2018 Lane Reports

Averting the Crisis in Small Business Survival

The Lane Report, September 2018
Tuesday, September 4, 2018 10:00 am
by Marc J. Lane

A new federal law has just been enacted which authorizes the Small Business Administration to help business owners sell their businesses to their employees. Not only will the law benefit the owners of companies at risk of shutting down for lack of a successor; it will also preserve jobs, and help employees and communities grow wealth in a way that nothing else can.

Employee ownership — whether through an Employee Stock Ownership Plans (ESOP), a tax-favored exit or succession vehicle put in place by the owner of a healthy and successful business, or a worker cooperative, a business owned by its employees — is good for business. It builds resilient local economies, attracts and maintains more productive employees, and boosts consumer demand. And many would argue, myself among them, that it can help restore America's hollowed out middle class.

The United States has the highest level of income inequality among all advanced nations. Only those families that are growing their wealth through capital ownership and capital income — dividends and capital gains — are seeing their net worth increase. But most U.S. workers, while earning wages, have little or no capital income from pensions or capital investments.

The empirical evidence is clear: when a company's employees are brought into ownership, both their income and their net worth significantly increase. They gain access to more company perks such as flexible work schedules, tuition reimbursement and parental leave. And they enjoy greater job stability.

Companies that include their employees in ownership develop a more committed workforce. They are more sustainable over the long term and compete more successfully with their peers. And since they are unlikely to leave the communities in which they operate, they are reliable contributors to the local tax base.

But small businesses are facing an existential challenge. Nearly half of America's small business owners are baby boomers who may retire soon, yet only about 20% of them have realistic succession plans in place. According to the nonprofit Project Equity, those businesses employ 24.7 million people whose livelihoods are at stake. Transitioning ownership to those workers can help ensure the survival of the businesses that employ them and the jobs they represent.

For the first time in 21 years, Congress has enacted legislation to promote employee ownership. The Main Street Employee Ownership Act of 2018, tucked inconspicuously into the $717 billion John McCain Defense Authorization Act, was signed into law on August 13, making employee-owned businesses eligible for Small Business Administration's section 7(a) guaranteed loans.

Section 7(a), the SBA’s primary and most popular program, allows banks to issue loans for up to $5 million, of which the government insures 85%, to help finance business expansion. Only a third of all family businesses successfully make the transition to the second generation. And now these loans can help finance the transition of family-owned and other private businesses to worker ownership as business owners retire and sell their businesses to their employees.

The Act also updates the SBA's lending practices to accommodate employee-owned businesses, authorizes the SBA to help small business owners convert their companies to employee ownership, and directs the SBA to collaborate with its licensed Small Business Investment Companies and microloan intermediaries to facilitate investment in, and lending to, employee-owned businesses.

The business succession crisis is real and, without intervention, millions could soon lose their jobs. The Main Street Employee Ownership Act offers them a lifeline, bringing the American Dream within their reach. As such opportunities for broader employee ownership emerge, business, labor and communities should all welcome them.


Marc J. Lane is a Chicago attorney and financial adviser and the vice chair of the Cook County Commission on Social Innovation.

Peterborough's problem was daunting: Sixty percent of prisoners serving short-term sentences historically had gone on to re-offend within a year after their release. But policymakers were confident that a solution was within their reach. They attracted private investment to pay experienced social service agencies to provide intensive, multidisciplinary support to short-term prisoners, preparing them to re-enter society and succeed outside the penal system. - See more at: http://www.chicagobusiness.com/article/20131007/OPINION/131009850/a-new-kind-of-futures-contract-for-illinois#sthash.ThgxeiFt.dpuf

The world's first social impact bond, or SIB, was introduced in 2010 to fund innovative social programs that realistically might reduce recidivism by ex-offenders in Peterborough, England, and, with it, the public costs of housing and feeding repeat offenders. Prudently building on the strengths of that initiative, Illinois Gov. Pat Quinn is rolling out SIBs to help solve some of the state's most vexing social problems.

A SIB isn't a traditional bond where investors are guaranteed a fixed return but a contract among a government agency that agrees to pay for improved social outcomes, a private financing intermediary and private investors. SIBs shift the risk of experimenting with promising but untested intervention strategies from government to private capital markets, with public funds expended only after targeted social benefits have been achieved.

Peterborough's problem was daunting: Sixty percent of prisoners serving short-term sentences historically had gone on to re-offend within a year after their release. But policymakers were confident that a solution was within their reach. They attracted private investment to pay experienced social service agencies to provide intensive, multidisciplinary support to short-term prisoners, preparing them to re-enter society and succeed outside the penal system.

The government decided which goals would be supported, but exactly how those goals would be achieved was left to the private sector. It was the investors, through a bond-issuing organization, who ultimately endorsed the allocation of investment proceeds — how much would be invested in job training, drug rehabilitation and other interventions.

If the Peterborough plan eventually shrinks recidivism rates by 7.5 percent or more, the government will repay the investors' capital and share the taxpayers' savings with them, delivering up to a 13 percent return. If the target isn't hit, the investment will have failed and the government will owe the investors nothing.

Illinois' SIB effort was spearheaded by the state's Task Force on Social Innovation, Entrepreneurship and Enterprise — the governor's think tank on social issues, which I am privileged to chair — with support from Harvard University's John F. Kennedy School of Government, the Rockefeller Foundation and the Aurora-based Dunham Fund. A request for information issued by the Office of Management and Budget on May 13 yielded responses from service providers eager not only to reduce recidivism here but also to create jobs, revitalize communities, improve public health outcomes, curb youth violence, cut high school dropout rates and alleviate poverty.

Now the governor has issued a request for proposals intended to spur better outcomes for Illinois' most at-risk youth — by increasing placement stability and reducing re-arrests for youth in the state's Department of Children and Family Services, and by improving educational achievement and living-wage employment opportunities justice-involved youth most likely to re-offend upon returning to their communities.

Kudos to Mr. Quinn for bringing SIBs to Illinois. May they soon start delivering on their promise.

- See more at: http://www.chicagobusiness.com/article/20131007/OPINION/131009850/a-new-kind-of-futures-contract-for-illinois#sthash.ThgxeiFt.dpuf
The world's first social impact bond, or SIB, was introduced in 2010 to fund innovative social programs that realistically might reduce recidivism by ex-offenders in Peterborough, England, and, with it, the public costs of housing and feeding repeat offenders. Prudently building on the strengths of that initiative, Illinois Gov. Pat Quinn is rolling out SIBs to help solve some of the state's most vexing social problems. - See more at: http://www.chicagobusiness.com/article/20131007/OPINION/131009850/a-new-kind-of-futures-contract-for-illinois#sthash.ThgxeiFt.dpu

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