SBA Says Main Street Employee Ownership Act Has Not Produced Many ESOP Loans
The 2018 Main Street Employee Ownership Act was intended to spur lending from the Small Business Administration for ESOP transactions. While the law seemed very clear that ESOPs should be eligible for the SBA’s 7(a) lending program (a program that allows borrowers to get loans through SBA approved lenders rather than having to navigate the more cumbersome process of going to the SBA directly), SBA guidance on the Act excluded ESOPs from the program, as well as adding other requirements for equity in the deal and a separate valuation, that have made the law cumbersome at best.
In a September 26, 2022 proposed rules change affecting non-ESOP transactions, the SBA reports that “Over the past 4 completed fiscal years (FY 2018 through FY 2021), SBA processed a total of 206,415 7(a) loans, of which 31,940 loans (approximately 15.5%) included loan proceeds used to affect a change of ownership. ESOP loans (loans to assist an ESOP trust in acquiring 51 percent or more of the equity ownership in the small business concern) accounted for only 17 loans in the four years between FY 2018 and FY 2021, or fewer than five loans per year, and therefore ESOP loans have not made the anticipated impact in transitioning small businesses to employee ownership as originally intended by the Agency.”
The language “as originally intended by the Agency” is ironic, of course, because while Congress intended the program to spur ESOP lending, SBA regulations had the opposite effect. Comments on the proposed changes can be made through December 27th. While the changes do not affect ESOPs, because they are mentioned in the proposal, it would be appropriate to comment.