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ESOP Legislation May Boost Small Business Employee Ownership

New legislation, if signed into law, may make it easier for small businesses to offer employee stock ownership plans (ESOPs). Moreover, the ESOP Association is calling on the U.S. Department of Labor and the Small Business Administration (SBA) to take steps that further ease ESOP formations.

The bipartisan ESOP Fairness Act (S.3270) (H.R.5851) was introduced this week by Senators Thom Tillis (R-NC) and Gary Peters (D-MI) and Representatives Mike Kelly (R-PA-16) and Brian Higgins (D-NY-26).

If the legislation gains approval and works as designed, it could inspire more U.S. small businesses to gradually transition ownership to their employees.

The legislation is particularly timely in the IT channel, where thousands of Baby Boomer owners are mulling potential retirement, business transitions and exits, according to ChannelE2E reporting since 2015.

Some MSPs, VARs and IT consulting firms have already embraced ESOP business ownership models. Examples include:

Still, the vast majority of channel business ownership transitions don’t currently involve ESOPs.

ESOP Fairness Act: Proponent Perspectives

In a prepared statement about the new legislation, Senator Tillis said:

“The current limitations placed on certain small businesses by not allowing them to offer employees ownership is costly to both businesses and employees. This bipartisan legislation would change the law to ensure we allow these qualified small businesses to offer their employees a stake in the company they work for.”

Added Senator Peters:

“Providing small businesses additional pathways to retain and recruit talent is critical to supporting the companies that help drive our state’s economy. The ESOP Fairness Act would allow more small businesses across Michigan to easily offer ESOP plans to their employees, allowing them to expand corporate equity, aid employee retention and create jobs. I look forward to building support for this bipartisan measure.”

Noted Congressman Kelly:

“The fast path to financial prosperity for working Americans is through ownership of property and businesses. We can make a difference right now by allowing small and medium-sized businesses to include employee ownership stake in their compensation. It’s a no-brainer, a win-win, and we can do it right now by passing this bipartisan plan.”

Concluded Congressman Higgins:

“When employees have a stake in the success of their workplace, everyone benefits. The ESOP Fairness Act will create opportunities for businesses and their employees alike to invest in each other’s success and growth, resulting in empowered workers, increased workplace longevity, and strong employee retirement benefits.”

Proponents of the legislation include the OTC Markets Group Inc. According to OTC:

“The newly proposed ESOP Fairness Act would put the hundreds of qualified U.S.-based companies and community banks that meet established financial standards, such as those traded on the OTCQX Best Market, on par with exchange listed companies by allowing them to fully access the benefits of public company ESOPs.”

Congress has previously supported ESOP-related legislation, including the Main Street Employee Ownership Act of 2018.

Congressional Hearing Explores ESOPs

Meanwhile, a Congressional hearing earlier this week explored small business employee ownership models — particularly, the ESOP model.

During the hearings, ESOP Association member Daniel Goldstein, president and CEO of Cedar Rapids, Iowa-based Folience, testified and called for the:

  • U.S. Department of Labor to issue regulations on adequate consideration and other issues vital to forming and growing ESOPs.
  • U.S. Small Business Administration to carry out the mandates of the Main Street Employee Ownership Act—such as streamlining the ESOP loan process and working to promote employee ownership.

One quick fix, Goldstein asserted: Have the SBA add ESOP loans to the agency’s Preferred Lending Program.

ESOP Pros and Cons: Potential Rewards and Risks

ESOPs offer a range of potential benefits and some potential risks for those involved.

Potential ESOP Benefits: For instance, employee-owners have more job stability than non-employee-owners, according to one study. Employee-ownership has also shown to be advantageous for workers with families. For those households with children between 0 and 8 years old, the employee-ownership advantage translates into a median household net worth of nearly twice that of those without employee ownership. Employee-owners are also more confident in their financial future, according to another study.

Potential ESOP Risks: While there are certainly benefits to an ESOP, they also invite risks for employees at companies that have inconsistent profits and poor financial controls in place. For instance, employees can suffer if a company’s stock valuation doesn’t represent the company’s true worth. That disconnect can trigger big losses for employees, who essentially “buy” the company at too high a price. Lawsuits involving ESOP valuations have popped up from time to time.

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