Critical Industries and Employee OwnershipPreventing the quiet closure of the companies working-class America depends on
More than half of business owners in defense, manufacturing, and other critical industries are over 55, and an estimated 900,000 companies face succession risk over the coming decade. Employee stock ownership plans are a proven tool for keeping these firms intact, protecting jobs, and preserving productive capacity in the communities where they operate.
Introduction
Ownership succession trends put the vitality and productive capacity of the U.S. industrial base at risk.
There is bipartisan consensus that a robust industrial base is at the core of America's national and economic security. Several federal agencies have identified industries with particular strategic significance, spanning sectors such as information technology, manufacturing, transportation and logistics. Using the most recent lists by the Department of Commerce (DOC) and Department of Defense (DoD), 20% and 9% of all companies are defined as operating in a critical sector.1
The Business Succession Crisis in Critical Industries
Baby boomers make up the largest group of business owners in the country.2
As this generation has been reaching retirement age—a phenomenon known as the "Silver Tsunami"—a record number of privately held businesses are faced with a change of ownership in the coming years.3
Too often exiting business owners either 1) close the business for lack of an interested buyer or family successor or 2) are faced with selling to a competitor or financial buyer that may not be committed to keeping jobs and production in the region or even the United States.4
Either scenario may hurt our national productive capacity.
Over half (52%) of firms defined as critical by the DOC and the DoD have an owner that is aged 55 or older. This means that 14% of American businesses are both operating in critical industries and are likely to undergo an ownership transfer in the next five to ten years. At a conservative estimate, this translates to around 900,000 American companies that could be at risk.5
Policymakers can bolster the viability of employee ownership as a succession alternative to counteract these threats to the U.S. industrial base.
Employee Stock Ownership Plans (ESOPs) are a Prevention Tool
Selling a closely held business to an ESOP is an opportunity to preserve domestic production while building generational wealth for American workers. Empirical evidence suggests that ESOP companies are shown to be more resilient, grow faster and lay off less workers during economic downturns than competitors.6
Recent evidence suggests further that ESOP-owned manufacturing firms boast higher labor productivity than their peers, offering one potential remedy to the overall productivity slowdown in the U.S. manufacturing sector.7
ESOPs Have a Strong Track Record of Operating in Critical Industries
The current landscape of ESOPs proves that this ownership structure is well-positioned to be a leader in preserving the national industrial base in critical industries. Depending on the definition of critical industries, ESOPs are 40 to 75 percent more likely to be in a critical industrial sector than the average company. 38% of all ESOPs are defined as critical by either the Department of Commerce or Defense compared to 27% of all firms. 35% of ESOPS are critical as defined by only the Department of Commerce, and 14% by the Department of Defense, compared to 20% and 9% of all firms.8
Employee Ownership Can Help Convert the Risk of Business Succession in Critical Industries Into a Competitive Advantage
Business succession presents a clear risk to our industrial base, but we can turn those risks into opportunities by creating favorable conditions for the growth of employee ownership.
ESOPs face both capital access and regulatory barriers that have impeded the growth of the field, but addressing these issues offers an additional tool to prevent offshoring and the attenuation of U.S. productive capacity. The stakes for getting this right are highest in industries that are critical to our national security.
By reducing the financing and regulatory barriers that currently discourage the sale of U.S. businesses to their employees through an ESOP, policymakers have a bipartisan opportunity to enable U.S. businesses in strategic sectors to remain domestically owned and operated once those businesses are sold. With an expected generational wave of privately held business succession over the next decade, employee ownership is an increasingly important tool to strengthen our economic security including the interests of American workers. Reindustrializing America requires a proactive strategy to confront business succession—employee ownership is uniquely positioned to convert these risks to our industrial base into an enduring competitive advantage.
