeff Mendelsohn’s LocalCode, a national nonprofit developing shared-ownership models for mixed-use assets in communities of color.

Their organizations are among the handful of specialized private fund managers that are using ESOPs and other structures for employee ownerships, such as co-ops and ownership trusts. Mosaic Capital Partners, also in Charlotte, has financed more than a dozen employee buyouts. Mosaic is the only registered Small Business Investment Company, or SBIC, under the Small Business Administration that is exclusively focused on employee ownership.

At Ownership America, Moriarty helped craft legislation, based on the SBIC model, to create Employee Equity Investment Companies, or EEICs. The Employee Equity Investment Act, introduced in May by Democratic Sen. Chris Van Hollen and Republican Sen. Marco Rubio, has attracted bipartisan support in the House of Representatives as well. The U.S. Impact Investing Alliance, Sorenson Impact Group, Project Equity, Capital Impact Partners and other impact organizations have endorsed it (disclosure: the Alliance sponsors ImpactAlpha’s Policy Corner; Sorenson Impact is an investor in ImpactAlpha)

Typically in an ESOP or co-op deal, the seller or owner of the business is required to finance some — and oftentimes all — of the transaction, extending the time it takes for the owners to exit, cash out and get on with their own retirement or next chapter. To make employee ownership a competitive option for such sellers, rather than exiting to private equity or other foreign buyers, he adds, the Employee Equity Investment Act will solve this capital gap. 

“It’s incumbent on the seller to take out a subordinated note and get paid out very gradually over time,” Moriarty explained during a panel discussion. “Most sellers, despite the potential intrinsic value of preserving their legacy and taking care of their employees, they want their capital upfront.”

The legislation aims to reduce financing barriers for worker-owner transitions for small and mid-sized businesses by incentivizing private investors to finance such transactions by allowing the new crop of investment funds targeting employee-ownership deals to access low-cost capital via SBA loan guarantees. The $5 billion credit facility would operate without cost to taxpayers to make debt capital available to EEICs to invest in ESOPs and worker cooperatives. 

Bipartisan appeal

The full-day Ownership Economy summit convened employee-ownership fund managers and other ecosystem leaders such as Corey Rosen who founded the National Center for Employee Ownership in 1981 to advance employee ownership through research, outreach and more. 

“Around 1980, I thought, ‘You know, this is a great idea, but nobody knows much about it and we don’t know if it actually works,’” said Rosen. “I said ‘I’m going to start an organization to do all that.’”

In July, Rosen helped Democratic Sen. Ben Cardin and Republican Sen. Steve Daines introduce another bipartisan legislation in Congress that aims to create better incentives for employee ownership, as well as support the growth of ESOPs via federal-income tax exemptions.

Moriarty says employee ownership planks are included in both the Texas Republican party platform and the Massachusetts Democratic party platform. “As you might imagine, there’s very little overlap between those two documents, but employee ownership is a source of agreement.” 

Last year, California state Sen. Josh Becker and a bipartisan group of co-sponsors introduced the Expanding Employee Ownership Act, which set up an employee-ownership hub in Gov. Gavin Newsom’s office to support owners that want to transfer ownership of their businesses to their workers.

The bill passed into law with unanimous support.