A Rural Loan Program Change Means More Employees Can Buy a Retiring Owner’s Business

This post is part of the series, SmallBusiness.com Guide to Government Resources for Small Business Owners and Managers: Guide to U.S. Programs and Resources for Small Business You can browse other posts in the series below.

  1. A Rural Loan Program Change Means More Employees Can Buy a Retiring Owner’s Business

  2. U.S. Resources for Women Business Owners

  3. U.S. Resources for Employers and Job Seekers

  4. U.S. Resources for Small Business: USDA Rural Development

  5. U.S. Small Business Resources for Military Veterans

The retirement of Baby Boomers who own businesses means there’s 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, according to Sam Rikkers, USDA administrator, Rural Business Service. A recent change in a U.S. Department of Agriculture (USDA) loan program addresses one challenge of succession-oriented lending in rural areas.

A change in a major U.S. rural loan program means that employees, not just off-spring of the owner, can access the loan program as part of a business succession plan. Under the previous Rural Development Business and Industry (B&I) Guaranteed Loan Program rules, loans for purchasing businesses required complete ownership transfer. That meant that the selling owner could not retain any financial or ownership interest during the transition of ownership. The limitation was a part of the loan program because it was assumed in previous generations that all such transitions were from parents to children. Under that assumed scenario, the need for a staged transfer of ownership was not envisioned.

However, such a requirement made it difficult for employees wishing to purchase the business to access financing; it was impossible for them 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 supports 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.