Contributing Author: Gwenllian Kern-Allely, Law Clerk
On August 13, 2018, the 2019 National Defense Authorization Act (N.D.A.A.) was signed by the President of the United States. It is the fastest N.D.A.A. passed by Congress in twenty years, with large bipartisan support. The House of Representatives passed the 2019 N.D.A.A on July 26, 2018 with a vote of 359-54, and when the Senate voted on August 1, 2018 the votes were 87-10. While the majority of the act focuses on defense spending and military positions, Title VIII – Acquisition Policy, Acquisition Management, and Related Matters, Subtitle F – Small Business Matters, contains twelve sections detailing improvements to government support of small businesses.
The Main Street Employee Ownership Act (“the Act”) sought to expand Small Business Administration §7(A) to encourage the creation of more employee owned companies in the United States. Initially passed by the House and introduced to the Senate in May 2018, the Act was incorporated into the 2019 N.D.A.A in June 2018.
This legislation is a sign of the times. With a large number of retirees looming, the economy of the United States may be on the precipice of a crisis if steps are not taken. In the next 10 – 15 years, over $10 trillion worth of assets will be for sale. Typically, the liquidation of the business means the end of numerous jobs, and the sale of a business does not guarantee a continuance of employment. In 2017, there were 9,919 closed transactions, a 27% increase from the number of closed transactions in 2016. The growing sale of small businesses is bound to continue as the baby boomers retire. Already 2018 is poised to top the number of closed transactions: 5,383 small businesses have closed transactions in the first two quarters.[1]
Employee ownership presents a solution to the possibility of a mass jobs loss with the number of possible liquidations and sales. Employee ownership, particularly employee stock ownership plans (“ESOPs”), presents a “best of both worlds” situation for the retiring business owner and the business' employees. The retiring owner receives the value of the business through a sale to a qualified employee trust – which is likely the same value the owner would receive if selling the business on the open market assuming a third-party buyer exists. The employees become owners of the business through the trust, with the value of the employees' shares to be paid on their retirement or departure from the business. An ESOP provides a retirement solution to both the employer and the employees, while also giving the owner the fair market price for the business and keeping the employees employed.
The trend of baby boomer business sales is on the rise and is set to continue over the next ten to fifteen years as the boomers retire. Congress has recognized the advantage of employee ownership as a way to safeguard the employees jobs, while also allowing the owner to reap the benefits of his or her business. Now that Congress has passed its first pro-employee ownership legislation in years, it is time for the state of California to begin to encourage its businesses to stay in-state and plan for retirement!
[1] BizBuySell Insight Reports. https://www.bizbuysell.com/news/media_insight.html
