Written Testimony of Tabitha Croscut, Esq., Shareholder of Devine, Millimet & Branch, P.A., January 24, 2024

Summary

Written testimony of Tabitha Croscut, a shareholder of the New Hampshire law firm Devine, Millimet & Branch, P.A., before the Senate Committee on Small Business on January 24, 2024, on Employee Stock Ownership Plans as an ownership succession strategy. The testimony reports that roughly 6,500 ESOPs in the United States cover almost 14 million participants as of 2023, and that approximately 30 ESOPs in New Hampshire cover over 4,600 participants and hold more than $800 million in retirement asset value. It describes two New Hampshire companies that sold stock to an ESOP, and identifies low awareness of ESOPs and a shortage of lending capital as the two main obstacles. It states that only 17 SBA loans between FY 2018 and FY 2021 assisted ESOPs in acquiring 51% or more of a small business.

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                   WRITTEN TESTIMONY OF TABITHA CROSCUT, ESQ.
                SHAREHOLDER OF DEVINE, MILLIMET & BRANCH, P.A.
            BEFORE THE SENATE COMMITTEE ON SMALL BUSINESS AND
                                          ENTRPRENEURSHIP

                                              January 24, 2024


Good afternoon Chairman Shaheen, Ranking Member Ernst, and members of the Committee.
My name is Tabitha Croscut and I am a Shareholder at the New Hampshire law firm of Devine,
Millimet & Branch, P.A. For over twenty years I have helped my clients, who are owners of
both small and large privately held businesses, to assess, consider, and navigate the feasibility
and implementation of Employee Stock Ownership Plans (ESOP) as an ownership succession
and employee incentive strategy. I would like to thank you for the opportunity to appear before
you to discuss the importance of succession planning and for allowing me to share with you how
and why ESOPs can be a better option for many business owners looking for a sustainable and
impactful succession strategy.

                                               ESOP Statistics

Before I share with you a couple ESOP success stories from the State of New Hampshire, I
would like to outline some important statistics for background.

One recent survey has estimated that “[e]ighty-seven percent of American businesses are family-
owned or controlled.” 1 In New Hampshire, the Center for Family Enterprise out of the
University of New Hampshire reported that around eighty-five percent of businesses in the state
are family owned. 2 Across the U.S., these family owned businesses represent “54% of U.S.
GDP and 59% of employment, meaning family-owned businesses directly affect more than half
of U.S. workers.” 3 However, according to an often cited 2021 survey done by PwC, “only 34%


1
  Arturo Holmes, “Most family businesses don’t look like ‘Succession.’ Here’s what America’s enterprising families
bring to the table”, Fortune (May 29, 2023), available at https://fortune.com/2023/05/29/most-family-businesses-
dont-look-like-succession-heres-what-americas-enterprising-families-bring-to-the-table/.
2
  Paul Briand, “An enterprising endeavor: Center for Family Enterprise expands to encompass all NH businesses”,
Foster’s Daily Democrat (Jul. 3, 2019), available at https://www.fosters.com/story/business/2019/07/07/center-for-
family-enterprise-expands-to-encompass-all-nh-businesses/4749136007/.
3
  Holmes, supra note 1.
[of respondents] said they had a robust, document and communicated succession plan in place.” 4
Those are just the family-owned businesses in our communities. Others also report that “baby
boomers who are at or near retirement age own nearly half of the nation’s privately-held
businesses,” and” more than half of small business owners expect to retire in the next 10 years,
[with] fewer than fifteen percent hav[ing] a formal exit plan in place.” 5 As a result of such lack
of planning, many companies are bought up by third parties, such as private equity firms, and
some even close their doors when they are unable to find a buyer. For other business owners the
lack of planning results in lower value paid for an investment they have spent their lives and
livelihood to build. This is a challenge for not only the business owners, but also for the many
families and communities that rely on their companies.

It is not my position that private equity is “bad” per se, or even that selling to a third party is bad,
but rather that for many successful, small businesses—family owned and community centric—an
ESOP could be a better alternative. Unfortunately, the ESOP alternative has far less public
awareness than third party sales, but offers small businesses in many cases a more favorable and
higher impact alternative.

The National Center for Employee Ownership (NCEO) estimates that, as of 2023, there are
roughly 6,500 ESOPs in the United States covering almost 14 million participants. 6 The vast
majority of these ESOPs own stock in privately held companies. 7 More than half of these
privately held companies have what are referred to as “small plans”, meaning they include under
100 participants. 8 According to the NCEO, more than half of the nation’s ESOPs are
professional science or technical services, manufacturing and construction companies. 9




4
  “PwC’s 2023 US Family Business Survey” (May 16, 2023), available at
https://www.pwc.com/us/en/services/trust-solutions/private-company-services/library/family-business-survey.html.
5
  Rutgers School of Management and Labor Relations, “Main Street Employee Ownership Act Summary”, available
at https://smlr.rutgers.edu/sites/smlr/files/Documents/Faculty-Staff-Docs/3-21-
18_main_street_employee_ownership_act_summary_5_copy.pdf.
6
  National Center for Employee Ownership, “Employee Stock Ownership Plan (ESOP) Facts”, available at
https://www.esop.org/#:~:text=Employee%20Stock%20Ownership%20Plan%20(ESOP,covering%20almost%2014
%20million%20participants.
7
  National Center for Employee Ownership, “Employee Ownership by the Numbers”, available at
https://www.nceo.org/articles/employee-ownership-by-the-numbers.
8
  National Center for Employee Ownership, supra note 7.
9
  National Center for Employee Ownership, “A Statistical Snapshot of ESOPs: Company and Participant Numbers,
and Industry Distribution”, available at https://www.esop.org/infographics/statistical-snapshot-esops.php.
According to information collected annually by the U.S. Department of Labor, in the Granite
State there are approximately 30 ESOPs in privately held companies. 10 Of these ESOPs,
approximately 27 are headquartered in New Hampshire (and that’s important) –small towns in
the Monadnock Region or White Mountains, cities like Manchester or Salem. 11 These are
companies that are staying in New Hampshire and are heavily invested in the success of their
communities. Those 30 New Hampshire ESOP owned companies cover over 4,600 participants,
of which approximately 3,300 of those are identified as current employees. 12

In New Hampshire, most of the ESOP owned companies are smaller businesses; in fact, more
than two-thirds have under 100 employees. 13 Taken as a whole, however, these small businesses
have ESOP plans that have accumulated significant wealth for their employee-participants.
Together, New Hampshire ESOPs hold more than $800 million of retirement asset value for the
employee-participants of those plans. 14 New Hampshire ESOPs also come from a wide variety of
industries: approximately 33% are manufacturing companies, 30% professional services, 17%
construction, 10% retail, and healthcare, finance and insurance, and miscellaneous services each
make up 3%, respectively. 15

Given the positive impact of ESOP owned companies, you might be wondering, why are there
only 30 ESOP owned companies in New Hampshire? I believe there are two primary obstacles
to the utilization of ESOPs as a positive succession strategy, not only in New Hampshire, but
across the United States. First, there is low public and professional awareness about ESOPs.
Second, there is a shortage and/or absence of lending capital for ESOP formations and their
related stock acquisitions from business owners, which puts ESOPs at a disadvantage.

Before proposing how we can address those obstacles, I would like to take a few minutes to
share with you a couple ESOP success stories from New Hampshire. I think these stories
demonstrate well why ESOPs should be an option for any successful small business owner
looking to make an impactful ownership succession planning choice.


10
   National Center for Employee Ownership, “NCEO analysis of Dept. of Labor Form 5500 data” (last accessed Jan.
17, 2024).
11
   Id.
12
   Id.
13
   Id.
14
   Id.
15
   Id.
                                       Yankee Publishing

Since 1792, across the U.S. consumers have thumbed through The Old Farmer’s Almanac to
predict the weather, learn a couple of jokes, or obtain new gardening tips. The Almanac is the
oldest continuously published periodical in North America, and, for many years, Yankee
Publishing has owned the exclusive rights to it.

Based in rural Dublin, New Hampshire, Yankee Publishing is an 88-year old family business that
publishes (in addition to The Old Farmer’s Almanac), Yankee Magazine, New Hampshire
Magazine, and the NH Business Review, to name a few. It employs approximately 75 people in a
region of New Hampshire where the town populations typically consist of 2,000 people or less.

When it came time to start seriously considering an ownership succession plan, Yankee
Publishing had almost a dozen third generation shareholders, two of which worked in
management, and a number of other family member shareholders. The combined ownership was
looking ahead to around twenty-two children, and none of them were particularly interested in
running the company. The need for a viable ownership transition strategy became pressing.

Ownership considered all of the standard succession options, including a shareholder buyout and
a management buyout, however, no one had the capital or interest to pursue this option further.
They next turned to the idea of selling the company to a third party, but not many people lined up
to buy a publishing/media company. Ownership next considered selling the assets of the
business. This was not seen as a viable option primarily because it would likely result in
operations being moved out of Dublin and employees losing their jobs. Ownership felt they had a
duty to continue to preserve not only the family legacy, but also Yankee Publishing’s
commitment to the community. As such, they spent some time researching other non-mainstream
ideas, including the ESOP, and decided to go forward with the sale of the Company’s stock to an
ESOP for the benefit of the company’s employees. Leadership of Yankee Publishing decided to
approach the stock sale by selling 30% to the ESOP in 2019 and the remainder in 2022, which
demonstrates the flexible and accommodating nature of the ESOP. Today the Company is 100%
ESOP owned and the two shareholders that worked in the business before the sale of stock to the
ESOP, continue to work at Yankee Publishing today.
Yankee Publishing ultimately chose the ESOP option for their ownership transition because the
shareholders were willing to be patient with receiving fair value for their shares and they
believed the ESOP would allow their business to remain independent and headquartered in
Dublin; that employees would be able to retain their jobs, and, most importantly, that the
employees, many of whom had been employed by Yankee Publishing for a long time, would get
to share in the future value of Yankee Publishing.

I can report that today the 75 employee-owners of Yankee Publishing, headquartered in rural
New Hampshire, are very happy with the decision of prior family ownership to sell the business
to an ESOP.

                                              Geokon

Now let me turn to a different and important industry - manufacturing. Geokon is a
manufacturer of geotechnical and structural health instrumentation. Although they are
headquartered in Lebanon, New Hampshire, they have an international presence. In the 1970’s,
after graduating from Oxford with an engineering degree, the company founder was working in
the mining industry in Canada and began to see that modifications needed to be made to the
geotechnical monitoring and measuring instrumentation that he was working with. Geokon was
later formed in 1979 in Lebanon, New Hampshire in order to do just that – and it has been very
successful.

For over 40 years now, the company has enjoyed consistent growth – they have acquired
multiple buildings in Lebanon, New Hampshire, while also adding small offices in Singapore
and Chile. As the founder would tell you, a central reason for their success is a culture that
revolves around the concept of giving back to the community and Geokon’s employees.

While the founder was at the helm of Geokon, the industry saw (and continues to see) many
acquisitions by private equity consolidating manufacturing as well as service providers. With this
in mind, and because of the founder’s employee-centric philosophy and commitment to the
community, he started looking for alternative business succession planning options. His research
took many years, but after he learned about it, he knew the ESOP was the right fit for Geokon.

Important considerations in his decision to pursue an ESOP ownership transition included the
realization that an ESOP would reward the employees, that it would maintain the local,
community presence, that it would protect the business from being dismantled by industry
focused private equity, that management would be able to retain day to day operational control,
that there would be significant tax benefits for the company, and that there would be an
opportunity to leverage the ESOP to further foster an employee culture of continuous
improvement and success.

Today, approximately 140 employees of Geokon are still located in Lebanon, New Hampshire
and benefit from ESOP ownership in the company.

                                          Legislative Changes

While both Yankee Publishing and Geokon are great examples of successful ownership
transitions utilizing ESOPs, we continue to struggle with the challenges of access to capital and a
greater awareness of the ESOP succession strategy. Chairman Shaheen has supported several
policy solutions to address such issues, including The Main Street Ownership Act passed in
2019, the Worker Ownership, Readiness, and Knowledge (WORK) Act in 2023, and Employee
Equity Investment Act (EEIA) bill introduced in 2023, but more is needed. The Main Street
Ownership Act passed in 2019 was championed as a win for ESOPs, but it was in fact slow in
providing additional access to capital for ESOP transitions through SBA’s 7(a) lending program,
which due to certain procedural requirements, actually had minimal ESOP loans funded by the
program. Since passage of the Act in 2019, I personally assisted only four companies to utilize
SBA 7(a) loans in successfully financing their ESOP ownership transitions. According to the
SBA reports, between FY 2018 and FY 2021 there were only 17 SBA loans to assist ESOPs in
acquiring 51% or more of the equity ownership of small businesses. 16 Why have the numbers
been so low? Unfortunately, the Act fell short in fully streamlining the lending process for small
companies that desire to utilize an SBA 7(a) loan to finance an ESOP’s purchase of company
stock from the business owner. The exclusion of ESOP loans from the Preferred Lending
Program caused inconsistency and delays in the review and approval of SBA 7(a) loans. Those
are delays and risks that business owners are not willing to accept. However, I do believe that
recent steps taken by the SBA to remove barriers in the SBA 7(a) loan process have been


16
   National Center for Employee Ownership (Oct. 31, 2022), “SBA Says Main Street Employee Ownership Act Has
Not Produced Many ESOP Loans”, available at https://www.nceo.org/employee-ownership-blog/sba-says-main-
street-employee-ownership-act-has-not-produced-many-esop-loans.
successful. Just last month I assisted a business owner in transitioning 100% of their stock in a
sale to an ESOP utilizing an SBA 7(a) loan, and the process was much faster! We must
continue to streamline the SBA 7(a) loan process to make it more appealing to small business
owners.

Turning to the other primary obstacle, The Main Street Ownership Act also directed the SBA to
promote awareness of ESOPs and employee ownership. As previously mentioned, awareness of
ESOPs is a primary barrier to businesses utilizing ESOPs for their ownership transitions. If a
business owner and their professional advisors are unaware of how ESOPs work or that they
even exist, they will lose out on the opportunity to transition ownership to an ESOP and instead
sell to a third party buyer or simply shutdown the company. While The Main Street Ownership
Act directs the SBA to promote such awareness, a step in the right direction, that only helps
when the SBA has adequate support, structure and resources to implement that directive. The
Employee Ownership Expansion Network reports that 40% of the 957 ESOPs created from 2014
through 2017 were by businesses located in states that had centers for employee ownership – that
is a formal organization in the state to provide resources and education around the benefits of
ESOPs. 17 The Work Act also took a big step in the right direction, as it requires the Department
of Labor to establish an employee ownership initiative to promote employee ownership, which
includes funding existing state programs or creating new ones. Again, we have seen initiatives
passed previously but have limited impact due to how they were actually implemented. Focus
needs to be given to ensuring the Work Act funding is made available quickly to those
organizations that can maximize employee ownership outreach. The numbers show that if we
can support the expansion of state centers throughout the United States while also empowering
the SBA’s promotion of ESOPs through Small Business Development Centers (SBDCs) and
Women Business Centers (WBCs), business owners will have more access and be better
educated on the ESOP succession option, which will lead to stable jobs and stronger
communities.

Lastly, a number of our small businesses take advantage of programs for disadvantaged groups,
including programs for minorities, women and veterans, to name a few. These businesses are


17
  Employee Ownership Expansion Network, available at https://www.eoxnetwork.org/state-centers (last visited Jan.
19, 2024).
then penalized when they consider an ESOP ownership transition because the various
certification requirements to qualify for such preferences generally require some portion of the
company’s stock to be owned by eligible members of the disadvantaged group, which does not
consider the ESOP. As a result, those business owners must choose between a 100% transfer to
ESOP ownership with a loss of their preferential status, or keeping their preferential status while
finding an alternative ownership transfer option; which is a choice that typically has negative
implications on the value of the stock of such business if they choose a sale to an ESOP.
Fortunately, legislation has been proposed to address these barriers. The Employee Equity
Investment Act (EEIA) directs SBA to study and report on alternative solutions for ESOPs, issue
rulemaking to provide a path for majority ESOPs to maintain their contracting preference, and
provide a two year grace period for majority ESOPs to maintain their preferential status. The
EEIA also seeks to help bridge the capital gap that small businesses experience when considering
options other than a third party sale.

                                            Conclusion

In conclusion, there is a significant challenge for all privately held businesses across the United
States - ownership succession. There are limited solutions for a business owner to solve that
challenge. I propose to you that ESOPs can be a greater part of that solution, which will keep
good jobs intact, strengthen local communities and, at the same time, allow business owners to
receive the value of their businesses. With more awareness and understanding of the ESOP
option, as well as greater and easier availability of capital to small businesses, we can ensure this
once in a lifetime decision for many business owners to sell their companies, is also a win, win
for employees and the communities they live and work in.

I appreciate the opportunity to appear before this Committee. I look forward to answering any
questions you may have.


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