In a polarized US Capitol, employee ownership brings lawmakers together
The idea that hardworking Americans should have an ownership stake in the companies they are helping to build is resonating across the aisle in a US Congress otherwise largely divided along party lines.
Employee stock ownership plans, or ESOPs “are where Karl Marx and Adam Smith meet in warm embrace,” Sen. Bill Cassidy, Republican of Louisiana, said last week, getting a laugh at the Employee Ownership Ideas Forum, held in the Dirksen Senate Office Building across from the Capitol.
“It’s like, ‘Workers of the world unite,’” Cassidy continued. Controlling the means of production, in a way that actually augments the productive capacity. It is really an innovative thought.”
The two-day forum, co-hosted by the Aspen Institute and Rutgers University’s Institute for the Study of Employee Ownership and Profit Sharing, convened about 100 impact investors, policymakers, academic researchers and other professionals around accelerating the growth of employee ownership in the US.
“We all talk about an economy that works for everybody. I’m such a big believer in employee ownership because I think that’s an opportunity to match that rhetoric with action going forward,” said Sen. Chris Van Hollen, Democrat of Maryland. “At a time when we’re so polarized as a country in terms of so many other issues, this is something that people can rally behind and make good.”
Hollen plans to reintroduce legislation to create loan guarantees for private investment funds that finance ESOP conversions. ESOP conversions have been limited by the necessity, in many deals, for the selling owner to finance at least part of the sale to the workers. That means waiting for years, to fully cash in on their exit, a disincentive compared to an immediate payout from a private equity buyer. A guarantee program would help bring in private financing to replace the seller’s share of the financing, encouraging more retiring business owners to sell to their employees through the ESOP structure.
“We have small business owners who are rapidly approaching retirement age and we want to make sure that a private equity firm with no connection to the community doesn’t swoop down and eat them up,” Van Hollen said. “And in many cases, it’s foreign capital where there’s just no local attachment to the community from the purchasers.”
Van Hollen’s original bill, called the Employee Equity Investment Act, was initially introduced in 2023 through the US Small Business Administration. He plans to introduce the revised version through the US Department of Commerce. In the Senate, the bill is co-sponsored by Republican Sens. Jerry Moran of Kansas and Todd Young of Indiana.
At the forum, Rep. Blake Moore, a Republican from Utah, said the win-win of employee ownership is core to “the new world of social impact, the double bottom line, and the things that companies are trying to do to improve lives of those in their communities.”
For Rep. Lori Trahan, a Democrat from Massachusetts, firsthand experience of tough times has made her an advocate for employee ownership. Her father was a union iron worker; her mother juggled part-time jobs while caring for four daughters.
“Employee ownership can transform a nine-to-five job into a retirement plan with dividend benefits,” she said.
Tax advantages
That bipartisan support could be valuable as Republican lawmakers search for budget cuts to offset the cost of the tax bill currently before Congress. The tax advantages of ESOPs are part of what make them attractive to sellers.
When an S corporation, for example, is 100% owned by employees through an ESOP, the company pays no federal income tax on its profits. Some ESOP tax benefits start to kick in at 30% employee ownership, the minimum stake that qualifies as employee-owned under the structure.
Such specialized tax programs are under the microscope as Congress seeks $1.5 trillion in spending cuts according to Stephanie Silverman of Employee-Owned S Corporations of America, a Washington, DC nonprofit that advocates for employee-owned S corps. Losing the tax benefits that S corp. ESOPs offer would dramatically slow down the growth of employee ownership in the US, she said.
The roughly 6,500 ESOPs in the US hold over $1.8 trillion in total assets on behalf of more than 10 million worker owners. Of those, nearly 4,000 are S corporations, according to data from the National Center for Employee Ownership.
“The challenge is going to be that eventually they’re going to run out of stuff that they can use to raise money, and we’re on a list of special tax benefits,” Silverman said.
In the UK, a capital-gains tax break for employee ownership trusts, or EOTs, has spurred thousands of business transitions to employee ownership since the law went into effect in 2014. Business owners that sell to an EOT pay no capital gains tax on the sale of their shares. Six percent of all business sales in the UK last year went to new worker-owners through the EOT.
Canada moved this year to join the bandwagon. More than a dozen businesses are in the pipeline to transition to employee-ownership this year through Canada’s version of employee ownership trust, which passed into law last year. Sellers are exempt from taxes on up to $10 million in capital gains tax realized on a sale to an employee trust (see, “In Canada, employee ownership trusts offer a path to shared prosperity and national sovereignty”).
Capital mobilization
Bringing institutional investors into employee ownership funds will be key to accelerating the growth of employee-owned businesses in the US, according to participants at last week’s Employee Ownership Ideas Forum.
“There’s this new set of employee ownership funds that are looking to work with capital in different ways, and those funds need to be capitalized in a much greater way,” said Alison Lingane of Ownership Capital Lab, which has identified nearly two-dozen funds raising a combined $670 million to finance transitions to at least 30% employee ownership.
Apis & Heritage Capital Partners is raising a $250 million private credit fund to create ownership access for up to 3,000 low- and moderate-income US workers (watch the replay of “Sharing the wealth through employee ownership,” last month’s Agents of Impact call). At this month’s Skoll World Forum in Oxford, Washington, DC-based Apis & Heritage was awarded a $2 million Skoll Foundation Award for Social Innovation.
Apis & Heritage’s Phil Reeves is calling for a 10-fold increase in the number of employee-owned businesses in the US, and expansion globally as well. “Asia, Africa, the entire global south was bought into the idea of employee ownership. We have a movement and we need to capitalize on it,” he said.
“It’s incredibly important that the funds that are in the market now are successful,” said Sorenson Impact Foundation’s Lindsay Zizumbo during a panel discussion. “If they don’t raise the capital needed at this time, it’s going to be a failure to launch in this space, as far as an investor sees it.”
The Sorenson foundation was the first institutional check in Apis & Heritage’s inaugural $58.1 million employee-led buyout fund, which has financed the transition of five US businesses with 450 workers to 100% employee ownership.
Thinking about financing for employee ownership as part of an endowment’s broader private-credit allocation, said Catherine Toner of Gary Community Ventures, a hybrid family office and private foundation in Denver, “is really powerful for our investment committee and also for getting folks off the sidelines.”
That framing can help traditional investment advisors “to think about this as more traditional asset allocation and not a niche, fluffy impact strategy, because it’s not,” she said.
“It’s not ‘I’m investing in employee ownership,’ or ‘This is my impact strategy.’ No, it is a private credit strategy that fits into our endowment portfolio strategy and the underlying value creation is employee ownership itself.”
As seen in ImpactAlpha and written by Roodgally Senatus.