Building Sustainable Businesses through Employee Ownership at SBA (House Small Business subcommittee hearing, December 6, 2022)

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Transcript of the House Committee on Small Business Subcommittee on Oversight, Investigations, and Regulations hearing Building Sustainable Businesses through Employee Ownership at SBA, convened December 6, 2022 during the 117th Congress, Second Session, published as Small Business Committee Document Number 117-069 (GPO 49-736). Opening statements were delivered by Hon. Dean Phillips and Hon. Beth Van Duyne. Witnesses were Mo Manklang of the United States Federation of Worker Cooperatives, Corey Rosen of the National Center for Employee Ownership, Keith D. Butcher of Mosaic Capital, and Scott Lockard of Hampton Enterprises. The appendix includes post-hearing responses to Hon. Nydia Velázquez and Hon. Chrissy Houlahan and statements from the Bipartisan Policy Center and cooperative organizations.

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“Building Sustainable Businesses through Employee Ownership at SBA (House Small Business subcommittee hearing, December 6, 2022).” Original at www.govinfo.gov. Archived at Pandemic Darlings, https://pandemicdarlings.com/source-documents/building-sustainable-businesses-through-employee-ownership-at-sba-hous-da6273a1fa/, SHA-256 dce8d7130bb6c6c34f070135aff0efc05bfb38f89ce2019fb4525d87c51a511a.

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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

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 VELÁZQUEZ, 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

(II)
CONTENTS
OPENING STATEMENTS
Page
Hon. Dean Phillips .................................................................................................. 1
Hon. Beth Van Duyne ............................................................................................. 3
WITNESSES
Ms. Mo Manklang, Policy Director, United States Federation of Worker Co-
operatives, 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. Velázquez to Ms. Manklang and Responses from
Ms. Manklang ............................................................................................... 42
Questions from Hon. Velázquez and Hon. Houlahan to Mr. Rosen and
Responses from Mr. Rosen ........................................................................... 45
Questions from Hon. Velázquez 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) Coali-
tion .................................................................................................................
(III)
IV
Page
Additional Material for the Record—Continued
Statement from the Worker-Owned Recovery California (WORC) Coali-
tion—Continued
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 [chair-
man 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 re-
quirements 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 em-
bodiment of the American Dream. Of course running a small busi-
ness 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, rath-
er, sharing as much with the employees and the communities that
made it possible.
(1)
2

I have had opportunities to visit employee-owned companies in
my district, like Rainbow Treecare, and learning more about em-
ployee-owned structures has been very enlightening to me. Em-
ployee-owned companies take various forms, but they are united by
the fact that they align with the interest of workers and the own-
ers. 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 se-
curity 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 em-
ployees. Employee ownership is an innovative way to address this
retirement wave that is forthcoming.
Moreover, converting to an employee-owned structure is an effec-
tive 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 ini-
tiatives meant to support all small firms. Unfortunately, despite
the efforts of Chairwoman Velázquez, 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 Velázquez’s Main Street
Employee Ownership Act. The bill included provisions to ease bur-
densome guarantee restrictions and ultimately encourage more
SBA-backed lending to cooperatives and to ESOPs. But unfortu-
nately, the SBA has failed to follow congressional intent and many
of the challenges the bill sought to address continue to vex em-
ployee-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
Velázquez and I introduced two bills that would build on the Main
Street Employee Ownership Act. And finally, finally eliminate bur-
densome 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.
3

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’ struc-
ture and foundation are critically important to their success and
longevity. However, amending requirements at the SBA should al-
ways be viewed with caution. And it cannot be done without con-
sidering all possible ramifications and potential unintended con-
sequences.
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 in-
flation 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 Fed-
eration of Independent Businesses, NFIB, the small business opti-
mism index, lists October as the 10th consecutive month below the
49-year average. It is also no surprise that increasing costs con-
tinue to remain one of the more pressing issues facing small busi-
nesses. 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 sus-
tain in this environment. And as a result of this inflationary time
period, the Federal Reserve has moved to increase interest rates re-
peatedly, 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 impos-
sible. The latest NFIB report shows 46 percent of owners reported
job openings that were hard to fill. Ninety percent of business own-
ers 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 strug-
gle 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 disrup-
tions 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 mil-
lion 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 Com-
mittee should be focused on trying to solve.
4

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 wel-
come 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 hear-
ing is going to proceed. The witnesses will have 5 minutes to pro-
vide 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 fin-
ished.
Just an announcement, Members of Congress are expected in the
Rotunda at 10:45 for the Gold Medal ceremony. So I plan to intro-
duce 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 Co-
operatives. The USFCW is a national grassroots membership orga-
nization 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 Philadel-
phia. 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 or-
ganization 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 Sen-
ate 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 em-
ployee stock ownership plan buyout. He also serves as managing
director with Butcher Joseph & Company, which is an ESOP-fo-
cused investment bank. Prior to founding Mosaic, Mr. Butcher
served as an executive president of Purcell Tire and Rubber Com-
pany, and as an executive director with Morgan Stanley. He re-
ceived his B.A. in international business and finance from Bradley
University and his Doctor of Jurisprudence from Wake Forest Uni-
versity School of Law. We thank you, Mr. Butcher, for being here
today.
5

I now yield to the Ranking Member to introduce our final wit-
ness.
Ms. VAN DUYNE. And our final witness would like to be intro-
duced 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 En-
terprises. 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 Lin-
coln 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 fac-
ing 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 OWN-
ERSHIP; KEITH D. BUTCHER, PARTNER, MOSAIC CAPITAL;
AND SCOTT LOCKARD, PRESIDENT, HAMPTON ENTER-
PRISES.

STATEMENT OF MO MANKLANG
Ms. MANKLANG. Hello. Thank you very much. As Representa-
tive Phillips said, my name is Mo Manklang. I am here to rep-
resent 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 rec-
ognized 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 suc-
cession 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
6

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 im-
prove access to capital and technical assistance, including financing
the sale of business to their employees, working with small busi-
ness development centers to provide training and education on em-
ployee-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 expecta-
tion that we would see this number rise, and that we would see
more worker co-ops being able to access these vital resources pro-
vided by the Small Business Administration.
This is about an even the playing field with other small busi-
nesses, in particular, regarding the personal guarantee require-
ment which has created a distinct disadvantage for co-ops. Asking
a single member, or the selling owner to take on ultimate responsi-
bility 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 busi-
ness.
We see two big issues in regard to support of employee owner-
ship, 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 pan-
demic with many of the worker co-ops who applied for the Eco-
nomic Injury Disaster Loans and the Paycheck Protection Pro-
grams 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 em-
ployee-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.
7

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 em-
power 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 op-
portunity to talk to you today.
45 years ago I was a Staff Member for the Senate Small Busi-
ness Committee working on a bill to create the Small Business Em-
ployee 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 Commit-
tee’s staff and the Senate Committee’s staff to try to fix these prob-
lems 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 re-
spect, 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, accord-
ing 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 peo-
ple—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.
8

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 al-
luded 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 out-
reach 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 guar-
antee, 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 be-
fore 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 min-
utes 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
9

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 com-
panies 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 valu-
able 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 oppor-
tunity for the SBA, and that it is more of—I focus more on the op-
portunity 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 mas-
sive pool of capital, and they are going to consolidate into those in-
dustries.
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 com-
panies to move into employee ownership. We created 1,400 em-
ployee owners. And ultimately, we project that we will produce
something in the range of $130 million to $150 million of retire-
ment value for these employees, all of that enabled by the SBA, al-
lowing us to go through the process and issuing us a license, be-
cause it is the ultimate public-private sort of partnership.
What I see with the 7(a) program is, is that there is the capa-
bility 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 mil-
lion 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 avail-
ability.
It is the reason we created Mosaic, so that we could create a
market-competitive transaction. We enter a traditional M&A mar-
ket process and we win over other options, because owners want
10

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 work-
ers.
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 em-
ployees 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 start-
ing 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 de-
layed 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
11

parts not being available at the factory and labor not being avail-
able 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 ave-
nues 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 in-
creased 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 los-
ing 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 de-
mand 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 mov-
ing 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.
12

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 Velázquez
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 au-
thority 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 ex-
pected 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 proce-
dures 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 re-
sisting 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 em-
ployee ownership as kind of an outlier that they don’t really want
to get into. They did, in their regulation, say something very inter-
esting, 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.
13

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 tradi-
tional 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 entre-
preneur who will forego liquidity in order to do the ESOP trans-
action, 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 Over-
sight, 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 ev-
erybody 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
14

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 con-
struction costs being significantly higher than what they had ex-
pected.
We also have an apartment development that we were looking to
build on one of our properties. Again, as I alluded to in my testi-
mony, the market is there for housing. There is a shortage of hous-
ing. 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 con-
struction 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 polit-
ical term in our industry. It is not a political term with our ten-
ants. 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 unem-
15

ployment and they refused to come work for him while those unem-
ployment 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, Ne-
braska. It sounds like Mr. Butcher is also from Nebraska.
This is a fantastic opportunity for the Committee to hear first-
hand 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 in-
flation 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 fac-
tories, 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 in-
crease.
And then the lost revenue of not having a tenant in there or hav-
ing 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
16

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 struc-
ture, but we haven’t executed on it.
Mr. FLOOD. Would it be possible that one of these limited coop-
erative associations would be more cost-effective as opposed to set-
ting 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 con-
textual 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 coopera-
tives scale very large in ag areas in Nebraska. And one of the bene-
fits 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 cus-
tomers 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 rec-
ognize the gentleman from Pennsylvania, Mr. Meuser, the Ranking
Member of the Subcommittee on Economic Growth, Tax, and Cap-
ital 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, par-
ticularly 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-favor-
able 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?
17

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 effec-
tively.
But the problem is—and I have had enough experience in busi-
ness, when you have got urgent and important other matters tak-
ing 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 be-
fore 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 work-
force 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 re-
duce the assault on domestic energy. We need to bring down diesel
costs, and we need to stop wasteful spending that sometimes cre-
ates 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
18

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 inter-
est 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 dif-
ferently 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 owner-
ship 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 excep-
tion 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 prov-
en 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 pro-
grams 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 sur-
prises 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.
19

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 be-
cause 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 em-
ployee ownership, those are where there is vast amount of employ-
ees. 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 his-
tory of working with cooperatives to great success. You know, work-
er 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 com-
plementary 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 ad-
dress 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.
20

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 construc-
tion, 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 busi-
ness 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 Choco-
late 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 uncer-
tain about what are things going to look like.
Mr. FLOOD. Mr. Phillips, our Chairman, talked about—his ques-
tion 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 agen-
cies 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
21

in order to qualify for the SBA loan they had to do an environ-
mental 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 busi-
ness owner. I have been in business my whole life. I recognize how
inflation, workforce development, and permitting—and permit-
ting—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 oppor-
tunity.
I also heard some very promising comments from both sides
about the importance of sharing more ownership. I think it is ter-
ribly 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 im-
pact 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 Em-
ployee Ownership that indicates that in ESOPs, employees earn
wages that are 5 to 12 percent higher than employees in conven-
tional firms. The net worth of employee owners aged 28 to 34 is
92 percent higher than in nonemployee-owned firms. And the re-
tirement 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 own-
ership 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 bet-
ter 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.
22

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 col-
leagues for showing up today. Thanks, everybody.
[Whereupon, at 12:40 p.m., the Subcommittee was adjourned.]
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