In the News: Characteristics of a Strong ESOP Candidate, Minnesota Employee Ownership Fund

Windings Inc. (New Ulm, MN)

We previously discussed the Windings Inc. ESOP and the Minnesota Employee Ownership Fund in In the News: Increased Management Accountability, Succession Planning, Addressing ESOP Misconceptions. Passing torch to those who made your business work identifies some of the characteristics that made that the company a strong ESOP candidate:

• The owner mentored his management team
• The owner's children have their own careers
• The owner wanted the company to remain in New Ulm
• The owner wanted its employees to share in the gains of the company
• The owner wanted to maximize the chances that the employees will retain their jobs
• The owner wanted his legacy to be the future success of the company in New Ulm
• The owner accepted the fact that he could possibly "have gotten more faster" if he pursued a third party sale

The article notes that it takes time to plan for an ESOP (although I want to point out it is possible, but not ideal, to close an ESOP transaction in six months):

"You can't retire at 65 and say 'I want to do an ESOP by the end of the year,'" Northland CEO Scott Martin said. "It's fixed-rate, multiyear financing. We will come in behind and help the owner and bank understand how it works," he said. "We will make subordinate loans in participation with local lenders to finance the sale of owners' stock. You need time to plan and do these right."

It also provides more information on the Fund:

Martin said Northland has one active ESOP loan and many inquiries after conducting just a few seminars around the state.

The Minneapolis-based Community Reinvestment Fund, which pools community-development debt and sells it to institutional investors, has agreed to buy and sell the ESOP credit, which generates more capital.

Characteristics of a Strong ESOP Candidate

Here is a list of characteristics of a strong ESOP candidate:

1. Strong balance sheet to absorb ESOP debt
2. Sufficient cash flow to cover debt payments
3. Taxable income sufficient to benefit from tax deductions
4. Minimum of 15-20 employees
5. Sufficient payroll to support ESOP debt (contributions are generally limited to 25% of payroll)
6. S Corporation or C Corporation
7. Effective communication between management and employees
8. Owners and management support employee ownership
9. Successor management in place