The federal government just made it a lot easier to form an employee-owned business.
In an increasingly rare example of bipartisan cooperation, President Donald Trump on Aug. 13 signed a defense bill into law that included a popular provision that allows the Small Business Administration to straightforwardly loan money to employee-owned businesses that wish to buy out retiring small business owners.
This and other changes in the provisions are significant. Not only could they double or even triple the growth rate of employee-owned companies over the next decade, we expect they will help stabilize jobs in local communities as well as reduce inequality by giving more middle-class families a means of accumulating wealth. Furthermore, this measure – which we supported with research and analysis – will be a boon to the hundreds of thousands of small businesses owned by retiring baby boomers that are at risk of closing up, putting millions of jobs on the line as well.
The impetus behind the latest piece of legislation is a result of what some have dubbed the “silver tsunami.” As baby boomers retire, more than 2.3 million closely held businesses that they own are at risk of closing down because of an inability to find someone to take over. These companies employ about 25 million people, spend about US$1 trillion on payroll a year and make about $5 trillion in sales.
While some of these businesses will be passed down to members of the family or others, about 6 out of 10 are expected to wind up on the auction block in the next decade because the owners need to sell out in order to retire. We believe this will represent one of the largest transfers of wealth in American history.
Workers to the rescue
Surveys show that only a small fraction of retiring owners have a daughter or son who wants to take over the company and is competent to do so, and only a fifth of businesses listed for sale ever sell.
That makes selling their businesses to the workers who helped create all the value in the first place one of the best options available. It not only helps secure the owner’s retirement but also leaves behind a legacy in the local community. It has also slowly become more popular in recent decades. Small businesses are sold to their managers or workers using one of three methods: an employee stock ownership plan or ESOP, a worker cooperative or an employee trust.