[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

                              ----------                              


                       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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