In 2006, second generation business owner Ken Baker needed to create some liquidity to address some financial obligations. His company, NewAge Industries in Southampton, PA was a small but successful manufacturer of plastic tubing and hose. The company was started from scratch by his father, who decided to retire after many years at the company.
Ken looked into taking on a loan, but was not enamored with the additional debt. He then learned about an “ESOP” an Employee Stock Ownership Plan. After much research and deliberation, Ken sold 30% of the company to his employees. Because an ESOP is part of an ERISA sanctioned trust, with employee shares held within that trust, the profits of Ken’s company were now 30% tax free. That’s right, TAX FREE, both Federal and State of PA. And in addition, the employees pay nothing. Not a penny.
Immediately after converting to employee ownership, Ken’s company began to grow. The employees now had a real stake in the organization’s profits. Employee owned companies are, on average, as much as 8-12% more productive, year-over-year, than traditional companies, according to the National Center for Employee Ownership. Over the next 12 years, the company share price grew over 1,100%, with Ken still owning the vast majority of the profits. In 2019, Ken sold the balance of the company to the employees at a dramatically higher share price, reaped tremendously greater rewards than he would have, and NewAge is now a 100% tax free organization. Ken remains as CEO, managing all day-to-day operations, and even owns shares as an employee in the ESOP. The tax benefits have created additional cash and contributed to the growth of the company.
Here is how it all works.
Employee Ownership rewards owners, preserves legacy, creates real financial futures for workers, keeps businesses here in Pennsylvania and bolsters the economy. And yet very few know about ESOPs.
ESOPs are not a trick or a loop-hole device. They are a US Department of Labor program, established in 1974 by Senator Russell Long and economist Lewis Kelso. Generally designed for businesses with 20 or more employees, the goal was to create a deferred tax program that would allow business growth and address the ever concerning problem of retirement for workers. When employees leave the business, via retirement or otherwise, they can cash in their shares and pay ordinary income tax, just like a 401(k). The difference is that employees pay nothing for this benefit.
The Exit Planning Institute estimates that, due to the aging of the Baby Boomers, as many as 4 million companies, large and small, will transact within a 10-year period. It is further expected that up to 30% of those businesses will simply disappear. These facts make succession planning a critical business issue. So what is your strategy for succession? For growing the business? For caring for your family? Employee Ownership is not only an exit/succession planning alternative but is also a business growth strategy.
But what if your business does not have 20 employees? What if you are a Main Street or Commercial Corridor business? A café, hardware store, retail, or service organization? There’s a relatively new program called an Employee Ownership Trust that is designed specifically for smaller organizations. Just like an ESOP, a business owner can sell some or all of the shares to the employees for an agreed upon amount. The shares of the business are held in a Perpetual Trust, and the profits of the business belong to the employees in a way designed by the selling owner and the employees.
The owner(s) reap value from their years of work and the employees now profit from their daily efforts. Although relatively new in the US, EOTs have been common in the UK for generations. The large UK Department Store, John Lewis, has been employee owned for over 100 years! You can read about them here.
The Pennsylvania Center for Employee Ownership is a 501(c)(3) nonprofit that exists for one reason, to raise awareness about a remarkable program that can benefit business and business owners. We sell nothing and charge nothing for our work. We do not provide accounting or professional services. We are a volunteer collective of CEOs with experience in various forms of employee ownership; professionals in the industry (CPA’s, Attorneys, Wealth Managers, etc.); and Foundations and Universities (Rutgers, University of California San Diego, University of Pittsburgh, Chatham University). We are dedicated to simply helping to raise awareness about an important program.
If you would like to learn more about ESOPs and employee ownership, join us for the Chamber’s next Coffee Conversations on Thursday, September 7, from 8:30 – 10:00 am at the Chamber office, 131 S. Fraser Street, Suite 1, State College, PA 16801.