Employee stock ownership plans can provide tax advantages for a company and provide an exit strategy for business owners looking to retire. Best of all, it can offer an attractive employee recruitment and retention benefit.
Story by Rick Berg
Attorney and CPA Robert A. Mathers knows well the value of maximizing tax advantages for ongoing business operations, as well as for business owners’ estate and succession planning. Yet, he says, it’s a mistake to focus first on the tax implications of any business restructuring.
“If the tax tail is wagging the dog, that’s probably not the right strategy for that company and its owners,” said Mathers, a shareholder and business consulting specialist in the Oshkosh office of von Briesen & Roper. He adds a good succession planning process begins with identifying the existing owners’ goals, developing best-case scenarios and exploring options.
In Mathers’ world, those options are plentiful, but there’s no question that an employee stock ownership plan – more commonly referred to as an ESOP, for short – has the rare ability to positively impact succession planning while also helping businesses compete for talent.
“It’s a unique and compelling tool for attracting and retaining employees,” Mathers said.
Aaron Juckett, founder and president of Appleton-based ESOP Partners, said that’s one of the leading reasons some business owners opt for an ESOP. Studies have shown that ESOP companies tend to outperform their non-ESOP competitors, Juckett noted, largely because employees with an ownership stake are more personally connected to the company’s success. (See “ESOP Fables, Facts and Figures,” page 27.) That, in turn, creates an attractive company culture for current and future employees.
“ESOP businesses are able to create an employee benefit, reward employees who have helped build the company, provide employment stability and increase job satisfaction to build an ownership culture and then promote that culture and those benefits to new recruits,” Juckett said.
“Employees in ESOP owned companies typically have a higher wage and more retirement assets than employees in non-ESOP owned companies, because there is more cash flow to reinvest in the company and the employees with the tax savings,” said Stephanie Geurts, CPA, a partner in the Oshkosh office of Suttner Accounting. “Research and statistics imply that employees feel incentivized to grow their own personal wealth, which enhances their productivity.”
Leaving a legacy
For some business owners, creating an ESOP is a way of ensuring that the company they’ve created remains in local control, even if there is no next-generation family member in place to carry on. This is especially true when there are long-time and loyal employees who have helped build the business.
One of the longest-standing ESOP companies in northeastern Wisconsin is Kaukauna-based Keller Inc., which launched its ESOP in 1986. The company’s founder, Walter Keller, was looking for a succession model that would carry on the customer service values he believed in and reward the employees he valued.
“The Keller ESOP remains very robust 31 years later, employing over 50 construction crews throughout the Midwest, along with a larger number of office personnel,” said Keller President Wayne Stellmacher. “We need our employees to think like an owner and act like an owner. This drives our attitude about putting our customers first and treating them how we would want to be treated.”
More recently, three other northeastern Wisconsin businesses created ESOPs for reasons similar to Walter Keller’s.
Elipticon Wood Products in Little Chute launched its ESOP in August 2015 as the culmination of owner John Wiley’s desire to “share some of the financial value of the company with its employees,” said current Elipticon CEO Doug Gilbert.
“He saw it as a way to pass on his legacy,” said Pat Heckner, Elipticon’s controller and marketing director, as well as a 21-year veteran of the company.
In March 2015, Vehicle Security Innovators of Green Bay completed its conversion to an ESOP as an alternative to selling the business to outside investors.
“When the selling owners bought into VSI in 2005 and 2006, our original intent was to grow the business and then sell it. Over the years, we came to the realization that most potential buyers would be located outside of the Green Bay area and that a sale could jeopardize the jobs and careers of our employee group,” said Chief Financial Officer Bob Arnold, who was president and majority owner at the time of the ESOP conversion. “We were very much aware that the employee group enabled our success and we did not want their jobs and careers to be at risk. We realized that going down the road of an ESOP allowed them to control their own destiny.”
“At VSI, our corporate culture is an extremely important determinant of our continued success,” said Jay Yeaso, the company’s current president. “This culture includes an ownership mentality which is reinforced by the ESOP. The ESOP helps each employee to focus on making the company better.”
In January of this year, Green Bay-based Bayland Buildings completed the process that began five years ago when owner Steve Ambrosius chose the ESOP model as his retirement transition plan.
“He has always been an owner who has placed a high value on taking care of his employees,” said Dean Hunt, Bayland’s director of marketing and business development. “He wanted to reward his employees and help secure the future growth of the company by giving his employees a stake in the company.”
The owner mentality
While it’s early in the process for Bayland, Hunt noted the ESOP model seems to work well in achieving Ambrosius’ goal of ensuring the quality of Bayland’s work continues.
“It has created a sense of ownership in the company and we really do hold each other accountable,” Hunt said. “I’ll be out on a job site and one of the guys will tell me that there was an event somewhere and that we should have been there with a marketing presence. It’s amazing to me to see that.”
That owner mentality has held true at Keller for three decades, said Stellmacher. “Our employee-owners hold each other accountable and expect a higher performance level.”
The same holds true at Elipticon Wood Products, where employees are invested in the future growth of the company.
“Being here at Elipticon for 21 years I can tell you that I now see employees becoming more engaged and feeling empowered,” said Heckner. “They’re all looking for that growth and sustainability when they come into work each day.”
At VSI, Yeaso said, “our employees are extremely engaged and productive, they want to grow and become better, both personally and professionally, which makes us a fierce competitor in a global market.”
Attracting new talent
In an era when the skilled talent pool seems to be shrinking in many industries and Baby Boomers keep moving into retirement, the ESOP model is often touted as a competitive tool for attracting and retaining talent. At Keller, that has proved to be the case, according to Stellmacher.
“Employee-owners who are committed and informed workers attract others that value ownership,” Stellmacher said. “Once the employee experiences and sees the benefits of being part of an ESOP, they want to stay involved with Keller until retirement.
“For this reason, employee retention has been and remains very strong. When candidates hear about Keller and the benefits of being an employee-owner, they are intrigued. During this time when great employees are hard to come by, we can use our uniqueness to attract qualified candidates.”
At VSI, Yeaso and Arnold are convinced the ESOP has made the company more attractive to prospective employees.
“The ESOP, combined with our 401(k), insurance, and personal time off policies, result in a benefit package that few local companies match,” Yeaso said. “As we build a history of stock appreciation within the ESOP, this benefit will become more and more of a selling point. The current job market is highly competitive, but we believe we have a great story and that helps with not only employee retention but also attracts new talent as well.”
Rick Berg is a writer and editor based in Green Bay.