Every business owner comes to that point in life when he or she has gotten older and needs to transition out of his or her business. It is inevitable. Recently, I turned 61. While I still love trees and love working in a company that cares for them, I know I cannot do it forever. As I looked to the future, I realized I had limited choices. This included selling to a large national company, selling to a venture group or, as I later found, selling to my employees.
As I considered these options, I could not overlook the fact that my company would not be what it is without the people who built it. And if I sold it, I would, in effect, be selling them. However, if I did an employee stock ownership plan, or ESOP, I could sell it to them. So I did.
There are a lot of great things about ESOPs, starting with the fact that you are bringing wealth to a community of people who now have the opportunity to build their own futures. Here are some benefits of ESOPs:
• The selling shareholders receive the full value for the business.
• ESOP employees typically have retirement accounts that are 2.5 times the average 401(k).
• The culture of the company is kept intact.
• The selling shareholders often stay with the company in their same roles.
• A 100% ESOP company pays no corporate taxes.
ESOPs are not for every company. The most important element is to have a ready group of employees who can keep the business intact while continuing to grow it. Without that, a stand-alone ESOP is not a viable option.
The process: There are firms that specialize in helping companies become an ESOP. They make the process easy, but it can be expensive. Our company hired a consultant who connected us with independent ESOP specialists. This included an accountant, an attorney and a trustee team to represent the employees. This team made it a seamless process and cost one-third the price of some other options. No matter your working style, there are a variety of ESOP companies or contractors to support your organization.
How does it work for employees? All employees become part of the ESOP after being with the company for 12 months, after which they start receiving stock, which then vests over the next six years. Our company uses a 40-year stock-distribution plan, which means we distribute 2.5% of the stock per year. This is given to all employees, with amounts based on longevity and salary. We decided to use the 40-year distribution plan because we are trying to prevent a culture of haves and have-nots as well as avoid a bubble of payments as people begin to retire.
When it comes time for an owner to transition out of a company, an ESOP is a great alternative as opposed to selling the company outright. There are many advantages, including the fact that ESOP-company employees are typically more engaged and overall happier than their non-ESOP counterparts.
Tom Prosser is senior director of TCIA’s Board of Directors. He is the founder and CEO of Rainbow Companies, which includes Rainbow Treecare, an accredited, 33-year TCIA member company; Rainbow Treecare Scientific Advancements, a 33-year TCIA corporate member company; and T&S Growth Solutions, all located in Minnetonka, Minnesota.