ESOPS: UNDENIABLY GOOD FOR BUSINESS

0

Employee Stock Ownership Plans (ESOPs) let owners cash out now and turn staff into owners focused on the bottom line while providing tax advantages to all involved.

ESOPs are not fables. They are real life business models, essentially retirement plans that effectively sell a company to its employees, turning them into owners with many of the benefits and responsibilities as well as concerns of ownership.

There are approximately 7,000 employee stock ownership plans (ESOPs) covering about 14 million employees in the U.S., according to estimates by the National Center for Employee Ownership (NCEO). While there has been a decline in the overall number of plans since the beginning of the 21st century, there has actually been an increase in the number of participants.

In the optical world, companies operating as ESOPs include Walman Optical in Minneapolis, Salem Distributing in Winston-Salem, NC, and NCC Automated Systems in Souderton, PA. Walman, which has been in business for over 100 years since it was founded in 1915, became an ESOP in 1989. Salem was founded 45 years ago in 1972 and became an ESOP 17 years ago in 2000. NCC is the youngest company having been founded in 1986 and the newest ESOP, converting in 2016.

HOW ESOPS WORK
Governed by ERISA (the Employee Retirement Income Security Act), a federal law controlled by the U.S. Department of Labor, an ESOP is a retirement plan under the auspices of the same department responsible for 401k plans and pensions. The ESOP is a trust managed by a trustee. The company stock is held in that trust.

In the case of Walman, 100% of the company stock is held in the retirement plan in the trust. One-third of Salem’s ownership was purchased by its employees in 2002, and the remainder was bought in 2005. For NCC, it holds 42% of the company stock in the ESOP trust because president Kevin Mauger retained 58% ownership in the company.

Being a retirement plan, ESOPs allow employees to cash out when they retire at an amount based on the share value at that time. In order to ensure that there is cash available at the time of retirement, the company must make contributions into the trust. All contributions into the plan are tax free.

After employees retire and cash out their stock ownership in the plan, their shares are reallocated to current participants. Walman Optical’s HR manager Jill Gerrick said, “It’s Walman’s philosophy to be an employee-owned company into perpetuity, so we are constantly recycling those shares.”

Success can be a double-edged sword, however, because the company is required to buy back the shares of a retiring employee, and when the value of those shares is high, the cost of buying them back is high as well. This can be a “huge cash strain on the company,” Gerrick said.

THE BENEFITS
Overall, the benefits of converting your company to an ESOP are substantial and can include increased employee productivity and company profitability, the ability to retain control of your company while selling your stock in a tax-free sale, receiving tax-free proceeds greater than from a sale to an outside buyer, and the opportunity to repay the debt with tax deductible or tax-free dollars.

There are soft reasons and there are hard reasons for converting a company to an ESOP, according to Mauger. “Soft reasons are hard to quantify. They’re the decisions made from the heart,” he said. “From a business perspective, there are cold, hard facts that employee-owned companies retain key employees better and perform better.”

As might be expected, when working for an ESOP, employees literally take ownership of their work and the company overall. “We feel employee owners say, ‘I own stock in the company where I work and can affect the stock price by my efforts. If I do a good job and provide quality manufacturing or selling or a service, whatever my specific job description is, if I do it to the best of my abilities I can drive business results,’” said Gerrick.

When Salem went to 100% employee owned, there was a palpable difference in attitude. “It was almost like we woke up the next morning and realized, ‘Okay, now we have to be responsible for the things the previous owner worried about,’” said controller Gale Marett. “We stress employee engagement and want people to take ownership. We’re all in this together and pulling for the same thing.”

In addition to changing employees’ perspectives so they act more like owners, there are other benefits as well. According to Gerrick, “It allows us to invest in our business and maintain it in the U.S., something that is also a selling point to our customers. We’re an American company keeping jobs here and investing here, and we’ve been able to do a number of acquisitions over the 28 years we’ve been an employee-owned company. We’ve acquired a number of independent wholesale labs and turned them into ESOPs too.”

Marett agrees that converting a company to an ESOP can help keep a company successful without having to sell out or move. “Selling out to a competitor was the last thing he wanted to do, and he kept those jobs right here in the Winston-Salem community,” said Marett about Salem’s previous owner, Bob Long.

“I’ve worked for other companies before, and I can’t imagine why every company wouldn’t want to do this,” she concluded.

ESOP Resources
Employee Ownership Foundation: a 509(a)3 public foundation whose primary purpose is to support programs that will increase the level of awareness and appreciation of the benefits of employee ownership and increase the number of employees who have access to this benefit. EmployeeOwnershipFoundation.orgInfo@EmployeeOwnershipFoundation.org • 202.293.2971
The ESOP Association: a national nonprofit organization with 18 local chapters, its members include ESOP companies, companies considering an ESOP and service providers that assist in setting up and maintaining ESOPs. Founded in 1978, the Association seeks to enhance federal laws governing ESOPs, provide members with expert information and fund research via its affiliate, the Employee Ownership Foundation. ESOPAssociation.orgESOP@ESOPAssociation.org • 866.366.3832
National Center for Employee Ownership (NCEO): a self-sustaining nonprofit membership organization that provides practical resources and objective, reliable information on ESOPs, equity compensation plans and ownership culture. A primary publisher and research source in the field, NCEO holds dozens of webinars and in-person meetings annually and provides services to thousands of members and others. NCEO.orgCustomerService@NCEO.org • 501.208.1300

Share.

Leave A Reply