Employee-ownership plans increasingly common: Selling to staff allows owners to ease back, gives workers stake in firms' success

March 24, 2008

When Unique Home Solutions owner Bob Dillon started thinking about retirement, he knew he didn't want to sell his company to the highest bidder.

After all, he and his 125 employees worked hard to establish a corporate culture that has helped the service firm triple revenue in recent years-and win the Better Business Bureau's Torch Award for marketplace ethics four times.

So like a growing number of baby boomers, Dillon is planning to sell the business to his staff through an employee stock ownership plan. So-called ESOPs essentially function as a retirement plan for employees, who borrow money to buy a stake in the company from the owner.

As the loan is paid back out of profits, employees get company stock based on their longevity and salaries. When workers leave the company, they can sell their shares back.

ESOPs are attractive to employees and employers alike because workers benefit directly from the company's success. Owners also get to relinquish control gradually.

Dillon is selling a third of the company, commonly known as Unique Window & Door, to employees for about $3 million. The 334,000 shares were placed in an ESOP account March 7. About 90 employees will begin receiving them April 14; the other 35 will receive shares when they've completed their first year of service.

"The ultimate goal is to make [the company] completely employee-owned," said Dillon, 53. He expects to stay involved for at least 10 more years and wants to increase annual revenue from more than $18 million to $25 million by 2012.

That growth rate could allow employees to collect all the existing shares within about seven years, said ESOP financial adviser George Cassiere, president of Indianapolis-based Pace Financial Group.

Unique's revenue has jumped from $6 million to more than $18 million since 2003.

"We have a company that's tripled its revenue and has significant growth, and now [Dillon] is selling it to employees on very, very beneficial terms," Cassiere said. He and Dillon declined to divulge all the terms of the deal, but Cassiere said the interest rate is several points lower than the norm for business acquisitions.

Unique Home Solutions is one of about 9,800 companies to participate in an ESOP plan nationally, according to The National Center for Employee Ownership. That's nearly a 10-percent increase from five years ago.

Leading the charge

Indiana State Treasurer Richard Mourdock knows well the potential for ESOP success. His 16-year stint at Koester Cos., an Evansville-based mining company with an ESOP, gave him the economic stability to pursue his political interests. He supported himself by selling back his Koester stock after leaving the company in 2000.

"Literally, I wouldn't be sitting here [in the treasurer's office] if it weren't for my involvement in an ESOP company," Mourdock said.

As state treasurer, Mourdock hopes to help Indiana become a leader in employee ownership plans. By the end of the month, he said, his office will roll out a "tool box" of literature to help business owners learn more about the exit strategy.

"There's a unique opportunity in the marketplace right now simply because there are so many retiring baby boomers who have the wonderful characteristic of altruism," Mourdock said, saying business owners want to repay the employees who've helped make their business successful.

Indianapolis-based Wood-Mizer Products Inc. is the archetype of a successful ESOP. Since the sawmill manufacturer began its transition to employee ownership in June 2004, sales have increased 55 percent. It became 100-percent employee-owned in November.

The success of companies such as Wood-Mizer is exactly what Mourdock wants to see, but he admits ESOPs won't work for every firm. Despite Koester Cos.' success during his tenure there, the company has since been forced to sell off some of its divisions to stay profitable.

"It's never magic pixie dust," Mourdock said of the transition to employee ownership.

How, then, do business owners know if the strategy can work for them? First and foremost, experts say, the business must be on track for continued growth. Otherwise, its profits will not be enough for employees to snatch up ESOP shares.

Indianapolis-based Herff Jones, named 2007 ESOP Company of the Year by the Indiana Chapter of The ESOP Association, has proven employee ownership through ESOPs can be successful. Since going to an ESOP in 1995, the company's revenue has nearly doubled, to $518 million.

Still, officials for the memorabilia company admit the model won't work at a business where management-employee relations are less than favorable.

A successful ESOP needs "a lot of communication, some sense of history as an organization, and ... some track record of success so employees are not frightened at the prospect" of owning their own company, said Mike Cheek, chief financial officer for Herff Jones. "All of those are true of our situation."

Teamwork and trust, Cheek said, also are pivotal.

"There clearly is an understanding that everyone has a part to play, and everyone is accountable for that part," he said.

Ensuring personal security

Still, employees shouldn't count on ESOPs as their only source of retirement income, Mourdock said.

Pennsylvania-based 401(k) Association President Ted Benna has seen both ends of the spectrum. He's served as adviser to companies in which ESOP shares increased in value and ones where the shares lost value.

Almost every company is bound to take a dive at some point, Benna said, and when shares lose value, employees relying on them are at risk.

"The problem for employees," he said, "is if that happens at the wrong time when you're approaching retirement, it's horrible."

That's why he and other experts urge employees to diversify their investments as early and often as possible.

"I would never suggest [employees] put all their money in just one basket," Mourdock said. " [Employees] need to be making regular contributions [to a retirement fund] on their own."

Experts also say employees must be wary of an owner looking to unload his company too quickly.

"We try to encourage owners to not wait until [they're] 72 and can barely move to start transitioning," said Steve Thompson, trustee of Unique's ESOP and a partner at the Lafayette-based Huth Thompson accounting firm. He has worked with ESOPs for 12 years.

Still in his early 50s, Dillon knows his departure from the company will be a gradual one. Eventually, he hopes to function more as a consultant.

"Obviously, we're taking it a stage at a time," Dillon said.

But if growth continues, Unique employees can look forward to increased ownership. And if Dillon's track record is any indication, they can be sure he won't jump ship before the company is ready.
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