In the News: Fastest Growing Private Companies/Controlling Their Destiny

I hope everyone has a happy and safe Labor Day weekend.

Acadian Ambulance Service (Lafayette, LA)

Companies cited for growth acknowledges Acadian Ambulance Service, a Lafayette, LA company, for being #4,463 on the Inc. 5000 Index, a list of the 5,000 Fastest Growing Private Companies in America:

"Acadian Ambulance started in 1971 with two vehicles and eight Vietnam veteran medics, said Richard Zuschlag, chairman and CEO.

The company now has about 2,600 full-time and 400 part-time employees, and a fleet of 265 ambulances, eight air ambulance helicopters and five airplanes.

One of the biggest factors in Acadian's growth has stemmed from its majority employee ownership, Zuschlag said. Seventy-five percent of the company is owned by employees, Zuschlag owns the other 25 percent. This has prompted an innovation among employees Zuschlag doesn't think he'd see otherwise.

In its first 25 years, 100 percent of Acadian Ambulance's revenue was based on ambulance trips.

"But during the last 10 years we've begun to diversify greatly, and part of that is because of employee entrepreneurship allowing us to blossom into other areas of business, like the offshore safety business," Zuschlag said."

Trachte Building Systems Inc. (Sun Prairie, WI)

Trachte Building Systems Inc., a manufacturer of pre-engineered steel buildings for the self-storage industry, sold the 220-employee company, including two subsidiary businesses, to an ESOP on August 29:

"The employee purchase of the company ensures Trachte will remain a leading employer in Sun Prairie," said Pam Klute, vice president of human resources. "The overriding benefit of an employee stock-ownership program is it allows our employees to participate in the company's growth and success." Klute is also president of the ESOP Association - Wisconsin Chapter, which represents more than 1,400 member companies.

"The officers and employees of Trachte are excited about what the future holds," said company President Jeff Seefeldt. "This purchase allows us to manage and control our destiny. We plan to continue in our commitment to serve the self-storage industry with top-quality products and services as well as expand into categories where we can leverage our core manufacturing competencies."

Prior In the News segments can be found here:

• In the News: Corporate Restructuring/The Value of Employee Ownership/Providing Quality Service/Voting for Board of Directors/Union Negotiations
  
• In the News: Constant Comprehensive Communication and Education/Long-Term Objectives/More Than 100 Millionaires
  
• In The News: Sharing Ownership and Creating a Market / Producing a Competitive Advantage / Leaving a Legacy
  
• More ESOPs in the News
  
• In The News

Stock Drop Litigation/ESOP Q&A/History of Tribune Transaction

Stock Drop Litigation

Stock drop litigation has been discussed in recent weeks. Here is our most recent post: Decrease in Large Public ESOPs This blog post provides a good explanation of stock drop litigation:

"Stock drop litigation occurs when a company stock loses value and drops in price and, as a result, the company's retirement funds which own sometimes substantial amount of company stocks (either through an employee stock ownership plan (ESOP) or an eligible individual account plan (EIAP), suffers significant losses too.

The allegation usually in such a stock drop case is that the officers of the company, who were also fiduciaries for the plan, had a fiduciary obligation to disclose certain material information about the company to the plan so that it would not continue its imprudent investment strategy of investing in the company."

The post focuses on public companies that face the difficult position of both complying with securities laws and their fiduciary responsibility to act in the best interests of the participants and beneficiaries under ERISA:

"The larger issue that lurks is how to reconcile conflicting securities and employee benefit laws in this area and how to prevent D&O and fiduciary insurance from becoming so expensive that no one wants to be a plan fiduciary for ERISA purposes anymore."

ESOP Q&A

We provided a link to some ESOP Q&A in a prior post. The ABRC-ESOP Blog has recently added the following questions:

Can I use an ESOP to make my L.L.C. Tax Exempt?

How Can I Use ESOP to Attract Quality Employees?

History of Tribune Transaction

We have discussed the Tribune transaction many times, including our most recent summary: Tribune Shareholders Approve Deal If you are looking for more details, check out Dealwatch: Tribune.

Motivational Buttons

In our Tribune Shareholders Approve Deal/Exit Strategy post, we talked about how baby boomers will be looking for an exit strategy in the next twenty years. This Retirement Plan Blog post expands the discussion on generations by suggesting that 401(k) communication would be more effective if we targeted the motivational buttons of each generation:

"It has everything to do with the retirement plans, particularly 401(k) being designed and managed for today's workforce. A workforce which also has four dimensions. But these are generational dimensions, the four generations of employees in the work force for the first time in our history. In purely demographic terms, they are:

• Veterans: 1922-1945
• Baby Boomers: 1946-1964
• Generation X: 1965-1980
• Generation Y: 1981-2000

And based on their generational backgrounds, each employee has different attitudes, behaviors, and expectations. If we're interested in using the right motivational buttons in making our 401(k) plans more effective, then we have to communicate accordingly. Let's not take the easy way out by simply using automatic enrollment and qualified default investments."

While the post refers to 401(k) communication, understanding motivational buttons is even more important for initial and ongoing ESOP education and communication.

In the News: Corporate Restructuring/The Value of Employee Ownership/Providing Quality Service/Voting for Board of Directors/Union Negotiations

Salem Distributing Co. (Winston-Salem, NC)

Salem Distributing Co., a 100%-owned ESOP, was recognized as the Company of the Year for the Carolinas Chapter of the National Employee Stock Ownership Plan (ESOP) Association. Their corporate website contains more details:

"Only into the third year of 100% employee ownership, Salem has made great strides in a corporate restructuring initiative, which included reinventing its corporate culture to focus on empowering, inspiring and challenging its employee-owners. The bottom lines of this initiative were to better serve and grow its customer base. The results yielded an impressive 15 percent growth in the first half of 2006 that yielded Salem's recognition as one of the Triad area's FAST 50 a business growth competition sponsored by THE BUSINESS JOURNAL."

M. Dyer & Sons, Inc. (Pearl City, HI)

A biography of the President and CEO of M. Dyer & Sons, Inc. includes the company's ESOP story:

"In 1996, Medford and Masu Dyer after 30 years in business sold 100% of the company stock to the employees in an Employee Stock Ownership Plan (ESOP). The success over the past ten years is the result of educating the employees to the value of employee ownership. We instill a sense of pride in providing quality service and pleasing clients which results in an increase in their employee stock value as well as pride in company ownership."

Shelton Turnbull Printers (Eugene, OR)

Shelton Turnbull Printers, a printer in Oregon with 90 employees, was sold to the employees in January 2002. The employees are participating in the decision making process:

"In March, all ESOP plan participants voted for Shelton Turnbull's seven-member board of directors, which is more representative of the overall company than the previous board….Another change under employee ownership is that departmental decisions are made by the department that's affected, rather than by a single owner…Involving the group takes advantage of "their expertise and experience and their practical knowledge of what they do every single day,""

The article also discusses how employee ownership has impacted "spoiled work" and its impact on union negotiations:

"Employee ownership added a new twist to recent labor negotiations at Shelton Turnbull. Roughly half of the company's employees are covered by the Graphic Communications Conference of the International Brotherhood of Teamsters. In its first three-year contract since Shelton Turnbull became employee owned, the union agreed to a 7 percent raise over three years, said shop steward Bill Babcock. "We would have been a little more demanding if we hadn't been employee owned," he said. Employee ownership "tempers your reaction," Babcock said "because you realize ... that actions you might have taken against a sole proprietor, now if you do them, you're really in essence doing it to yourself. You have to consider what you're asking for - how that affects the ability of the company to survive," he said. "

Prior In the News segments can be found here:

In the News: Constant Comprehensive Communication and Education/Long-Term Objectives/More Than 100 Millionaires

In The News: Sharing Ownership and Creating a Market / Producing a Competitive Advantage / Leaving a Legacy

More ESOPs in the News

In The News

Employee Ownership and Corporate Performance

The NCEO has updated their Employee Ownership and Corporate Performance page, which documents the research on employee ownership and corporate performance:

"The research comes to a very definite conclusion: the combination of ownership and participative management is a powerful competitive tool. Neither ownership nor participation alone, however, accomplishes very much…The findings also seem to apply primarily to closely held companies. Research indicates that public companies generally do not view employee ownership as much more than another corporate benefit. For this and other reasons explored below, the relationship between employee ownership and corporate performance in public companies is ambiguous."

The page discusses the following studies:

• The 2000 Rutgers Study – "ESOPs increase sales, employment, and sales/employee by about 2.3% to 2.4% per year over what would have been expected absent an ESOP. ESOP companies are also somewhat more likely to still be in business several years later."
  
• The 1986 NCEO Study – "The study found that ESOP companies had sales growth rates 3.4% per year higher and employment growth rates 3.8% per year higher in the post-ESOP period than would have been expected based on pre-ESOP performance."
  
• The New York and Washington Studies – "In both studies, employee ownership per se had little or no impact on corporate performance, but a substantial impact when combined with participative management."
  
• The GAO Study – "The GAO study found that ESOPs had no impact on profits, but that participatively managed employee ownership firms increased their productivity growth rate by 52% per year."
  

The page also addresses the following topics:

• The Impact of ESOPs on Employee Compensation – a study shows that ESOP employees are significantly better compensated. "In ESOP companies, the average corporate contribution per employee per year was between 9.6% and 10.8% of pay per year, depending on how it is measured. In non-ESOP companies, it was between 2.8% and 3.0%."
  
• Public Companies and Employee Ownership
  
• Broadly Granted Stock Options and Stock Prices
  
• Other Studies
  
• Broadly Granted Stock Options and Corporate Performance

Creating an ESOP is a Good Business Decision

The results of the Employee Ownership Foundation's 16th Annual ESOP Economic Performance Survey are discussed in 89% of Companies State ESOPs are Good Business:

""In 2007, 89% of survey respondents reported that creating employee ownership through an ESOP (employee stock ownership plan) was "a good business decision that has helped the company." In addition, 72% of companies reported that performance increased over the prior year and 68% indicated that the ESOP affected the overall productivity of the employees."

"These numbers prove what we in the ESOP community have been saying for more than 30 years – employee ownership creates better companies. It's time for our national leaders to start promoting policies to encourage more companies to become employee owned through an ESOP. It is time to have policies to create a fair and equitable society," said J. Michael Keeling, President of the Employee Ownership Foundation. "It is time for the cynics who question the power of employee ownership to be quiet."

In addition, the survey asked companies to indicate their performance in 2006 relative to 2005:

• 72% indicated a better performance; 19% indicated a worse performance; 9% indicated a nearly identical performance as previous year
  
• 82% indicated that revenue increased; 18% indicated that revenue did not increase
  
• 72% indicated profitability did increase; 28% indicated that profitability did not increase
  
• 68% of survey respondents indicated that the that the ESOP improved the overall productivity of the company's employees
  
• 47% of companies that responded indicated that they have created an employee participation program since establishing the ESOP"
  

Decrease in Large Public ESOPs, Increase in Private ESOPs/Wealth Management Checklist

Last week we talked about the Decrease in Large Public ESOPs. This topic was further discussed in Large employers back away from employee stock plans, but they are still popular with private companies. The article cites "stock drop" lawsuits and the lack of diversification as reasons for the drop-off, and cites a similar trend with 401(k) Plans that hold employer stock:

"In that sense, the move by big companies away from ESOPs is a parallel to the steady decline in recent years of the amount of company stock held in 401(k) plans. A recent study by the Employee Benefit Research Institute and the Investment Company Institute showed that 401(k) plan allocations to company stock fell to 11% in 2006, from a peak of 18.6% in 1998."

The article contrasts this trend to the rise in closely held ESOPs:

"Data show a steady rise in the number of ESOPs in closely held companies in the last decade," he said. "There's good reason to expect that growth will continue and even accelerate in the next decade." In privately held companies, ESOPs can provide a way for an owner to sell his or her stake in the company, Mr. Rosen said, and the Baby Boomers are at a point in their careers when many may be looking to make that transition."

Wealth Management Checklist

Tune Up for High-Performance Wealth is a checklist for individuals and business owners to "evaluate their wealth management initiatives to make sure they have the appropriate portfolio for their age and investment goals", and contains the following:

• "Maximize retirement plan contributions"
  
• "Invest in the IRA that's right for you"
  
• "Rebalance portfolios at least once a year"
  
• "Make year-round tax planning a priority"
  
• "Have a solid estate planning strategy"
  
• "Proactively manage debt"
  
• "Consider charitable giving"
  
• "Give to children and grandchildren"
  

Tribune Shareholders Approve Deal/Exit Strategy

Tribune Holders Approve Deal discusses the Tribune shareholders approval of the $8.2 billion deal to take the company private. Proxy-voting advisers backed the Tribune buyout, while union leaders appeared to oppose the deal. While the deal was expected to be approved, the financing, including $8 billion in loans, was uncertain. Even though the purchase price is valued at $34/share, shares are trading for significantly less.

"Tribune has said it believes the deal will close in the fourth quarter and that financing for the deal is fully committed. Debt financing is being provided by J.P. Morgan Chase & Co., Merrill Lynch & Co., Citigroup Inc. and Bank of America Corp….The company plans to sell the Chicago Cubs baseball team and related assets, but officials said there are no plans to sell more of its newspapers."

Here are some prior blog posts related to the Tribune transaction:

• Tribune Challenges/Healthier Employees?/Building a Company Culture (8/3/07)
  
• Should You Consider An ESOP? (6/25/07)
  
• ESOP Testimonial/Tribune Repurchase (4/26/07)
  
• Reasons for ESOP Termination/ESOPs and Economic Development/Next Step in Tribune Transaction (4/24/07)
  
• Chrysler ESOP Proposal/ESOPs in Mergers and Acquisitions (4/16/07)
  
• ESOP Companies are More Productive (4/10/07)
  
• Tribune Sale Coverage - Unfair Representation of ESOPs (4/4/07)
  
• The Tribune Goes Private in an ESOP Transaction (4/3/07)
  
• Tribune Proposal Update (3/31/07)
  
• New DOL Regulation/Tribune ESOP Update (3/12/07)
  
• Tribune Company/ESOP Update (3/3/07)
  
• Proposed Transaction to Structure a Buyout Around an ESOP (2/27/07)
  

Exit Strategy

The Retirement Plan Blog discusses the baby boomers that will be looking for an exit strategy in the next twenty years. Here are some links to some recent succession planning discussions:

Benefits of Succession Planning/Free Basic Financial Education

Succession Planning

Here is a link to a list of generations (e.g. baby boomers, generation X).

Benefits of Succession Planning/Free Basic Financial Education

Benefits of Succession Planning

We recently discussed Succession Planning. This study reports that the percentage of public companies with a board-approved CEO succession plan has increased from 14% in 2004 to 54% in 2007. The report also notes that succession planning is an effective way to control executive compensation:

"Many experts see better succession planning as the antidote to excessive executive compensation. The more eager (or desperate) a board is to bring in a stellar CEO from the outside, the more it is willing to offer up a candy store of incentives – which make headlines as "pay for failure" packages if and when today's incoming star becomes tomorrow's outgoing executive. "Going outside can be frightful," Alfred DeCrane Jr., former CEO of Texaco
Corp. and a veteran of four compensation committees, recently told The Wall Street Journal. "You can negotiate, but if you want to close the deal, you have to close it."

Free Basic Financial Education

Are you looking for a way to provide yourself, your family and friends, or your employees with some free basic financial information? The Federal Deposit Insurance Corporation (FDIC) created Money Smart, "a training program to help adults outside the financial mainstream enhance their money skills and create positive banking relationships." There is an instructor-led version and a computer-based instruction version, which is available online or on CD-ROM. The program consists of 10 modules that take 1-2 hours per module to complete:

1. Bank on It - an introduction to bank services
   
2. Borrowing Basics - an introduction to credit
   
3. Check It Out - how to choose and keep a checking account
   
4. Money Matters - how to keep track of your money
   
5. Pay Yourself First - why you should save, save, save
   
6. Keep It Safe - your rights as a consumer
   
7. To Your Credit - how your credit history will affect your credit future
   
8. It Right - how to make a credit card work for you
   
9. Loan To Own - know what you're borrowing before you buy
   
10. Your Own Home - what home ownership is all about

In the News: Constant Comprehensive Communication and Education/Long-Term Objectives/More Than 100 Millionaires

It's time for another installment of ESOPs In the News. If you are looking for more ESOP stories, here are some links to previous "In the News" blog posts:

In The News: Sharing Ownership and Creating a Market / Producing a Competitive Advantage / Leaving a Legacy

More ESOPs in the News

In The News

Ulteig Engineering (Fargo, ND)

Power to the people tells the story of 350 employee engineering firm Ulteig Engineering. The article identifies communication as one of the key challenges:

"Marlys Meier, chair of ESOP communications committee with Ulteig and in charge of accounting at Ulteig Bismarck office, said not only is initial communication necessary, but constant comprehensive communication and education is vital.…So the communications committee organized brown bag lunches and other educational efforts. Through those, Olson said, the "light comes on."…As well as educating their employees, the board and trust committee members are still educating themselves."

The article states that of the 104 members of the Minnesota/Dakotas Chapter of the ESOP Association, 97% are privately held and the average company has 159 employees. The article also discusses growth and production of ESOP companies compares to their non-ESOP counterparts:

"Companies that have employee ownership grow about 2 percent to 3 percent better than without it, he said. Combined with a degree of employee involvement in day-to-day activities, that production increases to 6 percent to 11 percent over non-employee-owned companies.

Ultimately, the goal of a company changing to an ESOP model is to get the workers to start thinking like owners, said Olson with Ulteig Engineers. It's an attitude of "we're all in this together,"Olson said."

Northwest Aluminum Specialties (The Dalles, OR)

NW Specialties celebrates independence discusses Northwest Aluminum Specialties and how "the employees bought the Specialties business from the debtholders who took over the larger Golden Northwest Aluminum Holding Company following its 2004 bankruptcy." It discusses how they started working with their Bank on April 18 and closed by May 30. The financing allowed them to pay off the hedge fund obligations and "provided a comfortable line of credit that would allow the company to expand its operation, buy new equipment, and hire more people. That could include expanded foreign trade." The article ended by emphasizing one of the most important benefits of an ESOP: "Now we can focus on longer term objectives and run the business in a more efficient manner."

ChemTreat Inc. (Glen Allen, VA)

We learn about Virginia -based ChemTreat Inc. in Buyout enriches workers. The ESOP owned 85% of ChemTreat, a maker of water-treatment products, at the time it accepted a $435 million cash buyout offer from Danaher Corp. The acquisition price averages out to more than $600,000 per each of the 600 employees:

"ChemTreat executives said more than 100 employees will get contributions of $1 million or more to their retirement. Others will get hundreds of thousands of dollars, likely to be worth millions by the time they retire. The deal terminates ChemTreat's ESOP, but it is one example of how employee ownership plans are supposed to benefit workers."

The article described the original ESOP transactions as follows:

"The ESOP was carried out in three stages, with employees acquiring an initial 30 percent of the company in 1989. They increased their ownership to 50 percent in 1995 and 85 percent in 2000. Tyler and Simmons together retained 15 percent ownership. The ESOP was financed through bank loans that the company paid back over a period of years, while issuing shares to employees as part of their retirement plans."

The following pros and cons at the time of the acquisition were also discussed:

• "ChemTreat doubled its business during the time it was an ESOP."
  
• Due to the stage that the ESOP was in, it "couldn't issue shares to new employees until other workers retired."
  
• The Company also had to be careful about taking risks such as acquisitions.
  
• "ChemTreat accepted the Danaher offer because it provided employee-owners with a good price for their shares."
  
• ""It was also attractive to us because we will be allowed to operate as a stand-alone company," Nygren said. "ChemTreat will maintain its identity. Not one person gets laid off or displaced" and the company can expand more aggressively as part of Danaher."

Decrease in Large Public ESOPs/Cashed Out Employee Has Standing/REITs as Section 1042 Qualified Replacement Property

The August 16, 2007 NCEO Employee Ownership Update is online and discusses the following:

One-Third of Large Public Companies Dropped ESOPs Between 2004 and 2005

1/3 of the largest 900 companies that had ESOPs in 2004 effectively eliminated their ESOP by the end of 2005:

"Overall, about 6% of the largest companies had ESOPs in 2005, all but 17 of which own less than five percent of company stock.  It is likely that the change is a direct result of concerns about legal fallout from the Enron, WorldCom, RiteAid, and other "stock drop" lawsuits that began earlier in the decade."

We previously discussed stock drop lawsuits in the following posts:

Two Recent Employer Securities Court Cases

Stock Drop Litigation

Third Circuit Rules Former Employee Has Standing Even Though Cashed Out of a Plan That Invested in Company Stock

The Update discusses the following cases that provided that "an employee who had been cashed out of a 401(k) plan nonetheless had standing to sue over questions about the prudence of investments in company stock.":

Graden v. Conexant Systems Inc. (No. 06-2337, 7/31/07)

Harzewski v. Guidant Corp. (No. 06-3752, 6/5/07)

Are REITs Qualified Replacement Property?

Earlier this week we discussed Qualified Replacement Property.  Generally, "shares in mutual funds and real estate investment trusts (REITs) do not qualify as Qualified Replacement Property, although shares in certain financial institutions and insurance companies may". 

However, the Update discusses how Robert Willens "argued that real estate investment trusts (REITs) that perform active and substantial management duties should be eligible as qualified replacement property under Section 1042 of the Code (the section that defines eligible investments for private C corporation owners who sell to an ESOP and take a tax deferral on the gain)."

Succession Planning

What is Succession Planning?

"Succession planning is a process whereby an organization ensures that employees are recruited and developed to fill each key role within the company. Through your succession planning process, you recruit superior employees, develop their knowledge, skills, and abilities, and prepare them for advancement or promotion into ever more challenging roles."

How many companies have a succession plan in place?

According to this article, only 21% of small, family-owned businesses have a written plan for succession:

"Failure to plan for ownership succession is the greatest threat to businesses with sales of less than $3 million and the second greatest threat to larger businesses, says the American Institute of Certified Public Accountants….'Too many healthy small businesses don't make it to the second or third generation due to incomplete or nonexistent succession planning,' said Chris Cooper, the program's coordinator. 'In fact, proper succession planning is the single most cost-effective method to maintaining and growing businesses and jobs in our communities,' he said."

What are some Business Succession Planning Options?

• "Management buy-out
  
  
  • Loans or notes from banks
    
  • Notes or loans from the seller
    
  • An installment purchase of stock
    
  • Employee Stock Ownership Plans (ESOPs)
    
• Selling to the employees
  
• Selling to an outsider
  
• Liquidation"

"Succession planning is about taking control of the inevitable. Eventually, every business owner will leave the business. If no planning is done, lawyers and the government will control the process. But if the owner plans for an orderly transfer, he or she can reduce the taxes paid, get the maximum value out of the business, leave it in the hands of chosen successors and avoid family and business crisis."

401(k) Debit Card/Line of Credit

A new financial product allows participants to use checks or a debit card to tap into their 401(k) account balance. This product is similar to a home-equity line of credit, except it uses the 401(k) account balance as the equity. The example in the article charges 2.9% above the prime rate. The prime rate interest is paid to the participant's account and the additional 2.9% interest is paid to the administrator of the loan program, who originates and collects the loan. The borrower also pays an initial set-up fee and a yearly maintenance fee to the recordkeeper.

This product makes it more convenient to take out a 401(k) loan. The article discusses the theory behind allowing 401(k) loans:

"Making it easier for 401(k) investors to borrow from their savings seems to run counter to the goal of helping workers build a nest egg for retirement. But most 401(k) plans do allow loans, in the belief that workers are more likely to participate if they can access their money prior to retirement. A 1997 study by the Government Accountability Office confirmed that allowing loans increases participation in 401(k)s, especially among lower-income employees, and it also concluded that employees in plans that permit loans contribute more.

A survey by the Profit Sharing/401k Council of America (PSCA) found that 85% of 401(k) plans allow loans, and about 25% of workers in those plans take them."

Here is a related blog post: Should I Borrow From My 401(k) Plan?

Addressing Benefit and Compensation Issues in an M&A Transaction

This blog post stresses the importance of addressing benefit and compensation issues before closing a merger or acquisition transaction:

"…the focus is on the liabilities - current and potential. Benefit and compensation programs can include, of course, retirement plans, welfare benefit plans, and non-qualiified deferred compensation plans. Some of the questions buyers will ask include:

• Is the retirement plan "qualified" for purposes of receiving tax favored treatment under the Internal Revenue Code?
  
• If the seller maintains a defined benefit plan, what is its funded status?
  
• If the seller contributes to a multi-employer, collectively bargained retirement plan, is there a withdrawal liability?
  
• Are there any welfare benefit liabilities, e..g, post-retirement medical benefits.

The due diligence process for both environmental and benefit and compensation issues can be quite involved, the results of which often dictate how the deal is structured: stock sale or asset sale."

If you are looking for more information on this subject, check out this blog post: Don't Let Benefits Issues Adversely Affect M&A ROI

ESOPs and Charitable Contributions

Getting Some Estate Planning Help From Your Employees discusses and provides an example of how combining estate planning and ESOPs can help achieve the following objectives:

• Providing a secure income for the life of the shareholder
  
• Providing an equitable transfer to the heirs of the estate
  
• Creating tax deductions and minimizing income taxes
  
• Minimizing the taxable value of the estate
  
• Taking care of the employees that contributed to the success of the company
  
• Increasing the likelihood that the company will continue to exist and be successful
  
• Providing a cost-effective, tax-efficient way to give to a charitable organization

The Virtues of Using ESOPs with Charitable Contributions discusses this complicated transaction in more detail. Here is a high-level summary of the steps:

1. Shareholder transfers company stock to a charitable remainder trust (CRT).

• The shareholder (the donor) obtains a tax deduction for the charitable contribution equal to the fair market value of the company stock as of the date of the transfer.
  
• After the CRT sells the stock to an employee stock ownership plan (ESOP) and reinvests the proceeds, the donor will receive income for a period of time, after which the CRT gains full control and usage of the proceeds.
  
• The donor will avoid paying capital gains taxes on the stock.
  
• The donor will get an income tax deduction for the interest that the trust earns.
  
• The value of the estate of the donor has been reduced, reducing or eliminating estate taxes.

2. CRT sells company stock to an ESOP

• This transaction allows participants that would be restricted from participation in a Section 1042 transaction (family members and 25% shareholders) to fully participate.
  
• The debt assumed by the company to purchase the stock decreases the value of the company. Remaining shares can then be transferred to a family member or other shareholder at a lower cost.

3. Shareholder uses tax savings from the CRT to create a wealth replacement trust

• The shareholder purchases life insurance policies to replace some or all of the property that would have been transferred to the heirs of the estate. The heirs will receive the insurance proceeds tax-free.

This method can also be an effective way to reinvest Section 1042 qualified replacement property.

Standardized Work and Developing Best Practices/ESOP Q&A

In a previous post I talked about lean and the Lean Enterprise Institute. This lean six-sigma blog post discusses how employees can be the most effective at developing best practices:

"Traditionally, work standards were imposed on a workforce. Industrial engineers studied the work and then told workers what needed to be done and how much time each task should require. While this information could be valuable, it ignored the all-important employee ownership element that can drive genuine and ongoing change. Standardized work, on the other hand, centers on the fact that workers themselves understand the best ways to perform their jobs. Employees, not "outsiders," study the jobs they know intimately in order to uncover best practices and create methodologies for continuous process improvement. Thus they become responsible for solving problems and own the standards that result."

ESOP Q&A

This ESOP blog has answered the following questions in recent posts:

• Can I Use ESOP to Motivate Employees?
  
• How Can an ESOP be an Exit Strategy?
  
• What should I look for when choosing a Third-Party Administrator (TPA)?
  
• Who should consider installing an ESOP?
  
• Who can qualify for the S-ESOP?
  
• What advantages do ESOPs bring to employees?
  
• Why is Congress supporting ESOPs if it means companies do not have to pay taxes?
  
• ESOPs have been making headlines since Zell used it to purchase the Tribune. What is it exactly?
  
• What options does a business owner have to exit the business?
  
• What should business owners be doing to prepare for retirement?
  

In the News: Employee Ownership Success Stories

Nypro (Clinton, MA); Atlantic Fasteners (West Springfield, MA); Litecontrol (Hanson, MA)

Ideally, employee stock plans can give workers more leverage provides an informative interview with a Massachusetts ESOP consultant. In my overview below I have provided links to more information about the employee ownersh