Employee Stock Ownership Plans, or ESOPs, are a way for employers to ensure that their workers have a personal stake in the success of the business.
Nationally, 9,000 to 10,000 companies use ESOPs, covering 13.5 million employees, or 10 percent of the private workforce, said Drew Barton, vice president of ESOPs of Idaho, a Boise independent advisory firm specializing in business transition strategies. That includes 40 to 50 Idaho companies. More businesses, including “large and significant” ones, become ESOPs every year, adding that he’s working with about a dozen new ones right now.
An ESOP lets a business owner transfer ownership to employees, preserving jobs and legacies in Idaho communities but passing the equity to the owner. “A lot of companies are very entrenched, three or four generations, and are looking for a way to exit their business in a favorable manner,” Barton said. In addition, ESOPs set up as S corporations, which is typical, can pass the stock to a tax-exempt trust that owns the ESOP, which is then free from state and federal income taxes. “That’s a 40 percent savings right there,” he said.
ESOPs can be complicated to set up and take time.
“This is not a ‘sell today and walk out the door tomorrow with 100 percent of your equity value,’” Barton said.
Setting up an ESOP takes about four months and requires a team of professionals including accountants and attorneys. It typically takes as much as 10 years before the owner receives all the equity. “That’s compared with selling to a third party who might offer a lot more cash upfront,” he said. “But you have to model that against not paying capital gains taxes on that sale. In Idaho, that’s about 32 percent. That’s compelling to business owners.”
Because ESOPs are private companies, employees don’t get shares of stock per se, but own a percentage of the ESOP trust. As with retirement plans such as 401(k)s, employees are vested over several years, typically six.
The big gun in Idaho ESOPs – and, in fact, the seventh-biggest ESOP in the entire country, with more than 18,000 employees – is discount grocer WinCo Foods, now in nine states and 118 stores. It takes its “all employees are equal” mantra so seriously that it doesn’t name employees in news stories, according to a company spokesman who asked not to be named.
Winco became an ESOP in 1985. “The main advantage is that you have everyone on the same page, working towards a common goal,” the spokesman said in an email message. “Every employee-owner shares in the success of the company, which makes a huge difference. It’s all about pride of ownership; when you walk into a store and see a piece of paper on the ground, you’re going to pick it up, because you own part of that store and you want it to look nice, to be inviting and to succeed.”
Lytle Signs Inc., based in Twin Falls, had its first ESOP stock transaction on June 1.
“Each year, we make payments to the former owners,” said JJ McBride, executive vice president. “Each year, that releases a certain amount of shares that get allocated among the participants in the trust.”
The business’s 85 employees are eligible once they’ve worked one year or 1,000 hours, he said. Employees vest over
six years or when they turn 65, whichever comes first. While it’s too soon to judge the impact, anecdotally the company sees less absenteeism and a boost in morale, as well as using it as a recruiting tool in the tight Twin Falls labor market, he said.
Pacific Steel & Recycling, based in Great Falls, Mont., and with locations in nine states including Idaho, started its ESOP process in 1978, said Tim Culliton, chief financial officer. “National studies suggest that during the downturn of 2009, ESOPs didn’t lay off as many employees and were quicker to rebound, because of this employee engagement,” he said. “When things get tougher, people work harder.”