An ESOP, 10 Years Later

Looking back on the sale of a company to its employees.

By Gary Shawver, MGWC

I wrote a column for the September 2017 issue of Water Well Journal on how I sold my business. This column is a follow-up to that one as it covers how things are going 10 years later after the sale was made.

At the National Ground Water Association’s 2011 Groundwater Expo in Las Vegas, Nevada, the general manager of my company and I attended a class on a company becoming an ESOP (Employee Stock Owned Plan). The class was put on by an attorney specializing in setting up ESOPs.

At the time, I was 61. I had always been concerned about what would become of my company when I was ready to retire, and having the employees own it—the ones who actually built the company to what it was—seemed like a logical choice.

Getting Started

When we got home, I started the process of looking into what it would require to become an ESOP. I first called my accountant as I learned in Las Vegas the company had to be appraised by an accountant familiar with ESOP appraisals.

ESOPs are regulated by the U.S. Department of Labor and there are a host of requirements one must follow if a company is to become an ESOP. One requirement is an appraisal must be done by a certified ESOP appraiser. The company can’t sell for more than the appraised value. It can sell for less, but not for more.

I believe my goal was met and the ability to retain the key personnel of the company has contributed to its continued success.

I wanted to find out what the company was worth before I made the decision to become an ESOP. I met with the ESOP accountant who outlined the specifics of what the appraisal would involve and the cost. I elected to move ahead with the appraisal.

Upon the receipt of the appraisal, I was satisfied with the result, and we then moved to the next step of becoming an ESOP: finding a plan administrator. A company becoming an ESOP, in essence, is creating a retirement plan for the company. Therefore, a plan administrator is required to oversee the plan once it is set up.

There are a lot more requirements to become an ESOP, but suffice it to say, it is not possible to cover each and every one in this column. But in short, here’s what is needed:

  1. Retain a certified ESOP plan administrator.
  2. Hire a certified ESOP accountant to appraise the company.
  3. Hire an attorney familiar with ESOPs as there are a lot of options the Department of Labor allows when setting up the ESOP.
  4. Either hire a trustee or have someone within the company be the trustee. The trustee oversees, on behalf of the employees, the negotiations of the sale of the company.

The plan administrator typically takes the lead and guides everyone through the process of the company becoming an ESOP. It typically takes at least six months to go through the process, but it sometimes can be longer.

Making the Sale

When an owner sells the company to an ESOP, it can be a minimum of a 33% sale of the stock, or they can go all the way and do a 100% sale of the stock. For me, the plan administrator outlined the reasons for the different percentages, and I decided to choose the 100% route.

I did so because it was the most cost effective and I could retain control of the company until one half of the money owed me from the stock sale was paid to me.

Some other things that are involved in an ESOP sale:

1. All employees become stock owners regardless of how long they have been employed with the company.

2. When a person leaves the company, regardless of how long they have been there, the company is required to buy back the stock at the current value per share of the stock for that calendar year. Therefore, the employee is guaranteed his or her money.

3. When the sale becomes complete, all employees are given prorated credit for the vesting based on the years they have been employed there.

Note there is some latitude the owners have in the vesting schedule. For example, if an employee has been there 15 years, they may be given three years of vesting, meaning for every five years they worked there previously they are being given one year of credit. Typically, after seven years of full vesting, the employee receives 100% value of their stock when they leave or retire.

4. To make an ESOP work effectively, a company needs to have at least 10 employees, and 15 works better. The plan administrator can outline what may work best for a particular company.

5. It is imperative that someone within the company step up to take over the management of the company if they aren’t already doing so. The company must have some type of manager/leader and finding someone within the company is best.

6. Most sales of ESOPs are typically financed by the owner selling the company. The number of years the sale is financed can vary and the plan administrator can help with that.

Getting a loan from an outside institution to finance an ESOP sale is rare, and if it is done, the interest rate is typically quite high. Rarely is there someone within the company willing to sign personally for a loan at a financial institution.

7. An owner can keep on working for the company they sell, and it should not be an issue so long as the owner still is owed more than 50% of the money owed from the ESOP loan. I chose to stay working for the company, but after less than one year of doing so, I retired.

Where We Are Today

So where is the company now and how is it doing? In my opinion, the sale via an ESOP has been a complete success for Shawver Well Co. The company is doing well without me, and I rarely get a call regarding any issue or question. In fact, the questions wane as time passes.

The general manager of the company, Ryan Budke, had been there approximately 12 years when the sale was done, but was not in fact the general manager when the sale was completed. The general manager at the time chose to move on after two years, and Ryan stepped up from the domestic sales rep position to general manger. It was a relatively smooth transition.

I recently asked Ryan if he is happy with the company being an ESOP, and this was his response:

“As an ESOP, Shawver Well employees are able to see how their hard work benefits the company and ultimately themselves. The transition in seeing the benefit was slow at first. It took a few years for employees to see the increase in share value on their annual stock distribution. But as time has passed, it’s really shown them the benefits of being employee owned.”

What were the benefits from my perspective? I see them as many:

  • The employees who got the company to where it was when I sold it got to be rewarded as being the new owners.
  • The employees had an opportunity to then operate the company and see the fruits of their work every year as new stock was allocated at the end of the year based on the previous year’s business. After a few years, they saw their stock and the fruits of their work grow.
  • The employees can now take pride that “this is their company” and realize they have a piece of the ownership!
  • Turnover in the senior employees of the company has been virtually nonexistent for the most part, so the retaining of the employees has been greatly enhanced.
  • For those young people the company is trying to bring on, being an ESOP is a recruitment tool.

I mentioned earlier I had initially considered a 33% ESOP sale, with the rest of it being done later when I decided to retire. I was looking for a method to retain employees, and the differences between the two percentages was one of the driving forces that helped me make my decision to go with the higher number. In retrospect, I believe my goal was met and the ability to retain the key personnel of the company has contributed to its continued success.

Unfortunately, not all companies are going to be able to consider an ESOP option, but for a medium size to larger company, it has a lot of merit—especially in this day and age of finding and retaining good employees.

If you have an interest in becoming an ESOP or have more questions, please feel free to reach out to me.

Click here to read Shawver’s September 2017 “Drawing from the Well” column that he references, “Retaining Your Most Valuable Asset in Your Business.”

Gary Shawver, MGWC, retired-2021, is vice president of Shawver Well Co. Inc. in Fredericksburg, Iowa. He has been in the water well industry for more than 40 years and is a Master Groundwater Contractor. He served on the NGWA Board of Directors. Shawver is semi-retired, having sold his business to his employees. He can be reached at grshawver@protonmail.com.

 

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