Business owners have new incentive to sell to their workers.
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 2018 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.
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 $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.
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.
Its most important element involves permitting the 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.