Socialism: update the buyout page for the SBA's October 2026 rules, and admit the gap they leave is narrow

Co-Authored-By: Claude Opus 5.5 <[email protected]>
Claude-Session: https://claude.ai/code/session_01QWPs69B8nQZjtPEUXMKzZx

JoshHeaps.Net/Content/Socialism/buyouts.md

@@ -64,14 +64,14 @@ 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.
-- **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.
+- **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. The SBA doesn't make sellers wait at all, but it counts a seller's loan as part of the buyer's own stake only if nothing is paid on it for the whole life of the SBA loan ([SBA SOP 50 10 8.1](https://legacy.sba.gov/sites/default/files/2026-09/SOP%2050%2010%208.1%20Technical%20Policy%20Updates%20effective%2010.1.2026.docx)). Two years is far short of that, so this is a loan paid last, not a stand-in for workers' cash. Two years is meant to cover the first, riskiest stretch after the sale without asking a seller to wait ten. After that, the lenders' protection gets thinner each year as the seller is paid. The coverage test and the forecast cut below only partly make up for it: they check that the business can pay, but they aren't a cushion if it fails. What the lenders do have in front of them is a smaller loan. The main loan here is about 80% of the price, where an SBA lender can lend up to 90%. 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'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.
 - **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.
 - **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 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 asks the same 1.25 times for a co-op or ESOP buying a business, under the rules that take effect in October 2026, measured on the last year or the average of the last two, with no credit for forecasts. It counts a seller's loan too, unless nothing is paid on it for the whole life of the SBA loan, and it treats a loan with a payment holiday as if it were repaid over ten years or less ([SBA SOP 50 10 8.1](https://legacy.sba.gov/sites/default/files/2026-09/SOP%2050%2010%208.1%20Technical%20Policy%20Updates%20effective%2010.1.2026.docx)). So neither the margin nor counting the seller is unusual. The bank's test is stricter in three narrower ways. It counts cash left after upkeep and taxes, where the SBA starts from earnings before interest, taxes and depreciation, adjusted as the lender judges prudent. It tests the heaviest year of the schedule, not an average. And it counts the cash members need for tax on their profit shares and their account payouts. The SBA also caps all the debt for a purchase at the business's appraised value, as this track does. 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
 
@@ -111,19 +111,21 @@ So buyouts get:
 
 ### 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)):
+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, including the revision that takes effect on October 1, 2026, treat a co-op worse than an ESOP in two ways that matter for a buyout ([SBA SOP 50 10 8.1](https://legacy.sba.gov/sites/default/files/2026-09/SOP%2050%2010%208.1%20Technical%20Policy%20Updates%20effective%2010.1.2026.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.
+- **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. The 2026 rules let a lender cut or waive the cash for an "owner buyout," which can include current employees buying the business as individuals, but only if the buyers already have enough cash and working capital. A co-op buying control is its own category, with no waiver. And workers who bought as individuals would each be owners who have to guarantee the loan, which is the next problem. 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)).
+- **Someone has to guarantee it.** The SBA's rule is that owners of 20% or more guarantee the loan. For an ESOP, the rules say plainly that the workers don't have to. For a co-op there's no such exception, and a second rule applies: 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 co-op advocates and a House committee have pointed to it as a 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)).
+Since the 2026 rules, those two are close to the whole gap. The SBA now has a category for co-op purchases, asks them for the same margin as everyone else, and doesn't require an extra earnings review. For a $3 million business, what's left is about $150,000 of cash, roughly $5,000 each for 30 workers, and one member's signature. A narrower fix could close that: the rule change above, or a small public fund that gives the cash stake as a grant, or lends it on hold for the life of the SBA loan, which the SBA counts as the buyer's own money. The case for putting $100 million into this track rests on those fixes not coming, or on the SBA route still failing co-ops once they do. The track's yearly reports are meant to show which.
+
+Until then, 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.
+- **It asks for the SBA fix first.** Both rules are the SBA's own policy, not written into law. Its regulation says only that owners of 20% or more "generally" guarantee ([13 CFR 120.160](https://www.ecfr.gov/current/title-13/section-120.160)). So the model asks the SBA to give co-ops buying control the same two exemptions ESOPs already have, and Congress if the SBA won't. If that happens, the buyout track lends only where the SBA route still can't serve the deal, says each year how many that is, and returns money it no longer needs to Treasury.
 
 ### Other public help that already exists
 

JoshHeaps.Net/Content/Socialism/open-problems.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. 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. State programs paid for by Treasury and USDA's rural guarantees already allow co-op buyouts in pieces. The track uses them, but can't count them as private money or use them to hide losses ([Other public help](buyouts.md#other-public-help-that-already-exists)). How often private lenders will really take an equal share is unknown, so deals the bank makes alone are capped at a third of the money.
+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)). Under the SBA's rules from October 2026, those two rules are nearly the whole gap, and both are SBA policy it could change itself. If it does, or a small fund covers the cash stake, much of the track may not be needed. Whether that's enough in place of cash and guarantees is something only the loss record will show. State programs paid for by Treasury and USDA's rural guarantees already allow co-op buyouts in pieces. The track uses them, but can't count them as private money or use them to hide losses ([Other public help](buyouts.md#other-public-help-that-already-exists)). How often private lenders will really take an equal share is unknown, so deals the bank makes alone are capped at a third of the money.
 
 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)).
 

JoshHeaps.Net/Content/Socialism/pilot-spec.md

@@ -53,7 +53,7 @@ It breaks down like this:
 
 - **About $290 million for loans.** Around 400 co-ops with a typical first loan of about $500,000 is roughly $200 million. The rest is for follow-on loans to co-ops that grow. For comparison, Shared Capital's average loan is about $230,000. The pilot's loans are larger because it's meant to fund real businesses with real payrolls, not only very small ones.
 - **$30 million, capped, for business help:** $20 million after the first loan (bookkeeping, governance training, legal setup, and more intensive help for half the co-ops, chosen by lottery; see [the support lottery](#the-support-lottery)), and $10 million before it, taken from the loan budget, for a lottery testing whether serious help makes more groups succeed in starting a co-op that lasts ([Help Before the First Loan](before-launch.md)). Venezuela's census blamed many of its failures on the lack of exactly this. This money is a public cost, stated openly and capped, and it's counted in the pilot's total cost to taxpayers. It isn't allowed to hide inside loan pricing.
-- **The remainder** is a cash cushion and running costs.
+- **The remainder** is a cash cushion and running costs. Running costs include audits of small co-ops: about 20 a year drawn by lot, plus those triggered by warning signs, perhaps 30 to 50 in all. At $10,000 to $30,000 each, in line with the SEC's estimates for small firms, that's roughly $300,000 to $1.5 million a year. Like any lender's checking, it's a cost of lending, paid from the bank's income and built into its market rate. Audits of buyout co-ops are charged to the buyout track ([What the Rules Cost a Small Co-op](compliance.md#audits-by-lot-and-when-something-looks-wrong)).
 
 ## Why about 400 co-ops