WASHINGTON, D.C. (July 8, 2014) – New data compiled by the National Center for Employee Ownership (NCEO) shows that private employee-owned businesses default on their loans far less than other businesses. In its recently released report, the NCEO finds that the default rate on bank loans to ESOP companies during the period 2009-2013 was, on average, an unusually low 0.2 percent annually. By contrast, mid-market companies in the U.S. typically default on comparable loans at an annual rate of 2 to 3.75 percent.
Noting this tenfold difference between the economic strength of employee-owned companies and other businesses, ESCA President and Executive Director Stephanie Silverman commented, “This new data confirms what we have only known anecdotally in the past: that when private businesses are owned by their employees, incentives and vision align to make them more stable, more successful, and better for employees as well as the larger economy.”
Today there are more than 2,600 companies in the United States that are privately employee-owned businesses through Employee Stock Ownership Plans (ESOPs). The vast majority of these companies are majority or wholly employee-owned. Tax rules enacted in the late 1990s were intended to encourage business owners to convert their companies to ESOPs. Often ESOPs secure bank loans to enable employees to buy their companies from prior owners, and loans are paid off out of the companies’ cash flow. When companies are economically hard hit, they default on loans. “That ESOP companies default ten times less frequently than other businesses is testament to the unique economic strength of employee-owned businesses,” Silverman said.
Stan Slabas, a member of the Board – and former CFO – of S&C Electric Company, a Chicago-based manufacturer of innovative electric power equipment that is 100 percent employee-owned through an ESOP, said, “The NCEO data tells us what we already knew: that when a company transitions to employee ownership, great things happen for the business as well as for the workers. ESOP companies fail less often than other businesses because everyone in the company is a stakeholder.” In order to become an ESOP, S&C borrowed from several banks and a private lender, and then loaned the proceeds to its ESOP so it could acquire the company on behalf of S&C’s workers. “We’re living proof that the confidence that a growing number lenders have in financing ESOP transactions has been well justified. Our story of a strong business, great workers with healthy retirements and steady economic contributions to our community has been replicated across the country, where millions of workers own other private businesses through the ESOP structure.”
Prior reports have shown that S ESOP companies weather economic storms better than their non-ESOP counterparts. A 2010 Georgetown University study by economists Phillip Swagel and Bob Carroll, both former senior Treasury Department officials, found that, during the most recent economic recession, S ESOP firms they surveyed increased employment by nearly 2%, at the same time that overall, employment in the private sector fell by nearly 3%. In his 2013 study, Macroeconomic Impact of S ESOPs on the U.S. Economy, economist Alex Brill of the American Enterprise Institute wrote, “Beyond the immediate benefit they provide to employees and customers, S ESOPs’ positive outcomes yield benefits to the U.S. economy broadly.” Brill’s analysis found that total direct and indirect output from these companies accounts for nearly 2% of gross domestic product.
Bipartisan legislation is now pending in both the House and Senate to enable more private companies to convert to employee ownership. The House version of that measure, HR 4837, also encourages banks to lend to companies to help them become ESOPs or grow employee ownership of the company.
The Employee-Owned S Corporations of America (“ESCA”) is the Washington, DC voice for employee-owned S corporations. ESCA’s mission is to preserve and protect S corporation ESOPs and the benefits they provide to the employees who own them.