Socialism: firm up the buyout numbers against the SBA's own rules

Co-Authored-By: Claude Opus 5.5 <[email protected]> Claude-Session: https://claude.ai/code/session_01QWPs69B8nQZjtPEUXMKzZx
2026-09-25 17:10:10 -06:00
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@@ -61,10 +61,14 @@ So should [the bank](the-bank.md) lend for these sales? This page's answer is **
 ### The seller shares the risk
 - **At least 20% of the price is paid to the seller over time**, and only after the bank's loan payments are made. If the price was too high and the business struggles, the seller's payments stop before the workers' jobs do.
- **That share shrinks if the forecast was wrong.** If profits in the first three years come in more than 20% below what the appraisal assumed, the seller's share is cut by a formula written into the sale. That puts a price on selling just before a drop the seller saw coming.
+- **Nothing is paid on it for the first two years.** Interest builds up, but the seller's payments start only in year three. The workers here put almost nothing in up front, so the seller's waiting share, a loan paid last, is what stands between the lenders and a loss. It isn't the same as workers' own money, and two years is weaker than what the SBA asks: it counts a seller's loan toward the buyer's stake only if nothing is paid on it for the whole life of the SBA loan ([SBA SOP 50 10 8](https://web.archive.org/web/20260619001535/https://www.sba.gov/sites/default/files/2025-05/SOP%2050%2010%208%20Technical%20Updates%20effective%206.1.2025.docx)). Two years covers the stretch when a new owner is most likely to stumble, without asking a seller to wait ten. The coverage test below is what makes up the difference. Anything else paid to the seller in those two years, such as adviser's fees, waits with it and is paid last too.
- **The seller is protected like a lender, and only like a lender.** The seller's share carries a legal claim on the business's assets, behind the bank's, and the right to be paid. It carries no say in how the co-op is run.
+- **The seller's loan has limits of its own.** Its interest rate can't be higher than the bank's own rate on the deal plus 4 points. That's a higher rate than the bank gets, because the seller is paid last and waits, but it's capped: any interest above the cap counts as part of the price, so it can't be used to slip past the appraisal cap. The deal file states what the seller's loan is really worth at a going rate for loans paid last, so everyone can see how much of the price is money now and how much is a promise. The loan is due within ten years of the sale, extended by any time its payments had to wait (below), with interest still building at the capped rate. A cut for a wrong forecast (next point) applies to the interest that has built up too, not just the original amount.
- **Pay isn't cut to pay the seller.** In any year the co-op cuts its members' pay rates below where they were before the sale (after inflation), the seller's payments wait. They're owed later, not cancelled.
+- **That share shrinks if the forecast was wrong.** If checked profits over the first three years average more than 20% below what the appraisal assumed, the price is treated as too high by the shortfall beyond 20%, and that amount comes off what's still owed to the seller, up to all of it. On a $2.5 million sale with $500,000 still owed, profits 30% below the forecast cut $250,000 (10% of the price); profits 40% or more below cut the whole $500,000. The cut is measured against the whole price, not just the seller's remaining share, because a seller who knew a drop was coming was paid most of the inflated price in cash at closing. There's no cliff, so a few dollars of profit either side of the line don't swing the seller's payout, and nobody on either side has much reason to nudge the books.
- **The debt has to fit the business.** The bank lends only if the business's checked profits cover all the loan payments, the bank's, the private lender's and the seller's, plus the cash members need to pay tax on their profit shares ([Member Capital Accounts](capital-accounts.md#where-each-years-profit-goes)), with a real margin to spare. The margin (for example, profits of at least 1.25 times the payments) is part of the lending standards filed before the first loan ([Making It Last](durability.md#what-a-new-board-cant-change)).
+- **Neither side can tilt the test.** Profits for the test are counted under the same accounting rules as the pre-sale restatement, with all pay, members' and managers' alike, held at pre-sale rates per unit of work (after inflation), and upkeep at its normal level. So the co-op can't shrink the seller's share by raising pay, hiring ahead, skipping repairs or moving costs into the test years. If profits jump back in year four, costs shifted into the test years are added back. The seller gets the audited accounts and the calculation, and either side can send a dispute to an accountant from the bank's panel, whose answer is final. The seller's payments due in year three wait in a separate account until the test is settled.
 - **Only half of an industry-wide fall is forgiven.** A fall that hits the whole industry is measured by a public index, chosen for each industry in the lending standards filed before the first loan, not picked deal by deal. Which industry a firm is in is fixed at signing, from the industry code on its last tax return before the sale. Half of that fall is taken out before the test, and half stays with the seller. A seller shouldn't carry all of a recession they couldn't have known about, but the workers shouldn't carry all of it either. The adjustment works both ways: if the industry grew, the forecast is raised by half the growth before the test.
 - **The seller is protected like a lender, and only like a lender.** The seller's share carries a legal claim on the business's assets, behind the bank's, and the right to be paid. It carries no say in how the co-op is run. The seller signs a written agreement with the bank and the private lender to be paid behind them, and can't demand early repayment or seize assets while the bank's loan is unpaid. If the seller sells the loan to someone else, every rule here, the wait, the cut and the pay protection, binds the new holder.
 - **Pay isn't cut to pay the seller.** In any year the co-op cuts its members' pay rates below where they were before the sale (after inflation), the seller's payments wait. They're owed later, not cancelled, and the due date moves back by the same time, so the waiting payments don't pile up into one lump at year ten.
 - **The debt has to fit the business.** The bank lends only if the business's checked cash flow, what's left after normal upkeep spending and taxes, covers all the loan payments, the bank's, the private lender's and the seller's, plus the cash members need to pay tax on their profit shares and the capital-account payouts that will come due ([Member Capital Accounts](capital-accounts.md#where-each-years-profit-goes)), with a real margin to spare: checked cash flow in each of the last two years, and on average over the last three, at least 1.25 times the payments in the heaviest year of the schedule. That's usually year three, when the seller's payments start on top of everything else, with the interest that built up during the wait. The SBA's own minimum, under the rules in force since June 2025, is 1.15 times, and for a change of ownership it can rest on a forecast of reaching that within two years ([SBA SOP 50 10 8](https://web.archive.org/web/20260619001535/https://www.sba.gov/sites/default/files/2025-05/SOP%2050%2010%208%20Technical%20Updates%20effective%206.1.2025.docx)). Many lenders ask for more than the SBA minimum, so 1.25 times is a normal lender's margin, not an unusual one. What's different is that it has to be met on past results, not a forecast, and after the seller's wait ends. The SBA has published a revision of these rules, reported to take effect in October 2026. This comparison is to be updated from the new rules once they take effect, and if the SBA's floor ends up as strict, the page will say so. The margin is part of the lending standards filed before the first loan ([Making It Last](durability.md#what-a-new-board-cant-change)).
 ### The workers decide
@@ -102,7 +106,25 @@ So buyouts get:
  The two tracks pass or fail on their own. A good buyout record can't rescue a failing startup test, and a bad one can't sink a passing one.
-If the bank's share of a typical deal is about $1.5 million, half the limit, $100 million funds roughly 60 to 70 buyouts. That's too few for the tight survival comparison the startup test uses. So survival is published and compared, but as evidence, not as a pass-or-fail line. The terms of every deal are published: the price, the appraisals, the loans and the seller's share.
+### Why not just use the SBA?
 The SBA can already back a loan for a co-op to buy a controlling share (51% or more) of a business. But its rules, as they stand since June 2025, treat a co-op worse than an ESOP in two ways that matter for a buyout ([SBA SOP 50 10 8](https://web.archive.org/web/20260619001535/https://www.sba.gov/sites/default/files/2025-05/SOP%2050%2010%208%20Technical%20Updates%20effective%206.1.2025.docx)):
 - **Cash up front.** Buyers in a change of ownership have to put in at least 10% of the cost themselves. An ESOP buying control is exempt. A co-op isn't. A seller's loan can cover up to half of that, but only if nothing at all is paid on it until the SBA loan is repaid. So the workers would still have to find at least 5% of the project's total cost in cash, including fees and any working capital, and more if the seller won't wait that long. For a $3 million business, that's $150,000 or more, from people most of whom don't have it.
 - **Someone has to guarantee it.** Every SBA loan needs at least one person or company to guarantee it. For an ESOP, the rules say plainly that the workers don't have to. For a co-op there's no such exception: if nobody owns 20% or more, which is normal in a co-op with more than a handful of members, "at least one of the owners must provide a full unconditional guaranty." That means asking one worker to promise their house and savings for everyone's loan. Lenders have long asked the same of co-ops in practice, and it's a main reason co-ops have rarely used the SBA since Congress opened it to them in 2018 ([The Pilot](pilot-spec.md#why-a-new-bank-not-existing-programs)).
 The bank's track replaces both. The seller's waiting share, paid last, takes the place of the workers' cash. The bank lends without personal guarantees, relying instead on the seller's share, the coverage test and a private lender taking part, and pricing what's left of the risk into its rate. That's a real risk the SBA's rules are there to guard against, and the track's loss rate is how it's judged ([below](#who-buyouts-are-compared-against)).
 To make sure the bank isn't just taking deals the SBA would have done anyway:
 - **Its rates are published next to the SBA's.** Each year, the bank publishes its average rate on buyout loans alongside the typical rate on matched SBA change-of-ownership loans, taken from the SBA's own loan data. The bank will usually charge more. The gap is roughly what doing without the workers' cash and a worker's house costs, along with the bank's own costs.
 - **Ordinary lenders have to say no first.** Before the bank lends, the co-op must have asked two lenders with no ties to the deal and a real record of lending for business purchases, one of them a conventional lender and not only the SBA route, and been turned down on a standard form that says why. The forms are published with the deal file.
 - **It counts its own overlap.** The bank publishes each year how many of its deals could have met the SBA's terms, by a definition fixed in the lending standards before the first loan.
 - **It asks for the SBA fix too.** The model asks Congress to give co-ops buying control of a business the same two exemptions ESOPs already have. If that happens, the buyout track lends only where the SBA route still can't serve the deal, and says each year how many that is.
 ### How many deals
 After the $5 million for advisers and governance help, $95 million at about $1.5 million a deal, half the limit, funds roughly 60 to 65 buyouts. With a private lender and the seller's share on top, that typical deal is a business priced around $2.5 million. That's too few for the tight survival comparison the startup test uses. So survival is published and compared, but as evidence, not as a pass-or-fail line. The terms of every deal are published: the price, the appraisals, the loans and the seller's share. So is what happened to them: every cut to a seller's share, every year payments had to wait, and the losses on deals the bank made alone, reported apart from the rest from the start.
 ### Who buyouts are compared against
@@ -135,6 +157,7 @@ Three groups of businesses can be followed. None of them makes a clean experimen
 ## What this doesn't solve
 - **The workers pay for what they helped build.** A fair price is a price for the owner's years of ownership, and the workers pay it out of profits their own work will produce. This model accepts that, because the alternative is taking the business, and it doesn't take anyone's business. The rules keep the price fair. They can't make it free.
 - **These loans have less behind them than ordinary ones.** Almost no cash from the buyers, no personal guarantees and a seller who waits two years, not ten. The coverage test and the seller's paid-last share carry the weight that cash and guarantees carry in an SBA loan. If that isn't enough, it will show up as losses above the published rate, and the track fails its test.
 - **The seller always knows more.** Written disclosures, checked profits and a shrinking seller's share make hiding problems costly. They can't make it impossible.
 - **A fair price is a matter of judgment.** Appraisals are estimates. The rules make overpaying harder and put the seller's own money behind the price, but they can't make valuation exact.
 - **The vote can be pressured.** A secret ballot, a neutral ballot and a majority of everyone eligible help. They can't stop a well-liked owner or manager from leaning on people in the break room.
@@ -15,7 +15,7 @@ This model doesn't buy, seize or convert anyone's company. Instead it builds new
 - **Workers own their company.** Every member gets one vote. A share of the profits grows with tenure until long-time members split them equally, per hour worked, which is how federal tax law lets co-ops pay tax on it only once. Salaries still exist, and hard jobs still pay more. Part of each year's profit goes into a personal account that pays it back a few years later on a fixed schedule, whether or not you've left, which is designed to keep it outside federal pension law, and part goes into a permanent reserve that keeps the business investing. Members can't drain it through high pay or let the equipment quietly wear out, and big bets get an outside opinion first. An insurance pool the co-ops pay for protects workers' last paychecks and part of their savings if the co-op fails. A fair, fast process deals with members who won't do the work, with protections so it can't be turned on the wrong people. Members are the co-op's employees, so they get the minimum wage, overtime and injury insurance like anyone else. Where the law leaves owners out, of unemployment insurance in some states or of union protection, the co-op's charter fills what it can. Membership comes automatically after a short probation, so co-ops in high-turnover work like home care don't end up run by the few who stay. Where Medicaid requires 80% of home care payments to go to care workers, co-ops meet it from wages alone. Equal shares give members a reason to turn down growth into lower-paying work, so co-ops can grow by starting new co-ops they invest in instead. [Worker Ownership](worker-ownership.md), [Does Sharing the Profit Mean Less Effort?](free-riding.md), [When People Don't Stay Long](high-turnover.md), [Owners Are Still Workers](labor-law.md), [When Growing Means Sharing](growth.md), [Member Capital Accounts](capital-accounts.md), [How a Locked Co-op Is Taxed](taxes.md), [Protecting Members' Savings](savings-guarantee.md) and [Investing for the Long Run](the-long-run.md)
 - **A small public bank lends to worker co-ops.** It charges market rates, so it only succeeds if co-ops can really compete. Its whole job is to be willing to lend to a kind of company other banks won't. Spain, Italy and the US have all tried versions of this, and the pilot is built around what went right and wrong. [The Bank](the-bank.md) and [Has This Been Tried?](precedents.md)
- **Owners who want to sell to their workers can.** The bank lends for these sales on a separate track, with its own $100 million and its own test. Only healthy firms qualify, there's no new tax break, the price is capped at an independent appraisal, the seller shares the risk, and the whole workforce votes. Its results are compared with SBA-financed purchases and ESOP sales, and its pay test follows everyone who worked there at the sale. [When an Owner Wants to Sell to the Workers](buyouts.md)
+- **Owners who want to sell to their workers can.** The bank lends for these sales on a separate track, with its own $100 million and its own test. Only healthy firms qualify, there's no new tax break, the price is capped at an independent appraisal, the seller shares the risk, and the whole workforce votes. It serves deals the SBA's rules shut out, which ask a co-op, unlike an ESOP, for cash up front and one worker's personal guarantee. Its results are compared with SBA-financed purchases and ESOP sales, and its pay test follows everyone who worked there at the sale. [When an Owner Wants to Sell to the Workers](buyouts.md)
 - **Co-ops funded this way stay co-ops forever.** They can't be sold to conventional owners, and members can't vote to cash out what earlier members built. An independent lock-holder can veto any attempt, including selling the business off piece by piece. If a co-op goes bankrupt, only another co-op can buy it whole, and its workers get a real chance to be that buyer. That needs an amendment to federal bankruptcy law, drafted here. [The Lock](the-lock.md), [When a Locked Co-op Goes Bankrupt](bankruptcy.md)
 - **It runs as an honest experiment.** A one-time $350 million pilot aims to fund about 400 new co-ops. The success measures are published before the first loan. If, after twelve years, co-ops stay open about as well as similar conventional firms while paying their members fairly, and the bank earned at least what Treasury bonds would have, Congress votes on growing it. If not, it shuts down automatically. It's built so that a hostile government can't quietly freeze it or rig the result, though Congress can always repeal it. It also tests, by lottery, whether serious help before launch gets more co-ops started. Part of the loan money is set aside for co-ops in lower-paid work, so the bank can't drift toward only the safest co-ops, and the verdict has to say which kinds of co-ops it covers. The pilot can't show whether co-ops lift pay at other employers. Even after a pass, a sector big enough for that is decades away nationally. So growth comes in capped stages, and that effect gets its own test in a few local markets. [The Test](the-test.md), [The Pilot, in Numbers](pilot-spec.md), [Help Before the First Loan](before-launch.md), [Who the Bank Lends To](who-gets-loans.md), [After a Pass: How Big, How Fast](scale.md) and [Making It Last](durability.md)
 - **Co-ops back each other up.** They pool part of their profits into a shared fund. If one fails, its workers are moved into others instead of being left with nothing. [The Federation](federation.md)
@@ -35,7 +35,7 @@ An honest list of what the model hasn't solved yet, most dangerous first.
 11. **Federal or state?** *(Mostly answered.)* The test stays federal, because one bank with one plan makes one clean experiment. Any state can copy the bank under the same published rules, reported separately, and a model state law protects the lock ([Making It Last](durability.md#federal-test-state-copies)). Still open: whether a few state lenders sharing one plan would have been the stronger experiment after all, since the most durable public bank in America, North Dakota's, is a state bank.
-12. **Voluntary buyouts: in or out?** *(Answered.)* In, on a separate track: $100 million of its own, healthy firms only, a willing seller, no new tax break, a capped price the seller shares the risk on, a vote of the whole workforce, and its own test of money and pay, so it can't flatter the startup result ([When an Owner Wants to Sell to the Workers](buyouts.md)). Still open: whether a price set by the market is fair to workers who pay it out of their own future work, and whether about 60 deals can show more than that the loans get repaid. The comparisons are now set out: SBA-financed purchases, ESOP sales and deals that fell through, with a loss rate fixed by formula in advance ([Who buyouts are compared against](buyouts.md#who-buyouts-are-compared-against)). With so few deals, the loss test can catch a track that does much worse than SBA lending, but it can't show that buyouts do better.
+12. **Voluntary buyouts: in or out?** *(Answered.)* In, on a separate track: $100 million of its own, healthy firms only, a willing seller, no new tax break, a capped price the seller shares the risk on, a vote of the whole workforce, and its own test of money and pay, so it can't flatter the startup result ([When an Owner Wants to Sell to the Workers](buyouts.md)). Still open: whether a price set by the market is fair to workers who pay it out of their own future work, and whether about 60 deals can show more than that the loans get repaid. The comparisons are now set out: SBA-financed purchases, ESOP sales and deals that fell through, with a loss rate fixed by formula in advance ([Who buyouts are compared against](buyouts.md#who-buyouts-are-compared-against)). With so few deals, the loss test can catch a track that does much worse than SBA lending, but it can't show that buyouts do better. Why co-ops can't simply use the SBA is now spelled out: its rules ask a co-op, unlike an ESOP, for cash up front and one member's personal guarantee. The bank's deals do without both, so they rest on the seller's paid-last share and a coverage test on past cash flow ([Why not just use the SBA?](buyouts.md#why-not-just-use-the-sba)). Whether that's enough in place of cash and guarantees is something only the loss record will show.
 13. **Work where people don't stay long.** *(Partly answered.)* In home care, most workers leave within a year or two. Membership is now automatic after a short probation, the buy-in comes out of profit shares rather than pay, and pushing people out before they'd join counts against the co-op ([When People Don't Stay Long](high-turnover.md)). Still open: with a five-to-ten-year profit share ramp, only a small minority of care workers ever reach a full share, so the people who stay collect much of the profit the others helped make. A much shorter ramp for low-margin, high-turnover co-ops would fix that, but it would go against the founding plan's range and weaken the ramp's protection against under-hiring. Also open: whether default members take part in governance, and whether Social Security counts a profit share as earned income for SSI, which decides whether members on SSI lose more by joining. SSI may also count an account credit as income when it's made. Until Social Security answers, members on SSI get their share all in cash and join only if they say yes ([How a Locked Co-op Is Taxed](taxes.md#benefits)), and workers who have only an IRS taxpayer number still can't be members. How labor law treats worker-owners now has its own page ([Owners Are Still Workers](labor-law.md)). Federal labor law probably doesn't protect members' own organizing, so the charter does, and fixing the law takes a separate bill that may never pass. Some states leave members out of unemployment insurance, and whether founders' unpaid work before the co-op forms is outside wage law still needs the Labor Department's answer. A federal rule due in 2030 requires 80% of certain Medicaid home care payments to go to care workers' pay. Co-ops meet it from wages alone and pay any shortfall as wages, but in that work it leaves little room for profit shares or a reserve, and whether the rule survives is unknown ([When Medicaid decides how much goes to pay](high-turnover.md#when-medicaid-decides-how-much-goes-to-pay)).