[House Hearing, 117 Congress]
[From the U.S. Government Publishing Office]
BUILDING SUSTAINABLE BUSINESSES THROUGH EMPLOYEE OWNERSHIP AT SBA
=======================================================================
HEARING
before the
SUBCOMMITTEE ON OVERSIGHT, INVESTIGATIONS, AND REGULATIONS
OF THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTEENTH CONGRESS
SECOND SESSION
__________
HEARING HELD
DECEMBER 6, 2022
__________
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Small Business Committee Document Number 117-069
Available via the GPO Website: www.govinfo.gov
______
U.S. GOVERNMENT PUBLISHING OFFICE
49-736 WASHINGTON : 2023
HOUSE COMMITTEE ON SMALL BUSINESS
NYDIA VELAZQUEZ, New York, Chairwoman
JARED GOLDEN, Maine
JASON CROW, Colorado
SHARICE DAVIDS, Kansas
KWEISI MFUME, Maryland
DEAN PHILLIPS, Minnesota
MARIE NEWMAN, Illinois
CAROLYN BOURDEAUX, Georgia
TROY CARTER, Louisiana
JUDY CHU, California
DWIGHT EVANS, Pennsylvania
CHRISSY HOULAHAN, Pennsylvania
ANDY KIM, New Jersey
ANGIE CRAIG, Minnesota
SCOTT PETERS, California
BLAINE LUETKEMEYER, Missouri, Ranking Member
ROGER WILLIAMS, Texas
PETE STAUBER, Minnesota
DAN MEUSER, Pennsylvania
CLAUDIA TENNEY, New York
ANDREW GARBARINO, New York
YOUNG KIM, California
BETH VAN DUYNE, Texas
BYRON DONALDS, Florida
MARIA SALAZAR, Florida
SCOTT FITZGERALD, Wisconsin
MIKE FLOOD, Nebraska
Melissa Jung, Majority Staff Director
Ellen Harrington, Majority Deputy Staff Director
David Planning, Staff Director
C O N T E N T S
OPENING STATEMENTS
Page
Hon. Dean Phillips............................................... 1
Hon. Beth Van Duyne.............................................. 3
WITNESSES
Ms. Mo Manklang, Policy Director, United States Federation of
Worker Cooperatives, Philadelphia, PA.......................... 5
Mr. Corey Rosen, Founder, National Center for Employee Ownership,
Covina, CA..................................................... 7
Mr. Keith D. Butcher, Partner, Mosaic Capital, Saint Louis, MO... 8
Mr. Scott Lockard, President, Hampton Enterprises, Lincoln, NE... 10
APPENDIX
Prepared Statements:
Ms. Mo Manklang, Policy Director, United States Federation of
Worker Cooperatives, Philadelphia, PA...................... 23
Mr. Corey Rosen, Founder, National Center for Employee
Ownership, Covina, CA...................................... 25
Mr. Keith D. Butcher, Partner, Mosaic Capital, Saint Louis,
MO......................................................... 33
Mr. Scott Lockard, President, Hampton Enterprises, Lincoln,
NE......................................................... 39
Questions and Answers for the Record:
Questions from Hon. Velazquez to Ms. Manklang and Responses
from Ms. Manklang.......................................... 42
Questions from Hon. Velazquez and Hon. Houlahan to Mr. Rosen
and Responses from Mr. Rosen............................... 45
Questions from Hon. Velazquez and Hon. Houlahan to Mr.
Butcher and Responses from Mr. Butcher..................... 48
Additional Material for the Record:
Bipartisan Policy Center..................................... 51
California Center for Cooperation Development................ 53
CooperationWorks (CW)........................................ 55
Cooperative Development Services (CDS)....................... 57
Cooperative Fund of the Northeast (CFNE)..................... 59
Current barriers of access for use of SBA lending for
conversion to an ESOP...................................... 61
Keystone Development Center (KDC)............................ 63
National Cooperative Business Association CLUSA International
(NCBA CLUSA)............................................... 65
Ownership America Education Fund............................. 68
Submitted Comments of R.L. Condra............................ 72
Submitted Comments of Carol Fraser........................... 75
Submitted Comments of Linda D. Phillips...................... 77
Submitted Comments of Indiana Cooperative Development Center. 79
Sustainable Economies Law Center............................. 81
Statement from Hilary Abell.................................. 84
Statement from Sarah S.H. Assefa............................. 87
Statement from Andy Browne, MPA, CPA......................... 89
Statement from George Cassiere............................... 91
Statement from Andrew Crow................................... 92
Statement from Ted Lauer..................................... 94
Statement from Jasmin Segura................................. 95
Statement from Kirk Vartan................................... 96
Statement from Jason Wiener P.C.............................. 98
Statement from the Worker-Owned Recovery California (WORC)
Coalition.................................................. 99
BUILDING SUSTAINABLE BUSINESSES THROUGH EMPLOYEE OWNERSHIP AT SBA
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TUESDAY, DECEMBER 6, 2022
House of Representatives,
Committee on Small Business,
Subcommittee on Oversight,
Investigations, and Regulations,
Washington, DC.
The Subcommittee met, pursuant to call, at 10:30 a.m., in
Room 2360, Rayburn House Office Building, Hon. Dean Phillips
[chairman of the Subcommittee] presiding.
Present: Representatives Phillips, Davids, Houlahan, Craig,
Meuser, Van Duyne, Donalds, Fitzgerald, and Flood.
Chairman PHILLIPS. Good morning. I call this hearing to
order. Without objection, the Chair is authorized to declare a
recess at any time. And I would like to begin by noting some
important requirements for this meeting. Standing House and
Committee rules will continue to apply during hybrid
proceedings. All Members are reminded that they are expected to
adhere to these rules, including decorum. House regulations
require Members to be visible through a video connection
throughout the proceeding so please keep your cameras on.
Also, please remember to remain muted until you are
recognized to minimize background noise. In the event a Member
encounters technical issues that prevent them from being
recognized for their questioning, I will move to the next
available Member of the same party. I will recognize that
Member at the next appropriate time slot provided they have
returned to the proceeding.
And with that, I am going to move to my opening statement.
For many, owning and operating a successful small business is
the embodiment of the American Dream. Of course running a small
business is not for the faint of heart. It requires hard work
and brings new challenges every single day. But the payoff can
be immense, successful entrepreneurs create jobs, invest in
their communities and drive our country forward. This Committee
serves as the voice for entrepreneurs in the U.S. Congress. It
is our responsibility to ensure that this dream is as
accessible to as many Americans as humanly possible. And that
is why I am such a proponent of the concept of employee
ownership.
I grew up in a family in which business was a means to an
end. And the end was not just making as much money as possible,
rather, sharing as much with the employees and the communities
that made it possible.
I have had opportunities to visit employee-owned companies
in my district, like Rainbow Treecare, and learning more about
employee-owned structures has been very enlightening to me.
Employee-owned companies take various forms, but they are
united by the fact that they align with the interest of workers
and the owners. When an employee-owned business grows, the
workers and the communities benefit directly. I have seen the
countless benefits of this model back home in Minnesota, home
to 265 employee-owned businesses, the most per capita of any
State in the Union. In many cases, workers at these businesses
boost higher pay, greater job security and better benefits,
such as higher retirement savings.
In addition to helping workers, the employee ownership
model also provides a way for retiring small business owners to
pass their businesses along to the people that know it the very
best, their employees. Employee ownership is an innovative way
to address this retirement wave that is forthcoming.
Moreover, converting to an employee-owned structure is an
effective succession plan to preserve a firm's continuity,
foster employee commitment, and build lasting economic value in
a community. Given the long list of benefits associated with
this model, it is vital that we ensure that these businesses
have access to the federal initiatives meant to support all
small firms. Unfortunately, despite the efforts of Chairwoman
Velazquez, myself and Members of this Committee, ESOPs and co-
ops continue to be virtually locked out of key Small Business
Administration programs. Take the SBA 7(a) loan guarantee
program for example. In the last 4 years, SBA has only approved
17, that is right, just 17 7(a) program loans to insist in ESOP
in requiring 51 percent or more of a business. The loan numbers
for co-ops are even worse.
ESOPs and co-ops are often kept out of the 7(a) program
because of their unique ownership structure and SBA's
unwillingness to align their programs to meet the needs of
these entrepreneurs. These obstacles have led the SBA in a
previous hearing before the Committee and in a recent proposed
rulemaking to acknowledge that its current policies are not
achieving its goals of increasing employee ownership. Congress
took steps to address these issues in 2018 with the passage
ever Chairwoman Velazquez's Main Street Employee Ownership Act.
The bill included provisions to ease burdensome guarantee
restrictions and ultimately encourage more SBA-backed lending
to cooperatives and to ESOPs. But unfortunately, the SBA has
failed to follow congressional intent and many of the
challenges the bill sought to address continue to vex employee-
owned enterprises to this very day.
It is clear that Congress must do more to support employee-
owned small businesses. And that is why last month, Chairwoman
Velazquez and I introduced two bills that would build on the
Main Street Employee Ownership Act. And finally, finally
eliminate burdensome requirements put in place by the SBA.
Today, I look forward to examining the potential impact of
this legislation as well as other actions that Congress and SBA
can take to encourage more employee ownership. I am also
excited to hear from our panel today about the benefits of
employee ownership, the ongoing challenges that these firms
face and the ways that this Committee can better support them
all.
With that, I would like to yield to the Ranking Member, Ms.
Van Duyne, for her opening statement.
Ms. VAN DUYNE. Thank you very much, Chairman Phillips, for
holding this hearing. And we can all agree that a business'
structure and foundation are critically important to their
success and longevity. However, amending requirements at the
SBA should always be viewed with caution. And it cannot be done
without considering all possible ramifications and potential
unintended consequences.
I look forward to discussing the employee ownership model
this morning. However, we must also address that we are
currently in the fourth quarter, and the small businesses that
I speak to in north Texas have been battling significant market
conditions that threaten their success. They continue to
struggle with rampant inflation labor shortages, ongoing supply
chain disruptions, and a growing regulatory burden. And it is
no wonder why small business optimism continues to decline in
this country. The National Federation of Independent
Businesses, NFIB, the small business optimism index, lists
October as the 10th consecutive month below the 49-year
average. It is also no surprise that increasing costs continue
to remain one of the more pressing issues facing small
businesses. With 7.7 percent year-over-year inflation, how
could it not be? The total energy index has risen a staggering
17.6 percent over the last 12 months. And many small businesses
simply can't sustain in this environment. And as a result of
this inflationary time period, the Federal Reserve has moved to
increase interest rates repeatedly, thus challenging small
businesses even further.
Labor shortages continue to be a top concern for our
constituents and their businesses. Not only does finding
workers pose a major problem, but finding the right skilled
workers is seemingly impossible. The latest NFIB report shows
46 percent of owners reported job openings that were hard to
fill. Ninety percent of business owners searching for employees
found few or zero qualified candidates to fill their open
positions. And how can we expect small businesses to succeed if
90 percent of owners are having a hard time finding qualified
candidates to fill their positions? Unfortunately, even when
our community businesses do have workers, they often struggle
with stocking their shelves. Supply chain disruptions continue
to impact many small businesses on a daily basis. In October,
31 percent of business owners reported supply chain disruptions
have had a significant impact on their businesses. If inflation
which has caused rising interest rates, labor shortages in
supply chain disruptions weren't enough, the regulatory burden
imposed by the Biden administration is also taking a toll.
According to the American Action Forum, during the first 2
years of the Biden administration 443 final rules we are
creating with a whopping cost of $309.1 billion, along with a
staggering 193.1 million new paperwork hours.
This is a stark difference compared to President Trump's
first 2 years in office. While the previous administration
created final rules, they actually saved small businesses $3.4
million and had half of 1 percent of the paperwork hours. Small
businesses continue to face these challenges daily and these
are the issues this Committee should be focused on trying to
solve.
Pro-growth policies that support deregulation in the
reduction in spending levels must be, first and foremost, on
the congressional agenda as they have a true real-world impact
on the nation's small businesses, entrepreneurs and startups.
I look forward to today's conversation. And I would like to
welcome all of today's witnesses. And thank you, Mr. Chairman.
I yield back.
Chairman PHILLIPS. Thank you. The Ranking Member yields
back. And I would like to take a moment to explain how this
hearing is going to proceed. The witnesses will have 5 minutes
to provide a statement. And each Subcommittee Member will have
5 minutes for questions. Please ensure that your microphone is
on when you begin speaking and that you return to mute when
finished.
Just an announcement, Members of Congress are expected in
the Rotunda at 10:45 for the Gold Medal ceremony. So I plan to
introduce each of our witnesses, try to get at least through a
couple of the opening statements and then we will probably have
to break and then reconvene around 1 p.m.
So with that, I would like to introduce Ms. Mo Manklang who
serves as a policy director for the U.S. Federation of Worker
Cooperatives. The USFCW is a national grassroots membership
organization for worker cooperatives. Its membership consists
of 350 businesses and organizations. And they represent the
estimated 1,000 worker co-ops and their 10,000 workers across
the country. Additionally, Ms. Manklang is a founding board
member of the Philadelphia Area Cooperative Alliance and serves
on the board of directors for the Sustainable Business Network
of greater Philadelphia. She is a graduate of Drexel
University, and we welcome Ms. Manklang.
Or next witness is Mr. Corey Rosen, who is the founder of
the National Center for Employee Ownership. NCEO is a nonprofit
organization with a mission to help employee owners thrive. Mr.
Rosen has authored numerous books articles and research papers
on employee ownership and has been recognized as one of the
world's leading experts on employee ownership. Prior to
founding NCEO he taught politics at Ripon College, and worked
in the Senate for 5 years where is he helped initiate and draft
legislation on ESOPs and employee ownership. Mr. Rosen received
his Ph.D. in political science from Cornell university. We
thank you for joining us today, Mr. Rosen.
Our third witness is Mr. Keith Butcher. Mr. Butcher is the
founder and partner at Mosaic Capital. Mosaic Capital is a
small business investment company that is licensed and
regulated by the SBA. The fund focuses on acquiring companies
through an employee stock ownership plan buyout. He also serves
as managing director with Butcher Joseph & Company, which is an
ESOP-focused investment bank. Prior to founding Mosaic, Mr.
Butcher served as an executive president of Purcell Tire and
Rubber Company, and as an executive director with Morgan
Stanley. He received his B.A. in international business and
finance from Bradley University and his Doctor of Jurisprudence
from Wake Forest University School of Law. We thank you, Mr.
Butcher, for being here today.
I now yield to the Ranking Member to introduce our final
witness.
Ms. VAN DUYNE. And our final witness would like to be
introduced by Congressman Flood, who he is from his home
district.
Chairman PHILLIPS. I recognize Congressman Flood.
Mr. FLOOD. Thank you, Chairman Phillips. Thank you, also,
Ranking Member Van Duyne.
It is my pleasure to introduce Mr. Scott Lockard of Hampton
Enterprises. Scott Lockard is a lifelong Nebraskan. He grew up
in Stella, Nebraska, studied construction engineering in Omaha
and has worked with Hampton Enterprises, a company based in
Lincoln since 2007. Earlier in his career, Mr. Lockard worked
as a project manager on the construction of Pinnacle Bank
Arena. The basketball arena for the University of Nebraska
Cornhuskers. Since then, Mr. Lockard had progressed quickly
through the ranks within the company he works. He currently
occupies a position of president of construction. Mr. Lockard's
experience in construction gives him unique insight into some
of the economic headwinds facing small businesses across the
country. He can also speak with authority about the challenges
of wrestling with inflation, supply-chain issues and labor
shortages. His perspective will be valuable to the Members of
this Committee.
Mr. Lockard, I look forward to your testimony.
Mr. Chairman, I yield back.
Chairman PHILLIPS. Thank you, Mr. Flood.
With that, I would like to recognize Ms. Manklang for 5
minutes for your opening statement. Ms. Manklang.
STATEMENTS OF MO MANKLANG, POLICY DIRECTOR, UNITED STATES
FEDERATION OF WORKER COOPERATIVES; COREY ROSEN, FOUNDER,
NATIONAL CENTER FOR EMPLOYEE OWNERSHIP; KEITH D. BUTCHER,
PARTNER, MOSAIC CAPITAL; AND SCOTT LOCKARD, PRESIDENT, HAMPTON
ENTERPRISES.
STATEMENT OF MO MANKLANG
Ms. MANKLANG. Hello. Thank you very much. As Representative
Phillips said, my name is Mo Manklang. I am here to represent
the U.S. Federation of Worker Cooperatives. Thank you so much
to the Subcommittee, especially Subcommittee Chairman Rep.
Phillips for creating a space to address this important issue.
As policy director, I have a ground-level view of
challenges and successes of our employee-owned businesses. And
I am attuned to the needs of the growing field. Worker co-ops
are increasingly recognized and a valued solution to economic
challenges. They strengthen companies, they reward workers and
they prevent job loss in the case of converted businesses.
Over the next decade, this converts massive job losses in
the succession crisis for the 2.34 million businesses that are
currently owned by baby boomers, eminently facing closure or
sale. This gives the workers opportunity to fill the shoes of
originating owners as Representative Van Duyne mentioned a
little bit earlier.
The worker coop model offers many benefits to its Members,
there is typically small and strong small businesses. Typically
in what it is paying its workers, paying an average of $19.67
per hour often in insecure industries like retail,
manufacturing, food service, home care and childcare. Worker
co-ops allow people like Mr. Lockard on this panel to benefit
directly from the value that they create, allowing them to
build skills, to grow professionally. And worker co-ops also
have a higher success rate than typical small businesses.
In 2018, we were proud and we were energized by the passage
of the Main Street Employee Ownership Act, which passed with
overwhelming bipartisan support. This legislation aimed to
improve access to capital and technical assistance, including
financing the sale of business to their employees, working with
small business development centers to provide training and
education on employee-ownership options and reporting on the
SBA's lending and outreach to employee-owned businesses.
This clear mandate from Congress that recognized employee
ownership was really important for this highly underserved
sector that has really long sought reasonable access to these
programs. Unfortunately, we haven't seen any meaningful support
from the SBA since the passage of Main Street Act with regard
to financing outreach or education.
In the 5 years that I have been on staff with the
Federation, I have only been able to find 2 cases ever of
worker co-ops being able to actually access 7(a) loan programs.
It was our hope and expectation that we would see this number
rise, and that we would see more worker co-ops being able to
access these vital resources provided by the Small Business
Administration.
This is about an even the playing field with other small
businesses, in particular, regarding the personal guarantee
requirement which has created a distinct disadvantage for co-
ops. Asking a single member, or the selling owner to take on
ultimate responsibility for the loan is directly at odds with
the shared ownership structure of cooperatives which shares the
financial burden across multiple co-op members who are all
deeply connected to the business.
We see two big issues in regard to support of employee
ownership, it is education and it is opportunity. Education is
needed for business owners, service providers, financial
institutions and the SBA itself. We know at least two different
worker co-ops who were actively discouraged from pursuing a co-
op model in their startup days, which we believe was because of
a lack of understanding of model. Financial institutions that
are unfamiliar with co-ops and ESOPs deprioritize their
applications during the COVID-19 pandemic with many of the
worker co-ops who applied for the Economic Injury Disaster
Loans and the Paycheck Protection Programs were denied or ran
into significant challenges in accessing these business saving
resources. And we simply also need access to opportunity. We
understand the importance of ensuring that people have skin in
the game, but they have deep commitment to ensuring the success
of the business, the repayment of their loans. The shared
ownership structure of worker coops actually make employee-
owned businesses more dependable, more resilient, better able
to weather economic downturns, and less likely to lay off their
workers as we have seen over the past several years.
There are many examples of co-op loan programs that
resulted in lower default rates that SBA loans with no personal
guarantee. For instance, Intermediary Lending Pilot Program,
which actually was a SBA program, but not the 7(a), resulted in
17 worker co-op loans with a zero default in 16 of those
businesses still operating.
Workers co-ops need the full access to the full range of
SBA's tools to foster and create stable, higher retention jobs
that empower people and provide workplace flexibility. We know
that the SBA has programs and assets that will spark
significant growth in the worker co-op sector and save jobs and
keep businesses rooted in their communities.
On behalf of a co-op community, we thank the Small Business
Committee for their attention to this issue. And we looked
forward to working with you to ensure a prosperous future for
all small businesses across the U.S.
Chairman PHILLIPS. Thank you, Ms. Manklang.
Now I will recognize Mr. Rosen for 5 minutes. And after Mr.
Rosen's opening statement, we are going to go into recess for
the Gold Medal ceremony and reconvene at 12 noon sharp.
Mr. Rosen, you are recognized for 5 minutes.
STATEMENT OF COREY ROSEN
Mr. ROSEN. Thank you very much. I really appreciate this
opportunity to talk to you today.
45 years ago I was a Staff Member for the Senate Small
Business Committee working on a bill to create the Small
Business Employee Ownership Act, which would authorize the SBA
to make loans to ESOPs. The SBA didn't really do anything on
that, much like it hasn't done very much on the Main Street
Act. In 2018, I had the privilege of working with Members of
both this Committee's staff and the Senate Committee's staff to
try to fix these problems and we thought that the legislation
that was passed would, in fact, do that. But again, the SBA for
reasons I really don't know has decided that it doesn't want to
pursue any of this.
Why should it? Well, there are about 6,500 privately held
ESOP companies in the United States, and those companies have a
long track record. First, they have an impressive political
track record. The tax benefits for ESOPs have been supported
unanimously by Members of both parties. It is one of the few
political ideas that can claim that. Secondly, these companies
perform well. With respect, for instance, to Representative Van
Duyne's comment about turnover, ESOP companies have about 70
percent lower voluntary turnover than comparable companies in
the food industry, according to a study we did this year. And
they have turnover rates in general, about half of those of
comparable industries.
At a time when retirement is increasingly unavailable to
people--fifty percent of the private-sector workforce
participates in no retirement plan at all. They have a median
account balance of zero. The mean account balance for
participants in ESOPs is $132,000, and most ESOP companies have
a 401(k) plan on top of it. ESOP companies grow faster, and
they lay people off one-third to one-fifth the rate of
comparable companies. And really importantly for this program,
the default rate on ESOP loans is two per 1,000 per year. Let
me repeat that: two per 1,000 per year. This is a program you
think the SBA would love to finance with a default rate like
that.
So what are the problems? Why aren't there more ESOPs given
the tax benefits and performance benefits? Well, one is, and Mo
alluded to this in respect to co-ops too, that companies simply
don't know they can do this. There are all sorts of
misperceptions about what ESOPs are and how they work. And we
know from efforts at State level programs to create more
outreach on ESOPs, a handful of States that do that, that when
information is provided to people, a lot of companies will do
ESOPs without any further intervention because of all the
benefits that these plans have. And we envision that the Small
Business Administration would conduct these outreach programs,
which could be done at an extraordinarily low cost via
partnerships with the nonprofit and for-profit sector. But they
didn't do anything on it, even though the law specifically
required it. They also threw up all sorts of obstacles: the
personal guarantee, the equity guarantee. They require that
there be a separate valuation when ERISA already requires an
extremely detailed valuation for an ESOP company. Requiring a
separate valuation takes a great deal of additional time, and
for reasons I can explain in questions if you are interested,
raises additional fiduciary risk.
We were expecting, and the law said, that the SBA should
make these loans available through the 7(a) preferred lender
program, but the SBA didn't do that. So companies say, ``Well,
do I really want to go through this detailed bureaucracy with
the SBA to try to get one of these loans?'' And for many people
it is just not worth it.
The SBA is asking companies to get a letter of
determination before they do these, and that is not practical
either. All of these things have made the SBA Main Street
Employee Ownership Act a failure. And the regulations that it
proposed to try to fix this problem don't even address it.
Thank you very much. I really appreciate this opportunity.
Chairman PHILLIPS. Thank you, Mr. Rosen.
With that, our Committee will recess and reconvene at 12
noon sharp. And with that, we will see you in an hour.
[Recess.]
Chairman PHILLIPS. Everybody, I will call the meeting back
to order and begin with Mr. Butcher, who I will recognize for 5
minutes for your opening statement. Mr. Butcher.
STATEMENT OF KEITH D. BUTCHER
Mr. BUTCHER. Well, thank you and good afternoon to
everyone. My name is Keith Butcher, and I am the founder of--
one of the founding partners of Mosaic Capital Partners, which
is a small business investment company that is licensed by the
SBA, and also the founder of an ESOP M&A advisory firm called
Butcher Joseph & Company.
I started my career in 1998 as a young lawyer and worked on
my first ESOP transaction back then, in 1998-1999, an ESOP
buyout. And coming from a small town in Nebraska, it really was
a fortunate opportunity for me to see it in action and to watch
a company transition from a family business, family-owned
business to the employees. And, frankly, I didn't even know
this structure existed back then when I entered my law practice
from law school.
Over the last 25 years, I have devoted my practice to
employee ownership. I have worked on 300-plus transactions,
enabling companies to transition into employee ownership of
every size, of every place in the United States, and frankly,
almost any industry you can imagine. And through that process,
I have watched how valuable this can be for communities and for
employees.
I come to this meeting with a little different perspective,
I think, than the prior speakers, because I view Mosaic Capital
as a success of the SBA in entering the employee ownership
world and creating impact on it.
And so the first thing that I would say is, if we assume
that it is truth that employee ownership and all the benefits
of it align with the SBA's mission, then to me, there is just a
massive opportunity for the SBA, and that it is more of--I
focus more on the opportunity in front of us.
And that opportunity presents itself because we have this
epic number of baby boomer entrepreneurs who have to do
something with their businesses. Over the next 10 years, a
massive number of businesses are going to need business
succession, and they are going to have to figure out who is
going to take the lead for these businesses.
The vast majority of them, but for a solution from the SBA
or some other capital provider, are going to get sold to
consolidators. And if there is a market for their business,
that is what will occur. And it is going to happen in a--
private equity has become a massive pool of capital, and they
are going to consolidate into those industries.
And so, the opportunity is for the SBA to do what it does
best, which is, it creates capital programs and it provides
solutions in a really risk-adjusted fashion to be able to
enable those markets to go.
I give the example of Mosaic Capital. We received our
license in 2014. We have invested roughly $150 million into
enabling 12 companies to move into employee ownership. We
created 1,400 employee owners. And ultimately, we project that
we will produce something in the range of $130 million to $150
million of retirement value for these employees, all of that
enabled by the SBA, allowing us to go through the process and
issuing us a license, because it is the ultimate public-private
sort of partnership.
What I see with the 7(a) program is, is that there is the
capability at the SBIC program level for companies of those
sizes--the 7(a) program would be a lower size one. It would be
sort of $15 million and below valuation companies.
And if the 7(a) program would embrace that market, then it
would be a viable solution to consolidators. To date, it is
not. Corey said it earlier. There are 6,500--I think for 20
years, I have been telling people there are 6,500 companies
that are ESOP-owned. And the reason for the lack of net growth
is lack of capital availability.
It is the reason we created Mosaic, so that we could create
a market-competitive transaction. We enter a traditional M&A
market process and we win over other options, because owners
want to do this if it is a good idea for their families. And
they ultimately are stewards for their families and they have
to have a good risk-adjusted alternative.
The same thing is true of smaller businesses, where if we
had the 7(a) program, if they would embrace this structure,
then you would allow professionals out there to be able to
offer up to these business owners a viable solution that would
compete with other options, which today, it is really a seller
note work your way out of the business market, and it is not
competitive.
Chairman PHILLIPS. Thank you, Mr. Butcher. Thank you.
And last but not least, Mr. Lockard, you are recognized for
5 minutes for your opening statement.
STATEMENT OF SCOTT LOCKARD
Mr. LOCKARD. Good afternoon. First of all, I would like to
thank the Committee for allowing me to testify today and share
some of the challenges that we small businesses are facing.
This is certainly an unprecedented time and challenges that we
face are, in some cases, crippling.
My name is Scott Lockard of Hampton Enterprises, located in
Lincoln, Nebraska. We are a nearly 75-year-old small business
that has two main focuses: commercial construction, as well as
leasing and development. With just over 70 employees, we own
and lease nearly 900,000 square foot of commercial property. We
built out, lease it, and maintain it with our own staff.
Since the majority of our tenants are also small
businesses, we have the unique perspective of seeing how small
businesses are being impacted and affected due to the current
economy.
Like many businesses around the country, labor has been a
major factor to our business and industry. On the construction
side, we struggle to find an adequate supply of employees who
are skilled in the construction industry, or willing to learn.
We offer on-the-job training, and we have worked with both
vocational schools as well as local universities in order to
find and train workers.
However, there continues to be a lack of skilled workers in
our industry. The majority of the subcontractors that we deal
with have also felt this pain. Unfortunately, since there is a
scarcity of skilled workforce, typically the subcontractor
market gains its employees by poaching from their competition.
This, along with the historic amount of construction work
over the past few years, has led to higher-than-normal wages.
We are having an increase of wages for current employees as
well as starting out wages higher for new employees who are not
skilled yet. This has been a huge impact to our construction
cost.
Additionally, the supply chain has had significant impact
to the construction industry. We have seen major projects that
have delayed due to the availability of materials. We have seen
switchgear and components, electrical components, that
typically take 6 to 8 weeks to deliver, now take 6 to 12 months
to be delivered. HVAC equipment, like rooftop units, typically
would take 12 weeks from the time the order was placed, are now
taking almost a year or longer in order to be delivered. This,
again, is a combination of parts not being available at the
factory and labor not being available at the factory to build
these components.
These delays have added to the construction cost, but they
also impact our ability to get our projects complete. I had one
tenant that was delayed for several months because the
switchgear that we needed for their space was unavailable. We
tried multiple avenues to find another solution. Ultimately, we
had to complete the project and wait until these components
arrived, thus delaying their move-in and delaying our revenue.
We have another project where the rooftop units were
ordered on time, but the delivery date has moved multiple times
to the point that it ended up delaying the completion of the
project. In both of these cases, not only did it add cost to
the construction project, but also lost revenue for us, as the
landlord, for the months of delays that they sat until the
tenants were able to move in.
These are only a couple examples, but I certainly could
speak all day of the impact of these delays and the short
supply of material. The combination of labor shortage and
supply-chain issues have increased construction costs nearly 40
percent of what we saw just 2 years ago.
Supply chain issues will be solved and, hopefully, after
another 6 to 12 months we will see improvement. However, we
likely won't see costs return to a reasonable range,
particularly in the labor market. I question the long-term
impact on our industry with these rising costs.
As a landlord, our tenants have had many struggles. We have
had some retail tenants that have struggled when COVID hit,
with the shutdowns that affected their businesses. It seems
that the labor market has not returned to the same level it was
prior to COVID.
For the most part, their customers have returned to the
stores. However, supply chain issues and labor costs have
affected them. Their cost for labor and product increases
significantly. They are only able to adjust their cost of their
goods slightly, for fear of losing customers.
In some cases, our tenants have had significant fears that
they will not be able to survive, and will have to shut down.
Not only would that be tragic for these businesses to close,
but the impact to us, as landlords, would also be significant.
We are looking at an apartment development and adding
market rate apartments in Lincoln. Our town has a housing
shortage and with the current market, due to construction costs
as well as rising interest rates, we have looked at our pro
formas and we have had to put this on the back burner. Even
though there was a huge demand for housing, the cost associated
with it and rate of return is just not effective.
At the end of the day, we still hope that we can improve,
and we have to have hope for where things will change. We
continue to look for ways to overcome challenges that we face
and keep moving forward. However, we need to see policies put
in place that will reduce these challenges, not restrictions
that will add cost and frustration to how we operate.
Thank you again for your time today.
Chairman PHILLIPS. Thank you, Mr. Lockard. And thank you to
all our witnesses to for being with us today.
I am going to begin by recognizing myself for 5 minutes.
Starting with you, Mr. Rosen. Recently, Chairwoman
Velazquez and I introduced two bills to address the barriers
that have been put in place by the SBA to increase lending to
ESOPs and co-ops and facilitate transfers of ownership.
So, Mr. Rosen, is it safe to say that these bills are
essentially technical changes, at best, and that the SBA
already has the authority to make these changes in order to
streamline 7(a) lending to ESOPs and co-ops?
Mr. ROSEN. Absolutely. Having had the chance to discuss
this with your staff and to look at the legislation, what these
two bills are doing, basically, is just telling to do the SBA
what I know from personal experience with the Main Street Act
was what we expected the SBA to have done on its own
initiative.
And, frankly, the ESOP community and the co-op community
were shocked when the SBA came out with the operating
procedures that were directly contrary to the law. So there is
nothing in the current law that the SBA couldn't do to enact
all these things. And I hope that they will. And maybe the
legislation, if it passes, will further cement that.
Chairman PHILLIPS. And, Mr. Rosen, quickly, in your
opinion, any reason why you think the SBA has failed to do so?
Mr. ROSEN. It is hard for me to speculate. I have not
talked to anyone at the SBA who has told me why they don't want
to do it. But there is this long four-decade-plus experience
with the SBA resisting these ideas. And I can only guess that
one of the reasons is that this is something new. This is an
added responsibility.
The SBA has, of course, had a lot of things thrust upon it
in the last couple of years. But historically, the SBA just has
viewed employee ownership as kind of an outlier that they don't
really want to get into. They did, in their regulation, say
something very interesting, which was that it really would be
better, actually, if the SBA just loaned to a few employees to
buy the company, because that would be cheaper than doing all
the compliance with an ESOP.
It is expensive to do an ESOP, for these small companies
maybe $100,000 to $200,000 to set these plans up. Of course,
selling your company any way is expensive, so that is an
important comparison.
But if a group of employees tries to buy the company with
after-tax dollars, a $3 million business would require $4.5
million or so in pretax profits to buy out the business,
imposing enormous risk on those individuals and $1.5 million
more in cost than an ESOP would, because an ESOP is all pretax.
Chairman PHILLIPS. So, Mr. Rosen, we are very like-minded.
I want to get to Mr. Butcher, but I appreciate your perspective
on that subject, and we are like-minded.
Mr. Butcher, as you are well aware, the formation of
employee-owned businesses has relied primarily on an especially
dedicated subset of sellers who are willing to forego liquidity
at closing and instead self-finance a significant portion,
usually of the transaction, with a note that is paid back by
the company over 5 to 10 years.
So can you please share your perspective on the seller
financing issue and the barriers to adoption that it presents
to the expansion of employee ownership around the country?
Mr. BUTCHER. Yeah. I mean, as you stated, that is the
traditional structure, particularly for the lower end of
valuation. So if you are, you know, below, I would say, $25
million to $15 million of valuation, there aren't a lot of
capital markets available to you. Part of the reason the SBA
7(a) program exists in the first place, right, for companies of
that size. And it is so different for ESOP transactions.
So, to your point, what you end up with is really two
groups of folks that will support doing an ESOP, either
companies that don't have another viable option, and, so, it is
kind of like a transaction of last resort, or companies where
it is a true believer family entrepreneur who will forego
liquidity in order to do the ESOP transaction, because they
value that legacy so greatly.
And there are those folks for sure. But what that creates
is a niche of a niche of a niche, and it is why it is not
growing. If you enable capital, you will create a competitive
alternative. It may not be complete liquidity in these
transactions, and I don't think you have to in the lower middle
market like that. But you will create a competitive option that
will enable the mainstream of owners to make that practical
decision for their family and do that instead of selling, which
is what we have been doing at Mosaic.
Chairman PHILLIPS. Thank you, Mr. Butcher.
My time is expired, so now I recognize my colleague, Ms.
Van Duyne Texas, the Ranking Member of this Subcommittee on
Oversight, Investigations, and Regulations.
Ms. VAN DUYNE. Thank you very much, Mr. Chairman.
Mr. Lockard, I want to thank you for being here today and
for being so patient with our schedule moving around. But I
also want to congratulate you on being with a business that has
a 75-year successful career. You are obviously doing something
right.
How do you see--given the longevity of your business, how
do you compare these times of uncertainty to times in the past?
Mr. LOCKARD. Well, there are definitely a lot of questions
as far as what the next year, year and a half will look like
for us. As I alluded to earlier, we have projects of our own
that we put on hold due to construction cost and rising
interest rates. They are not economically feasible for us to
move forward.
We are conservative as a whole. We have weathered some
pretty tough times in the past. In 75 years, we have a history
of laying off one time. That was in the nineties. And we were
able to bring most of those employees back into the company. We
try to keep everybody as if they are part of our family. You
know, we want them to have a stable job, stable employment.
Values are very driven within our company.
We have had a lot of success over the past couple of years
with the economy, especially on the construction side, and we
have done very well to build up our company to be strong, to
weather the next storm that we are going to face.
Ms. VAN DUYNE. So can you share with this company how your
small business is handling the current environment, you know,
during which time prices have skyrocketed and capital has
become much harder to get, with the rising interest rates. And
are there any projects that you decided not to go through with
as a result of interest rate hikes?
Mr. LOCKARD. We have a customer who just decided not to
build a new grocery store in Columbus. It was about a 55,000-
square-foot facility. We were looking forward to trying to
build that store for them. And the plug was just pulled on that
due to construction costs being significantly higher than what
they had expected.
We also have an apartment development that we were looking
to build on one of our properties. Again, as I alluded to in my
testimony, the market is there for housing. There is a shortage
of housing. This particular development is not low-income
housing. It would have been market rate. It wouldn't have made
sense to do low-income housing in this development. But, again,
due to construction cost and interest rates, the rate of return
is just not there to where it makes sense for us at this time
to move forward with that project.
Ms. VAN DUYNE. So we are losing grocery stores and housing?
Mr. LOCKARD. Uh-huh.
Ms. VAN DUYNE. So more often than not, we see the federal
government hinder growth of small business instead of helping.
What do you think is the biggest burden that you see coming
from the government right now?
Mr. LOCKARD. Well, locally, there is always red tape to get
through anything. I mean, even permits in our city.
Unfortunately, it used to take 2 to 4 weeks to get a permit
done, complete on time. Right now, it is taking as much as 4 to
6 months to get a building permit, which is absolutely
ridiculous. I don't see a lot of just help from our local
government, at least.
And then, obviously, with inflation issues, as I alluded
to, they are very real, especially for our small businesses. It
is not a political term in our industry. It is not a political
term with our tenants. It is something that we face every day,
inflation and rising cost.
And when our tenants don't have the same profitability they
have, because their cost of labor and their cost for goods is
up, but yet, they can't raise their prices because they are
afraid they can't get any more customers, it is sending them
out of business. And if they go out of business, they affect
our business.
Ms. VAN DUYNE. I represent north Texas, Dallas-Fort Worth
area. And small businesses are telling me all the time that
they are having a really hard time trying to find labor,
especially skilled labor. Are you seeing the same thing in your
area?
Mr. LOCKARD. Yeah. It has been a challenge for about 6, 7
years now. It is a combination of a lot of things. One, at
least on the construction side, for decades, we have told
students, Hey, stay out of construction and go get a college
degree, you need that in order to get ahead in life. And so we
have steered people away from the trades.
Additionally, with COVID, when it hit, and, unfortunately,
the unemployment benefits that were added, it was a negative
impact to us and our industry. I had an electrician friend of
mine who was offering jobs to electricians, but they were
getting paid for unemployment and they refused to come work for
him while those unemployment benefits were in place.
Now, I believe those unemployment benefits were a good
thought. Unfortunately, it had a negative impact to our
industry where we had a huge need for labor.
Ms. VAN DUYNE. Awesome. All right. I yield back. Thank you
very much for your testimony.
Chairman PHILLIPS. The gentlelady yields back.
And now I recognize the gentleman from Nebraska, Mr. Flood,
for 5 minutes.
Mr. FLOOD. Thank you, Mr. Chairman. I mentioned this during
my introduction to Mr. Lockard, but I would like to reiterate
how pleased I am that I have a witness from my district in
Lincoln, Nebraska. It sounds like Mr. Butcher is also from
Nebraska.
This is a fantastic opportunity for the Committee to hear
firsthand what people on the front lines of small business are
hearing, what they are seeing.
Your testimony, Mr. Lockard, tells really a troubling
story. The construction and commercial real estate sectors have
been some of the hardest hit, between the shutdowns on COVID-19
and the inflation that has followed.
You were talking specifically about supply chain issues.
And you were talking about heating, ventilation, air
conditioning in units, something that a lot of Americans don't
think about every day. But in construction, when those delays
happen, that is very real.
Can you just really walk us through what is behind the
extreme delay in getting these units and affecting the end of a
construction project?
Mr. LOCKARD. Sure. I believe it is a combination of
multiple things, again: One, the construction volume is at high
levels right now. So the availability for product is down just
due to the demand of these products.
Rooftop units are typically custom-made for a project. They
may have different components in there for humidity, humidity
control, as well as energy efficiencies. So they are basically
built at the time of the order. Some of those parts are coming
from overseas, and are not available at the factories, as well
as labor at the factories, just they don't have enough bodies
to build for all the orders that are there.
The delay to us, as a contractor, and to our customers, as
owners, is pretty significant. Added cost of what we call
general conditions, which is supervision, dumpsters, anything
that actually you need to manage the project, the longer it
takes the more those costs increase.
And then the lost revenue of not having a tenant in there
or having a business not being able to operate is significant.
Mr. FLOOD. Thank you, Mr. Lockard.
I would like to pivot for just a second. I am interested in
this topic of ESOPs. And I have a question for Mr. Butcher and
maybe one of our other witnesses.
Have you, Mr. Butcher, experienced a transaction where you
are dealing instead of with an ESOP, a limited cooperative
association? Have you used one of those before? I know in
Nebraska, we made this possible in 2008 by passing a law. Do
you have any experience with limited cooperative associations?
Mr. BUTCHER. I don't. I am familiar, actually, with the
structure, but we haven't executed on it.
Mr. FLOOD. Would it be possible that one of these limited
cooperative associations would be more cost-effective as
opposed to setting up the Employee Stock Ownership Plan?
Mr. BUTCHER. I don't know that it would be any different. I
mean, I think if you look at--and I think the cost piece, from
a contextual thing, is kind of overblown in the sense that if
you look at the real cost of putting these transactions in
place versus the tax savings and the efficiency of that
company, and just the retention of employees, particularly
today, it far outweighs that initial cost.
But I think that it is more they are different types of
structures and they probably apply to different kinds of
companies. And I am not an expert on co-ops, but I generally
see them as being on the smaller end of business, whereas ESOPs
can scale really big. I mean, there are numerous multibillion
revenue companies out there that are in the ESOP structure.
Mr. FLOOD. Thank you very much. You know, I appreciate this
topic. I think that finding ways to make businesses work,
especially in rural America, is important. And it does require
some creativity and structure.
One of the benefits of cooperatives--and we have seen
cooperatives scale very large in ag areas in Nebraska. And one
of the benefits I see with the limited cooperative association
is you have the ability to bring in that private investment to
help affect the buyout and allow the rest of the employees to
have the opportunity to enjoy some meaningful ownership and
build some wealth.
That said, I want to thank Mr. Lockard for coming from
Lincoln, Nebraska, today. His testimony about the frontline
struggles of where we are at with business and the ability to
deliver for customers and ultimately to grow our community is
really important. And the fact that he made time to come today
is really appreciated.
With that, I yield back.
Chairman PHILLIPS. The gentleman yields back. And now I
recognize the gentleman from Pennsylvania, Mr. Meuser, the
Ranking Member of the Subcommittee on Economic Growth, Tax, and
Capital Access. You are recognized for 5 minutes, Dan.
Mr. MEUSER. Thank you very much, Mr. Chairman. And I thank
the Ranking Member as well.
And thanks very much, Mr. Lockard, for being here and to
our other witnesses.
So ESOPs are certainly a very interesting subject, I think
a very important concept. There are some great situations where
ESOPs have worked out very well, or in the intended manner.
There are also a number of times that ESOPs don't work out very
well, particularly if the company fails.
Right after the loans are taken out, the current owners
cash out in many ways, right, and then move forward with less-
than-favorable returns, and the company starts declining. Then
those loans that took place as well as the new shareholders
that don't do very well, right?
I mean, you know, an ESOP is based upon future growth,
based upon the future. And the thing is this, and I am
interested in what some of the witnesses have to say.
Mr. Lockard, I am all for it. I think the SBA loan program
should work with ESOPs in a far better way. Mr. Chairman, you
brought up there were 17 or something of that nature. So yeah,
that doesn't make any sense at all. It should be utilized more
effectively.
But the problem is--and I have had enough experience in
business, when you have got urgent and important other matters
taking place, such as company survival, you are not
necessarily--you are thinking about next year, but you are
working for survival for today, not so much on growth and such
restructuring in the matter of ESOPs.
So in our Committee--and it is not a reflection of the
Chairman of this Subcommittee--we have not focused on some of
the urgent and important matters that small businesses are
taking right now. And meanwhile, we are the only Committee that
advocates--not necessarily by definition, but as far as I am
concerned--for small business, 100 percent.
So energy issues that our small businesses face, gasoline,
diesel, utilities. I mean, I just visited a company just
recently that changed over to natural gas for the purpose of
saving maybe as much as $1 million a year. You know, they are
about a $40 million company, about $3 million in central
overhead costs. It cut back to $1 million, because of the
increased natural gas. They are up to $5 million-$6 million,
thus losing $3 million off their bottom line before we get out
of the gate, just for the year, and moving into 2023. That, of
course, lowers profits, lowers wages, lowers tax revenues,
right, because their profitability is down. But we are not
talking about that.
Grocery stores. Grocery stores are hurting, right? I mean,
they are in a place where they feel it is a perfect storm
between workforce problems, increases in their cost, increases
of their products, delivery issues. I mean, the list goes on
and on with grocery stores. They are barely surviving, small
mom-and-pop grocery stores to larger grocery stores.
So, you know, these are the things that are going to keep
all these grand ideas of employee ownership from happening. And
we have got to stop it. We need a far more competitive economy.
We need to make small business tax cuts permanent. We need to
reduce the assault on domestic energy. We need to bring down
diesel costs, and we need to stop wasteful spending that
sometimes creates incentives for people not necessarily to
work--not my words, the words of many, many, many small
businesses I talk to.
So, Mr. Lockard, I would like to start with you. What are
your thoughts on some of my comments? Please.
Mr. LOCKARD. I appreciate your comments greatly. I think it
is spot on. There are a number of things that we can do as a
country to try to help small businesses, but I think you are
right, the focus needs to be with what are the problems that we
are facing today and attack those first.
Some things won't be solved quickly. They may take time,
take a lot of strategy. But I think we do need to make small
businesses and their--we need to make them successful in our
country and make it easy for them.
Mr. MEUSER. Does your industry, do you anticipate, as many
do, a recession, whether mild or severe, going into 2023?
Mr. LOCKARD. We do. Construction tends to kind of lag
behind what the economy is doing. And, again, we have been in a
boon for quite a while. But, again, due to construction costs
as well as interest rates, I see that slowing down.
Mr. MEUSER. Yeah. And interest rates play a big role there,
and we seem to be trying to fight inflation with interest rates
when, meanwhile, that is not really affecting the price of
gasoline or diesel. But that is being done by policy.
But, Mr. Chairman, I yield back. Thank you.
Chairman PHILLIPS. Thank you, Mr. Meuser.
With that, I think we are going to go to just a second
round of questions. We have some time. And I will start with
myself.
Returning to you, Mr. Butcher, how does Mosaic operate
differently as an active participant in the M&A market?
Mr. BUTCHER. Well, I mean, we have constructed a
transaction that provides the same economic reward for a seller
than they would get from any other market-based transaction.
And so, for the most part, when we come, we compete direct
head-to-head with private equity, with strategic buyers. Our
offer just looks a little different, because our offer says, We
will invest in this company to support it in transitioning to
employee ownership as opposed to us owning the business, which
we do not.
And so that is how--and because of that, we are able to
compete head to head with those other options. Instead of being
the exception transaction, we are now in the mainstream
transaction. And we have found it to be really effective. And
rarely have we had to match the market, which is, you know,
absolute truth.
We have never been the high bidder in any of these
processes, and owners will choose us at the end of the day. And
we have proven that for all walks of life of people. And so it
gives me great like--it gives me great hope and as sort of the
future that we have proven this out.
Chairman PHILLIPS. And anything you might recommend to this
Committee and the SBA about how it can better tailor its
programs to generate more interest from investors to pursue
ESOPs?
Mr. BUTCHER. I think a couple of things. One is--and I know
there is frustration around the 7(a) program not allowing the
PLP sort of channel in order to do those loans. And I guess
that surprises me, because I hope everybody recognizes that the
banking partners that are the major partners in the 7(a)
program, they all have dedicated ESOP lending teams.
I mean, if you look at every major bank and pretty much
every regional bank, they all have a lending group not doing
7(a) but doing traditional ESOP lending into supporting these
transactions.
And so, it seems to me that if there was a concern around
the structuring of these transactions and the complexity of
them, boy, they could lean on those groups within those banks
that already exist and the infrastructure is already there. And
so I would love to see that.
And the other, if I had a wish, I mean, it would be great
if at some point within the SBIC program, if perhaps, you know,
the size limitation would get increased for these transactions,
only because an ESOP have a really hard time competing for
those really high-quality companies that are sort of sized up
from where we are limited.
And those companies, if you want to move the needle on
employee ownership, those are where there is vast amount of
employees. So that would be interesting, but that is for sort
of future dreaming.
Chairman PHILLIPS. Thank you very much, Mr. Butcher.
Ms. Manklang, we have not forgotten about you. The USDA's
Business and Industry Loan Program does not require a personal
guarantee from co-ops. Instead, it requires co-op members to
sign a covenant to withhold profit distributions until the
agency loan is paid in full.
So could this work for SBA loans to co-ops in lieu of a
personal guarantee, in your estimation?
Ms. MANKLANG. Yes, I think so. This is one of a few
different solutions provided by the USDA, which has had a
really long history of working with cooperatives to great
success. You know, worker cooperatives, in general, you know,
the structure of it is that, you know, workers get paid a
salary. They also get paid patronage.
So that is where the profit goes. And, you know, the
average of that is more than $8,000 per year across all worker
co-ops. And being able to pay that back right away is
definitely a solution. But right now, the USDA's model is only
limited to populations of 50,000 or less.
So I think the SBA is really well-positioned to create a
complementary program, or a set-aside, to fill that gap for
businesses outside of these areas. And I think it is about, you
know, the strength of the shared risk.
You know, the USDA doesn't require a personal guarantee,
and the reason for that is that co-ops are not seen as an
exception at the USDA. You know, we have heard a lot of talk
about like the exception of cooperatives or ESOPs, but it is
really just a different business model, and a lot of times, a
small business model.
And the USDA has outlined requirements that co-ops can
equally participate, and because these businesses are ones that
are able to address survival, to some of the points that have
been brought up before by Representatives.
You know, there are longstanding businesses that are able
to address the immediate survival needs, like businesses that
make plans. You know, like, for instance, South Mountain
Company in Massachusetts made a plan after the downturn of
2008, and they were ready. And there are people that are
innovating on creating/using limited co-op associations to
pivot and meet the needs of the market and create businesses
and create jobs where there are none.
Chairman PHILLIPS. Great. And since my time is expired,
just a quick question and a yes-or-no answer if you would.
Do you believe the SBA is doing enough outreach and
education to inspire more co-op creation?
Ms. MANKLANG. No, I do not.
Chairman PHILLIPS. Thank you.
With that, I am going to recognize the Ranking Member, Ms.
Van Duyne, for 5 minutes.
Ms. VAN DUYNE. I actually don't have any questions, so I
yield back.
Chairman PHILLIPS. Okay. Any other Members wishing to ask
an additional question?
Mr. FLOOD. Mr. Chair.
Chairman PHILLIPS. Mr. Flood is recognized for 5 minutes.
Mr. FLOOD. I would like to, once again, thank Mr. Lockard
for being here. Thank you for making a trip to Washington, D.C.
And I guess just one final opportunity for you to react to the
testimony that you have heard today.
Your business depends on other businesses thriving enough
that they can expand into new space or build a new commercial
facility. When you talk to prospective clients of your company
in construction, and not so much about building a building,
what do they tell you are limiters on their growth? What do you
hear from other Members of the Lincoln Independent Business
Association? When you go to those LIBA meetings in Lincoln,
what are people talking about that are really the barriers for
companies like yours and theirs from growing?
Mr. LOCKARD. Right now, I think for a lot of them it is
just straight uncertainty, and again, when will costs come
down? Will they actually come down or is this a new normal for
us?
The labor market, you know, we just voted in Nebraska to
raise minimum wage over the next 3 years. That doesn't affect a
business like mine as much, because all of our workers are
skilled and they are not at the minimum wage level.
But my sister-in-law has a company who--it is called The
Chocolate Season. They make artisan chocolates and coffee they
ship across the United States. Labor is very impactful to them.
So there are a lot of limiters, I would say, and most of them
are just uncertain about what are things going to look like.
Mr. FLOOD. Mr. Phillips, our Chairman, talked about--his
question to the last witness was, you know, is the SBA doing
enough to reach out?
Let's ask a similar question: Is the SBA a relevant agency
for businesses in Lincoln, Nebraska, that are looking to grow,
maybe young businesses? Do you hear much about the SBA? Do you
feel like the SBA loans are working or that there is enough
outreach?
Mr. LOCKARD. I think, for the most part, they are working.
And, I mean, obviously, even my sister-in-law, she was able to
get an SBA loan for her business to start it up in Lincoln. And
without that, she would not have been able to open up her
business.
Other companies that I work with, they are able to get SBA
loans as well. And we work with the local banks and credit
agencies in Lincoln and around Lincoln, but for the most part,
I think they have been very successful in getting what they
need. On a few occasions, they have been turned down or hit
regulation that may not have made sense to them or to us, but
it caused them to not be able to get the loan that they wanted.
Mr. FLOOD. I am pleases to hear that. And I will end with
this: There is a cigar bar in my district that just got an SBA
loan, but in order to qualify for the SBA loan they had to do
an environmental impact statement that was costly and took time
away from the process and delayed the opening.
Now, this was a small--this is a small-size shop. Very
fortunate to have the SBA option, but that environmental impact
statement set the process back as they went through the
process.
So I think there are things that we can streamline when it
makes sense. And, Mr. Lockard, I am pleased to hear that you
have seen good things, and I am pleased to hear your sister had
success with the SBA loan.
I yield back. Thank you.
Chairman PHILLIPS. Thank you, Mr. Flood. Absent any more
questions, I will move to my closing statement and ask that Mr.
Flood maybe consider a congressional delegation to the cigar
bar at some point.
I think two things can be true at once. These are tough
times for all businesses, small businesses in particular. I am
a small business owner. I have been in business my whole life.
I recognize how inflation, workforce development, and
permitting--and permitting--are complicated.
And I look forward to working with my colleagues on both
sides of the aisle on this Committee to doing this important
work. I think we are in violent agreement, and I find that a
great opportunity.
I also heard some very promising comments from both sides
about the importance of sharing more ownership. I think it is
terribly important and particularly, as Mr. Flood pointed out,
for rural America, where I want to see more businesses
developed. I want to see more ownership. I want to see people
work hard and be able to retire with dignity and possibility.
And I think that we can do that together if we work together,
and I surely look forward to doing so here in the next
Congress.
I come from a family that, as I said earlier, believe
business is a means to an end. The end isn't just collecting as
much money as possible; rather, sharing as much as possible.
And I brought with me my family's bonus and profit sharing-plan
from 1941, 1941. We have been doing this for generations,
because we have seen the impact it makes on individuals and the
communities in which we live and our businesses operate.
And I refer to information from the National Center for
Employee Ownership that indicates that in ESOPs, employees earn
wages that are 5 to 12 percent higher than employees in
conventional firms. The net worth of employee owners aged 28 to
34 is 92 percent higher than in nonemployee-owned firms. And
the retirement savings for an ESOP employee is $170,000, which
is twice the national average.
I can't imagine anybody objecting to my premise that more
ownership is better in America, and we should be working
together to inspire that and I look forward to so doing.
There are challenges. I think the SBA can surely be doing a
better job to educate, inform, advise and encourage. It is our
job to provide oversight and the resources to do so, because I
think this can be a legacy-making opportunity for this
Committee and the businesses that pursue them.
Aligning workers' and owners' interests is an American
interest, not a Democratic or Republican one, and I look
forward to inspiring that as well. So to anybody interested in
this kind of work, let's keep it going. I think there is a lot
of shared sentiment and great opportunity.
With that, I will ask for unanimous consent that Members
have 5 legislative days to submit statements and supporting
materials for the record. Without objection, so ordered.
If there is no further business to come before the
Committee, we are now adjourned and I thank all of our
witnesses and my colleagues for showing up today. Thanks,
everybody.
[Whereupon, at 12:40 p.m., the Subcommittee was adjourned.]
A P P E N D I X
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