Successful Succession: Considering the ESOP

No matter if the business is brand-new or going on its centennial anniversary, deciding who will take over after they retire is an important choice that every business owner will make.

Experts agree it is important to start succession planning several years in advance, not just the year before deciding to retire. That is because there are several variables to consider when succession planning, such as which family members will be involved if the business is being passed down, or who will buy the business if family is not an option.

Each option comes with its own pros and cons. Plenty of consulting teams exist to help business owners navigate this process, and it’s recommended that business owners work with their own financial and legal experts to find the best course of action for their businesses.

One option worth considering is the employee stock ownership plan. The first ESOP was established in the late 1950s, but the idea did not take off as a popular succession plan until the 1970s. ESOPs had previously had a bad reputation because of unscrupulous business owners misusing them to get out of debt, but after the Employee Retirement and Income Security Act of 1974, which implemented regulatory structures that are still in use today, ESOPs became a much stronger and attractive option for succession.

HOW DO THEY WORK?

When business owners are looking to retire or leave the company, but have nobody in particular to pass it down or sell to, creating an ESOP can ensure the company’s continuation and success.

“Employee ownership is a great way to invest in employees and the community, and continue the legacy of the business you started,” said Daniel Goldstein, president and CEO of Folience. Folience, a Cedar Rapids holding company whose properties include the Gazette newspaper, was recently awarded the ESOP Association’s National 2022 Employee-Owned Company of the Year award.

Selling to private equity or strategic buyers comes with a chance the company could be broken up and resold, or have operations moved elsewhere, Goldstein explained. This creates a problem for the employees and surrounding community who may have relied on the jobs that the business provided. ESOPs keep a company local and give back to the employees who have helped to build it.

Essentially, ESOPs work as a retirement plan for each employee. Each company may have different specifics, but in general, the employees are given a portion of the company’s stock, and then receive profits from the stock in a retirement fund. The company itself is still run by a board of directors, and management remains largely the same.

Peter Voorhees, board chairman of Standard Golf in Cedar Falls, put it simply: “If you own Microsoft stock in a 401(k), you don’t get to tell Bill Gates what to do. You get the benefits of that stock. That’s what you get in an ESOP.”  Standard Golf, which makes golf course accessories, was a third-generation  family-run business, with many long-term employees. Voorhees, who had been president of the company from 1982 to 2021, said no other family members were interested in carrying it on. While planning for the business’s future, Voorhees and his team decided an ESOP would be best for the company, and established one in 2017.

“So often when a company gets bought out, new management has an entirely different idea of how they want to run things. … They outsource jobs, move the headquarters or close it altogether,” Voorhees said. “There was a sense of relief that that wasn’t going to happen to this company.” 

BENEFITS OF AN ESOP

Employee ownership is an attractive benefit that a potential employee might be excited by, no matter where their potential job falls in the company. It also can help retain employees long-term because of how the benefits are distributed and accumulate over time.

“It doesn’t matter what your gender, what your education level, your age, or even what your job title is. So long as you’re working for an ESOP, you can earn stock in the company, which means that even somebody who may not have had higher education or a fancy job title can earn enough to fund their retirement,” said Goldstein.

The ability to build a solid retirement fund is nothing to sneeze at. However, ESOPs go beyond money, and beyond only benefiting employees. They can often promote a sense of teamwork and loyalty from employees across the company’s spectrum, which makes the company itself even better overall.

“Every day they come into a good culture that emphasizes safety, collaboration, quality and productivity, and that’s what really makes a difference,” said Goldstein, who also serves on the board of trustees for the Employee Ownership Foundation and the board of directors for the ESOP Association.

“Done correctly, it can really support a strong culture of service to our customers, because everybody has skin in the game,” said Ken Feldmann, CFO of Employee Owned Brands. Employee Owned Brands, headquartered in Fairfield, became 100% employee-owned through an ESOP in 1987. 

“I’ve seen it in action. … Once people can see their statement grow every year, it really does energize [our employees] and get people engaged,” said Feldmann. Workers take pride in their success, and the success of their colleagues, because the results reward everybody.

SUCCESSFUL ESOP TRANSITIONS

When considering the succession plan for Standard Golf, Voorhees looked at several options until deciding “an ESOP was the best course of action both for me personally, for the employees and the future of the business.” Voorhees had been thinking about what would come next for his company for about 10 years, and said he recommends other owners give themselves plenty of time as well.

“You do have to have a team of consultants and lawyers and accountants and so forth to get through that process. It went fairly well for us, but it takes a while to do all that,” he said. 

Goldstein recommends getting in touch with the ESOP Association and the National Center for Employee Ownership for any advice. There are also education programs available for CEOs of established ESOPs that are available through the Employee Ownership Foundation.

“Really network with other ESOPs, they’re very collaborative and happy to help each other and give advice,” said Goldstein. “It takes education, communication and effort, and the payoff is absolutely worth it.”

While all owners are different, and each company may have different needs, Feldmann said he would encourage any business owner to look at an ESOP as an option for succession, “because it’s a great way to reward those employees that have been with them and helped along the way, and for a business owner to provide a legacy.”