The retirement of the baby boom generation of business proprietors is predicted to result in a major turnover in ownership. Developing an ownership succession plan is especially challenging in rural areas where many small businesses are at risk of closing from the lack of locally available financing to keep them in operation. Rural Development’s Business and Industry (B&I) Guaranteed Loan Program now has new capabilities as of this August that specifically accommodate the needs of financing ownership succession.
B&I guarantee borrowers can now apply to loans for financing the transfer of business ownership within a family, usually involving a sale from parents to children. Prior to recent changes in the rules it was assumed that within families the transfer of ownership was always a seller-financed transaction. Yet, some retiring business owners may need to immediately take the sales revenue out to finance their retirement.
In some cases, the children of rural small business owners are either not available or not interested in taking over the family business. In such cases another group that might be interested in sustaining the business and its legacy are the employees. Under the previous B&I rules, loans for purchasing businesses with a B&I guarantee required complete ownership transfer so that the selling owner retains no financial or ownership interest. This requirement made it difficult for the employees to take on such large loans and did not permit the selling owners to stay involved for transferring the know-how for running the business.
The new B&I rules provide for staged financing and support succession planning when selling to employees. If a business converts to a worker cooperative or forms an employee stock ownership plan for the purpose of transferring 100 percent of the ownership to employees, a series of B&I guarantees can be applied over a 5-year period. During this period, selling owners may stay involved with the business as they receive payments in exchange for their ownership shares.
The B&I program also provides loan guarantees for purchasing preferred stock that is issued by a cooperative. This feature can be used to help the conversion of businesses to worker cooperatives. Residents of a rural community may want to purchase preferred shares to help strengthen the financial structure of a cooperative, as well as local businesses that could obtain loans with B&I guarantees to buy large blocks of such stock. Another feature is that the selling owners may continue their membership in the worker cooperative so long as their governance rights are equal with all other members. Many owners want to sell their small business but also stay active to ensure continued success for the enterprise and its service to the community.
Ultimately, this is one more tool in the toolbox to help rural businesses not only survive, but thrive. These important employers then can remain productive, contributing members of the local economy not just as a source of jobs, but often as a part of the identity of the community they call home.