Fifty by Fifty

A MOVEMENT FOR EMPLOYEE OWNERSHIP

Melissa Hoover: SSBCI Financing Sets Stage to Grow Employee Ownership Conversions

· ·

In response to the reauthorization of the State Small Business Credit Initiative (SSBCI), Democracy at Work Institute has begun a conversation primarily within the field of worker cooperative practitioners about how we might meet this opportunity (see our press release with Employee Ownership Expansion Network) . Here we offer some thoughts gathered from dozens of conversations with partners, including those in the Workers to Owners Collaborative, on framing the opportunity, the field’s capacity for scale, and recommendations for using the SSBCI to implement both technical assistance and capital supports for employee ownership. Our focus is primarily worker cooperatives, employee-owned trusts, and member-managed LLCs, but we are actively connecting—and sharing ideas—with the ESOP community.

As a field we will need to work hard to build the pathways for capital and technical assistance within the SSBCI program.

Employee-owned forms and SSBCI priorities
Non-ESOP forms of employee ownership will be a very small but visibly important part of the SSBCI employee ownership pie, as these businesses meet standards for employing socially and economically disadvantaged individuals and firm size of under 10 employees, a priority focus for the legislation. The latest DAWI survey of the cooperative landscape shows:    

  • Nearly 60 percent of worker cooperative employees are minorities and over 62 percent are women.
  • Average worker cooperative wage is $19.67/hour, with firms concentrated in service and retail sectors.
  • Median firm size is eight employees.
  • Firm survival and worker retention/longevity for worker cooperatives are above average for comparable small businesses. 

Non-ESOP forms of employee ownership have a growing profile and momentum as a strategy for local business retention, increasing access to business ownership for disadvantaged entrepreneurs, and creating wealth for low- and moderate-wage workers. While a relatively small portion of the small business sector, the worker cooperative field has a robust and growing technical assistance and capital ecosystem that could support deployment of additional capital.

Data: Employee ownership lending landscape for SSBCI funds
A landscape scan of the non-ESOP portion of the employee ownership field shows growing interest and capacity to connect meaningfully with the SSBCI program. Important infrastructure has been built in recent years, including:

  • Lenders: Several CDFIs (e.g., Shared Capital Cooperative, LEAF, the Working World, and Cooperative Fund of New England) have extensive experience lending to business transitions; also, new entrants (e.g., Capital Impact Partners, Coastal Enterprises, WACIF, LISC) are coming into recent deals. In addition, a number of small investment funds have launched to make equity investments in business transitions. With an infusion of capital and funding for technical assistance, current CDFI lenders could increase the volume of transactions supporting transitions to employee ownership. An even higher increase in deal volume would come from incentivizing and supporting new entrants.
  • Technical assistance and data: A national collaborative of 40-plus organizations provides technical assistance (TA) to businesses transitioning to all forms of employee ownership. It gathers and reports impact data on these deals. With access to additional funding, these experienced providers could scale their support alongside investment, and track key metrics.    

As the chart below shows, we estimate that current deal volume could grow by three times to $150 million with additional capital and TA. Additionally, new entrants could deploy $500 million annually. To be successful in deploying new capital, the field will need to continue its focus to grow the pipeline of potential transition deals.

Entity Annual Vol AVG
Deal size		 Deal #s   Annual Vol AVG
Deal size		 Deal #s
CDFI EO
lenders		 $30m $1.5m 20   $110m $1.5m 72
EO Invest
Funds		 $20m $5m 4   $40m $5m 8
New
Entrants		         $500m $1m 500
Totals $50m   24   $650m   580
Current Capacity   Projected Year 1

Recommendations to Treasury
The following recommendations focus on leveraging existing infrastructure to scale support for effective deployment of appropriate capital by both existing and new lenders and investors.

  1. Designate funds explicitly to employee ownership. Dedicating a small portion of funds (1-2 percent) to employee ownership supports will ensure SSBCI connects to the existing ecosystem of support. All forms of employee ownership should be eligible for funds.
  2. Allow expansive use of TA funds, including outreach to business owners and new lenders. An effective way to grow TA capacity would be to fund multiple employee ownership centers per state, as with Small Business Development Centers (SBDCs) or ROC-USA TA providers, using common practices and metrics. Treasury could enable many small business service organizations with capacity, including state cooperative development centers, SBDCs, Women and Veteran-Owned Business Centers, to implement “state employee ownership center” programs, along with existing dedicated employee ownership centers.
  3. Pair TA with equity-like capital. Employee ownership lenders have demonstrated that 10 percent subordinate debt or other patient capital through SSBCI could leverage additional capital and catalyze a manifold growth in lending in the field. To meet impact goals, Treasury could make this 10 percent sub debt contingent upon the execution of a commitment letter by the selling owner to transition to employee ownership.
  4. Increase eligibility by requiring commitment to benefit employees. Include businesses that commit to transition to employee ownership in the SSBCI program’s definition of socially and economically disadvantaged businesses. States implementing such a provision could require documentation of the owner’s commitment and that the collective ownership stake of employees from socially and economically disadvantaged groups will exceed 51 percent after transition. 
  5. Use the existing infrastructure at the CDFI Fund. Using the CDFI Fund to implement employee ownership goals would leverage existing infrastructure, experience, and relationships and allow capital to be accompanied by the technical assistance needed to effectively deploy it. With minimal administration, Treasury could catalyze an increase in available resources for the field of employee ownership that would spur local business retention, business ownership for disadvantaged entrepreneurs, and wealth creation for low- and moderate-wage workers. These recommendations echo those of the National Association of Federally-Insured Credit Unions (NAFCU) and Inclusiv to make CDFIs and MDIs a priority for SSBCI.
    We recommend allocating a portion to the CDFI Fund, with allowable uses to include equity for borrowers alongside loan capital. The equity portion could be up to 20% of the external finance of a deal, and after some period of time would convert to employee-owner equity or indivisible reserves in the case of cooperatives.           

Call to action for the field    
The Treasury Department faces the large challenge of deploying $10 billion and leveraging it ten times in support of small businesses access to credit. We can help the agency do this effectively, thereby opening the door to scaling employee ownership, but as a field we will need to work hard to build the pathways for capital and technical assistance within the SSBCI program. As the department writes regulations this summer, we can be getting started on work that will lay good groundwork to make this possible.

  1. Build and deepen relationships with the states, territories, and tribes. The state agencies that received SSBCI last time are a broad swath. We will need to actively build relationships with state agencies, help them structure their programs, and ensure employee-owned businesses and transitions remain eligible as layers of bureaucracy define program parameters on the way to implementation. We need to map relationships, develop outreach materials, have conversations, and gain an understanding of how the programs will work.           
  1. Begin developing scalable standards. The worker cooperative field to date has largely resisted the kind of standardization that may well be the key to accessing resources of this size and nature. As the experienced practitioners in the field, we should be thinking granularly about program pieces, capital structures, success metrics, and begin developing recommendations related to multiple program elements, from the certification of TA providers to employees’ letter of commitment to the capital structures of deals.
  1. Prepare to train and mentor. We need to be prepared to support an influx of new entrants into the field, specifically training and mentoring capital providers making conversions loans a new line of business. We’re advocating for funding for peer learning and contemplating what it would look like to build an employee ownership practitioner network among CDFIs and the SSBCI implementing agencies.

DAWI is eager to support these next steps and will convene a series of conversations as we move forward on this opportunity.

Melissa Hoover is the founding Executive Director of the Democracy at Work Institute, the think-and-do-tank that expands worker cooperatives as a strategy to address economic and racial inequality. 

A project of:

Democracy Collaborative