In the News: Merging Multiple ESOP Companies to Form a Holding Company, Reducing Costs and Providing Diversification

Marine Hydraulics International Inc. (Norfolk, VA) and Técnico Corp. (Chesapeake, VA)

2 ship repairers unite to form new holding company discusses how two complementary ESOP-owned companies merged to form a single holding company. Marine Hydraulics International Inc. and Técnico Corp. have merged to form American Maritime Holdings Inc. The companies will keep their separate identities and operations while reducing costs and providing a more secure investment for the 550 employee-owners of the two companies:

"It's like any other portfolio - if you diversify, you have a better opportunity for success," said Torrech, the former president of Técnico. That is even more important in today's uncertain economy, he said.

Both Marine Hydraulics and Técnico will keep their separate identities and operations, Torrech said. The Navy is the biggest customer of both.

Having joint ownership will offer ways to reduce costs, such as by pooling insurance coverage, said Gary Brandt, MHI's former top executive who is now American Maritime Holdings' chairman and chief executive. The companies may now team up to go after some projects that each could not do separately, he said.

In the News: Planning for the Future and Selling to an ESOP While Retaining Control, Existing Management, and the Board of Directors

Air Tractor (Olney, TX)

Air Tractor to become employee owned discusses how Air Tractor, a Texas producer of aircraft, is being sold to an ESOP. The article notes that the seller will remain as president and the existing management and board of directors will remain as well.

"About a year ago, we began to make plans for the future to assure that Air Tractor will continue to be a strong, financially healthy company serving agriculture and the firefighting industry," said Snow. "The existing management and board of directors of Air Tractor will stay in place. I plan to continue in my existing capacity for as long as I am physically and mentally fit. We are excited about this change and are hopeful it will bring added strength, security, and long term benefits for Air Tractor, our employees, and the community."

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

In the News: Improving Performance by NOT Focusing on Financial Goals

Eileen Fisher, Inc. (Irvington, NY)

Eileen Fisher: Teamwork and a Focus on Employee Well-Being Fuel this Successful Company discusses Eileen Fisher, Inc., an Irvington, NY women's clothing retailer, and how their ESOP fit into their non-traditional company culture. The company has consistently increased sales, even during tough times, by NOT focusing on financial goals:

"We don't talk like that here."…How do they do it? Susan says employees do not focus on financial goals; instead they work to find success by constantly striving toward their mission: "To inspire simplicity, creativity and delight through connection and great design." She shared how many aspects of an employee-ownership culture were already in place long before becoming an ESOP company, such as encouraging participation in all areas of the company and working in collaborative teams.

The article also discusses the company's focus on employee well-being and development opportunities, both personal and professional, and their commitment to giving back to the community.

In the News: Employee Retires After 60 Years of Employment

Builders Supply Co. of Petersburg, Inc. (Petersburg, VA)

Career spans decades discusses how an employee of Builders Supply Co. of Petersburg, Inc., a Virginia building materials dealer that has had an ESOP in Existence for At Least 25 Years, has recently retired:

Martin decided to retire earlier this month after more than six decades with the same company. "I had to make some room to give the youngsters a chance," he said laughing.

But to Martin, retirement does not mean relaxation. He comes in every day to help his former colleagues for five or more hours. And he still holds stock in the company that he plans to sell in five years to invest in other stock.

In the News: Succession Planning, Empowering Employees, Improving Recruiting, Creating Selling Point, and Improving the Bottom Line

The Newberry Group (St. Charles, MO)

We previously discussed how a global IT consulting firm sold their company to an ESOP as part of a Strategy for Continued Growth and Contributing to the Economic and Philanthropic Development of the Community. Some additional reasons why Newberry sold to an ESOP are examined in Newberry hands off company to employees: A look toward long-term viability:

• To Provide a Succession Planning Solution
  
  "Founders can't act as though they're going to live forever," Brenda Newberry, the company's chairman and chief executive officer, said of the decision to shift ownership to employees. She says the move is about the future of the company - not next quarter, but once she and husband Maurice, the company's president and chief operating officer, leave the business (which, by the way, she says is not in their immediate plans).
  
  
• To Empower Employees to Be More Responsible
  
  Some Newberry associates say they expect their partial ownership to change their habits at work.
  
  "I think it does change mind-sets," said Richard Berry, a senior computer systems analyst in Newberry's security practice. "I believe people are just a little more responsible about wastefulness and thinking about the future of the company when they have this direct stake."
  
  
• To Improve Recruiting
  
  A veteran of corporate security practices who came to Newberry from information technology stalwart EDS, Berry expects employee ownership to help the company's future recruiting efforts, as well. "I believe that for recruiting top-notch people, it gives us an edge," Berry said.
  
  
• To Create an Additional Selling Point to Customers
  

  He also thinks it's a selling point, giving potential clients the assurance that Newberry's employees are committed to the job at hand.
  

• To Improve the Bottom Line
  
  Because the company is entirely employee-owned, Newberry is a tax-exempt entity. That, Maurice Newberry says, gives the company additional capital to grow.

In the News: More Responsibility and Better Decision-Making

South Mountain Co. (West Tisbury, MA)

Stonington to Host Economic Summit discusses the former owner of South Mountain Co., which we discussed in In the News: Employee Ownership Success Stories, and his support for employee ownership:

In 1987, Abrams sold his design and build business, South Mountain Co. He sold it to himself and his employees.

He has documented his experiences with creating an employee-owned construction company on Martha's Vineyard in "The Company We Keep."

"I'm a great advocate and a great believer in employee ownership," said Abrams. "There are tremendous benefits. When people make decisions and share in the benefits and the consequences, better decisions result. When we own it, we take better care of it."

In summing up the case for employee ownership and the responsibility it encourages, Abrams cites an observation made by New York Times columnist Tom Friedman: "In the history of mankind, nobody has ever washed a rented car."

While their employee ownership structure is a worker cooperative and not an ESOP, ESOP companies can benefit from learning about their ownership culture and company philosophy. The former owner is also the author of The Company We Keep: Reinventing Small Business for People, Community, and Place:

Like virtually all titles in its category, The Company We Keep: Reinventing Small Business for People, Community, and Place, by John Abrams, Chelsea Green Publishing Company, 2005 makes a case for strong workplace values and shows how we can ultimately profit from such a strategy. But unlike most of its fellow volumes, this book is also a personal tale, one liberally sprinkled with wisdom about ideas small and large that the author has accumulated during his 30+ year journey as founder of the South Mountain Company, a Martha's Vineyard design and building firm. Through a commitment to community entrepreneurship, Abrams has seen the company grow and prosper. At the same time, he's experimented with a revolutionary employee ownership model that challenges the traditional business model of unchecked growth. While The Company We Keep tells the personal success story of this revolutionary company, that's just the beginning of all the places it goes. Written in a down-to-earth conversational voice and laced with insightful side trips that offer additional lessons, Abrams examines the role business can and should play in creating and sustaining healthy communities. He sets down a framework for a model of employee ownership and community involvement that works. In the words of the author, "This is a book about a different way of doing business in today's world, a way based on workplace democracy, shared ownership, staying small, building community, making a commitment to place, and long term thinking." Rejecting the myth that short-term profits are the only indicator of business health and wealth, Abrams offers eight cornerstone principles. He shows how building a company upon these principals to serve the needs of employees inside, the community outside, and the environment both depend upon can create a business that's successful by traditional and nontraditional measures alike. To that end his book is part entrepreneurial business plan, part guide to democratizing the workplace, and part prescription for strong local economies. A series of detailed appendices explain how his company set up its employee ownership program, how meeting facilitation and consensus decisions work, and how Abrams performed a community visioning for Martha's Vineyard. This places much of the how-to nuts and bolts in the back of the book, preventing this technically oriented material from bogging down the breezy main text with nitty-gritty. The result is a thoroughly readable and eminently enjoyable book, and an important new addition to the library of anyone concerned with finding better ways to create a better world.

In the News: A Different Approach to Management and Compensation and Aligning Business Objectives with the Clients’ Objectives

North Highland: A Remarkable Consulting Firm Built on a Culture of Ownership discusses the story of North Highland, a 100% ESOP-owned consulting company with 500 employees. They used an ESOP to help transition the company from a local consulting firm to one that has a national and international focus:

Dave decided to share company ownership with employees from the very beginning, although it was a 10-year journey before the company was fully owned by its employees. A formal employee ownership program began in 1998 in the form of a leveraged employee stock ownership plan (ESOP) consisting of 30 percent of the company. As employees left and the company bought their stock, the ESOP gained controlling interest in about 2001. In December of 2007, the ESOP purchased the remaining equity-holders' shares, making the company 100 percent employee-owned…."When we became 100 percent employee-owned, there wasn't anything new as much as a recommitment and rededication to employee ownership," says CFO Kirk Hancock. "We try to look out for our clients and our people, and the company is a net result of that. A sense of entrepreneurship is what we strive for. That's always at the heart of employee ownership."

The company uses a different approach to management and compensation:

"Through employee ownership, we understand that the long-term health of the company is our responsibility," says Kirk. "Employees are charged with wearing their employee hats and owner hats. There's a complicated compensation structure at all levels of the organization, all tied to the quality delivery of their particular area. People are very well aligned to the success of their work. Their current compensation is tied to utilization, account growth and profit. Their long-term compensation is tied to the growth and success of the company. Those two aspects vary a lot. When times are tough they understand why we reduce our variable compensation. When times are good they know why they're getting more. I love to see that healthy tension. It shows that we're doing things right."

"At first, employees are interested but skeptical," says Dave. "Early on they see the unique culture. It takes a few years of getting annual statements before they see the benefits." The results for the company are low turnover (less than 10 percent, half of which is voluntary), an alignment with clients, and taking risks to make sure consultants do a good job on every assignment.

The company has aligned the objectives of the business with their clients' objectives by developing an ownership culture, holding semi-annual meetings, communicating financial results, and providing a two-day course for new employees to introduce the company culture and values.

In the News: Strategy for Continued Growth and Contributing to the Economic and Philanthropic Development of the Community

The Newberry Group (St. Charles, MO)

Newberrys turn company over to employees discusses how The Newberry Group, Inc., a global IT consulting firm, has sold their company to an ESOP as part of a strategy for continued growth and accomplishment:

"We wanted to restructure the company in a way that will encourage continued growth and accomplishment, while also rewarding the team that has played and will play a vital role in (its) success," Brenda Newberry said.

The Newberry Group now 100 percent employee owned discusses how the strategy will promote "continued quality IT solutions and excellent customer service", and discusses the benefits to employees and society:

"It is my hope that The Newberry Group continues to grow even beyond its previous pace, creating opportunities for more people to become employee-owners and allowing all those involved to contribute in an exponential way to the economic and philanthropic development of this community," Newberry said.

In the News: 2008 Innovations Award Winner, Three-Tier Reward System, 600 Hours of Management Training, and Two-Day Personal-Development Leadership Training

HCSS (Houston, TX)

HCSS Receives National Award for Employee Ownership announces that HCSS, a Houston software company serving the construction industry, is a winner of the 2008 Innovations in Employee Ownership Award:

HCSS has been an employee-owned company since 1998. At that time, Rydin sold 25 percent of the company to the employees via an ESOP (Employee Stock Ownership Plan) with the idea of getting HCSS employees to think and act like owners. HCSS now has a three-tier approach to employee ownership with annual cash profit sharing, Stock Appreciation Rights (SARS), and ESOP. Through these tools employees are rewarded financially for the positive impact they have on the company and are able to see how their work affects company performance. For the past 10 years, employees have received substantial profit sharing, both in cash and ESOP stock.

"Having ownership in HCSS is a constant source of motivation for me not only in my specific job, but in any area that will help our company grow," said Blake Driskill, who has worked at HCSS since 1998. "Knowing that my co-workers are also owners means that we all have a shared interest in working together for the benefit of HCSS."

The NCEO website also describes the winner:

HCSS is a fast-growing, industry-leading software company that serves the construction industry. HCSS works hard to make sure that employees do their jobs with an awareness of how they influence success in the business. The result is fiercely loyal customers and employees who provide a level of service unique in their industry because they learn, act, and work with the passion of owners. That passion comes from extensive open-book management and business literacy training at HCSS University, and it also depends on a three-tier reward system that gives employees a wide-spectrum ownership interest. The short-term incentive is a cash bonus program. Stock appreciation rights (SARs) cover the medium-term, and the ESOP rounds out the picture. Recognizing the key role that management plays in nurturing an ownership culture, HCSS invested heavily in management training, with a 50 hour, 12 week course for managers representing over a quarter of the company's employees. Additionally, every employee participated in a two-day personal-development leadership course.

The Innovations in Employee Ownership Award is defined as “an annual award recognizing creative ideas that help make employee ownership stronger, and publicizing those ideas so others can learn from them. Innovations can deal with employee participation, entrepreneurship, communication programs, education, plan design, or other ideas that strengthen employee ownership.”

We discussed some of the 2007 winners in Immediately Focusing on Building an Ownership Culture and Should You Consider An ESOP?

In the News: Employee Retention, Distinguishing Themselves from Competition, Using Employee Input for Continuous Improvement

Hansen Plastics Corp. (Elgin, IL)

Elgin plastics company's ESOP breaks the mold discusses Elgin, IL based Hansen Plastics Corp., a 100% ESOP-owned plastic moldings company with 60 employees. Their employee averages 10 years of employment and they have a low turnover rate:

The company Hansen currently has 60 employee-owners who have an average of 10 years employment with low turnover, a characteristic that's not uncommon for an ESOP, according to Michael Keeling, president of The ESOP Association.

The company uses employee ownership as a way to distinguish them from their competition:

"When we do a sales pitch, usually what this potential customer wants to know is, why to go with us," said Roy Lilly, president and CEO, "We have a completely different, positive attitude. These employees have stock in the company."

The company is run by a three-person Board of Directors and an ESOP Committee and the company uses Open-Book Management, which increases quality and productivity:

When employees are a company's owners, they have a vested interest in the company's bottom line, which increases quality and productivity, explains Vice President of Operations Tim Bayer. "No one is departmentalized," he said. Employees have open access to the company's statements of profits and losses.

The company also credits part of its growth and success to the input of the employees:

Hansen's growth and success is also based on internal changes and advancements, due in large part to the input to management provided by the employee-owners, according to Lilly.

Outside his office door, which is directly adjacent to the manufacturing area, sits a stack of bright pink "Continuous Improvement" forms, filled with workers' suggestions, each of which Lilly carefully considers. Throughout the work area, Lilly can point out machinery that once took one person per machine to operate, but through employee input has increased efficiencies that require only one person for four or five machines.

UPDATE 4/29/08:

Breaking the mold: Hansen Plastics competes globally provides a company profile, discusses how they compete globally, and how the ESOP was setup to reward long-term employees and serve as a morale builder:

Before stepping down, Watermann sought to reward Hansen's longtime employees who helped fuel the company's steady growth, according to Lilly.

"He found this ESOP (employee stock ownership plan) option and decided to sell the business to us," Lilly said.

He said the nice thing about ESOP is that employees need not purchase the company out of their own pocket. "You buy it from company profits -- so it didn't cost employees any money," Lilly said.

He described ESOP as a morale builder as well, "because when an employee makes a bad part -- it gets them right where it hurts -- in their wallet."

In the News: Maintain the Culture and Say Involved in the Business/ESOPs as an Exit Strategy/On Track for Continued Growth/Strong Management-Employee Relations

Unique Home Solutions (Indianapolis, IN); Koester Cos. (Evansville, IN); Herff Jones (Indianapolis, IN); Wood-Mizer Products Inc. (Indianapolis, IN)

Employee-ownership plans increasingly common tells the ESOP story of Unique Home Solutions, an Indianapolis-based employer of 125, and cites other Indiana-based ESOP companies as examples.

Transition Plan

As the owner started planning for retirement, he knew he wasn’t just looking for the highest price. He wanted to maintain the culture he helped build and stay involved in the business. As a result, he is selling one-third of the company to the ESOP, with plans to eventually sell the rest of the company:

After all, he and his 125 employees worked hard to establish a corporate culture that has helped the service firm triple revenue in recent years—and win the Better Business Bureau's Torch Award for marketplace ethics four times…"The ultimate goal is to make [the company] completely employee-owned," said Dillon, 53. He expects to stay involved for at least 10 more years and wants to increase annual revenue from more than $18 million to $25 million by 2012.

Promoting ESOPs as an Exit Strategy

The article discusses how Indiana State Treasurer Richard Mourdock has first-hand ESOP experience that provided him the means to pursue his political career. He plans to heavily promote ESOPs as an exit strategy:

"Literally, I wouldn't be sitting here [in the treasurer's office] if it weren't for my involvement in an ESOP company," Mourdock said.

As state treasurer, Mourdock hopes to help Indiana become a leader in employee ownership plans. By the end of the month, he said, his office will roll out a "tool box" of literature to help business owners learn more about the exit strategy.

"There's a unique opportunity in the marketplace right now simply because there are so many retiring baby boomers who have the wonderful characteristic of altruism," Mourdock said, saying business owners want to repay the employees who've helped make their business.

Businesses Considering an ESOP Should Be On Track for Continued Growth and Have Strong Management-Employee Relations

The article cites Indianapolis-based Herff Jones (Indianapolis, IN), named the 2007 ESOP Company of the Year by the Indiana Chapter of The ESOP Association, as a success story. The company stresses the importance of communication, teamwork, and trust:

A successful ESOP needs "a lot of communication, some sense of history as an organization, and … some track record of success so employees are not frightened at the prospect" of owning their own company, said Mike Cheek, chief financial officer for Herff Jones. "All of those are true of our situation."

Teamwork and trust, Cheek said, also are pivotal.

"There clearly is an understanding that everyone has a part to play, and everyone is accountable for that part," he said.

The article also cites Indianapolis-based Wood-Mizer Products Inc. as “the archetype of a successful ESOP”, and stresses the importance of having a diversified retirement portfolio.

In the News: Employees Directly Benefiting from their Quality Work, 14-Hour Training Sessions

Leonhardt Manufacturing (Hanover, PA)

Platts visits employee-owned manufacturer in Hanover discusses the story of Leonhardt Manufacturing, a manufacturer of tubular products with 135 employees, and how they are nearing the second anniversary of their ESOP. The article discusses a visit from their U.S. Representative:

Platts, an advocate of ESOPs, said the ability for employees to directly benefit from quality work is the main reason he supports the concept of employee-owned business.

"You have a more direct connection to that return," he said. "It's kind of the American way."

The article also discusses the challenge of educating employees on the concept of stock ownership:

The first challenge was educating employees on the concept of stock ownership, he said.

"People don't understand what it means to be an owner," Jacobs said. "You have to gradually teach people what that means."

The company taught its employees by instituting a 14-hour training session on basic economics.

"That opened people's eyes," Jacobs said.

In the News: Increased Management Accountability, Succession Planning, Addressing ESOP Misconceptions

Windings Inc. (New Ulm, MN)

Business feature: Windings Inc. tells the story of Windings Inc., a 43-year old contract manufacturer for electric motor parts for the aerospace, automotive, medical and factory automation industries with nearly 100 employees. The ESOP, which currently owns nearly 75 percent of the company, has been good for everyone:

Scott Ward, a vice president of Windings, said the employee ownership has been good for the company, good for employees and good for Ryberg (the owner).

"Employees build up equity that they take when they leave. They start asking more questions about how the business is run. They have a stake in it and they hold the management accountable," Ward said.

The article notes that the company, which had no family members involved in the business, had a succession plan in place, and the owner is now taking a less active role in the business:

"We chose an ESOP as a key element of our succession plan because I want our employees to have the opportunity for substantial benefit from the continued growth and profitability of this company they helped build," Ryberg said.

Ward and vice president Jerry Kauffman are the top executives of the company, while Ryberg has taken a less active role in the business.

The Minnesota Employee Ownership Fund, a non-profit institute with a mission to "promote economic activity in Minnesota communities," believes that ESOPs are the "best way to ensure companies, profits and jobs stay in local hands." They highlighted the importance of succession planning and the appeal of ESOPs to baby boomers:

"It's key that an owner plan for an ESOP early — while they are in their upper 40s or early 50s. "It takes some time to do it."

Baby Boomers and Succession Planning

Last year the first baby boomer reached retirement age. More than 5 million companies (UPDATED 3/2/08) will be looking to transition the ownership of their company in the next five to 20 years.

Windings Inc. had a succession plan in place. A recent PricewaterhouseCoopers survey found that 30% of CEOs do not have a plan in place. The number increases to 53% for family-owned businesses. Companies that do not have a succession plan in place will likely end up selling to a third party at the last minute. If more business owners took the time to identify their estate and succession planning objectives and considered all of their alternatives, many would find an ESOP to be a great fit for their situation. Unfortunately, most companies without a succession plan end up waiting until the last minute and are forced to sell their company to a third party (and often at a discount).

Addressing ESOP Misconceptions

The article also does a good job of providing a high level overview of how ESOPs work, including addressing some common misconceptions about ESOPs:

• Most ESOPs are entirely employer funded, so no employee dollars are at risk.
  
  Ward said there was skepticism and suspicion when employees were first told about becoming owners. One big worry was that employees would have to put up and risk their own money, which isn't true. ….But it's not like a 401K or something, where the employees put the money in. There's no out-of-pocket money at risk," Ward said.
  
  
• While the employees are now owners of the company, they cannot fire their co-workers or bosses.
  

  To replace the oversight of an owner, ESOP businesses have a board of directors that monitors the management team. An independent trustee ensures the board is acting in the company's best interests.
  

  Ward said nothing else changes in how a business operates and employees and managers have traditional roles.
  

  "We had some people joke that now that they're owners they can fire their co-workers, but it doesn't work like that."
  

• Employee ownership can potentially improve the relationship between management and employees because they both have a vested interest in the performance of the company.
  
  Ward said having a shared ownership, if anything, eases tensions between management and employees because employees know that moves to increase efficiency and increase profits will directly benefit them.
  

  "It keeps us on our toes, too," Ward said. "Employees have a stake in our decisions. They'll come and say, 'why are we building up inventory?' which usually isn't a good thing. And we'll say it's because we're trying to get into these new markets and it'll increase sales. And they'll say, OK, that makes sense.
  

  "So management has scrutiny from the board and from the employees."

In the News: Using an ESOP to Avoid Consolidation, Retaining the Management Team, Outside Board of Directors

Litecontrol (Hanson, MA)

Litecontrol announces full employee ownership discusses how Litecontrol, a Hansen, MA light manufacturer, purchased the remaining shares seven years ahead of schedule and is now 100% ESOP-owned.

This event, originally scheduled for 2014, completed a change in ownership that began in December of 1999. Litecontrol experienced fantastic growth from 2004 through 2007, which enabled the company to accelerate the purchase by nearly 7 years.

A press release discusses how they avoided the consolidation approach that their competitors have followed:

"In a time when many niche lighting manufacturers are being purchased by larger competitors, Litecontrol has chosen a different route," notes Clark. "Our ability to provide top notch service to our customers will be enhanced by ensuring we remain independent and that every one of our employees has a stake in the customer experience. Employee ownership is very consistent with our management philosophy at Litecontrol. We are known in the industry for the strength of our people. This is just another way we want to invest in this important asset," said Clark.

The release also notes that the management structure and team will remain the same and that they have an external Board of directors, consisting of the company chairman and four outside members.

In the News: ESOP Companies Acquiring Companies, Cost to Establish an ESOP

Tech Image (Buffalo Grove, IL) / SmithBucklin Corp. (Chicago, IL)

Sale Gives PR Firm the Benefits of Becoming Employee-Owned, one in a series of ESOP articles in the Wall Street Journal, discusses how Tech Image, a 17-employee technology public-relations firm, contemplated selling to an ESOP before ultimately selling to a company that was 100% employee-owned.

Tech Image explored establishing an ESOP but came to the conclusion that it would cost too much (see below). They ultimately decided to sell their company to 100% ESOP-owned, Chicago-based SmithBucklin Corp.:

"At first, Mr. Nikolich was torn. He worried about "losing our identity" as part of the much larger company and didn't want to change the firm's business model. He was concerned that if the deal didn't go through, he would have a contentious relationship with a client. And, he didn't want employees to think he was reneging on his promise to not take the money and run.

The deciding factor: SmithBucklin was employee-owned."

The article discussed how ESOP companies such as SmithBucklin are using the tax advantages gained by being ESOP-owned to acquire other companies.

"As employee-owned companies have grown in number and become established in the past 10 years, more are buying up other companies, partially because of big potential tax breaks, says Martin Staubus, director of consulting at the Beyster Institute, which focuses on employee ownership at the Rady School of Management at the University of California in San Diego."

How much does it cost to establish an ESOP?

The article discussed how the cost of establishing an ESOP persuaded the company to look at other options and ultimately sell to a third party:

"But he quickly learned that the cost of setting up an employee stock-ownership plan could top $100,000 -- more than his 17-person company could handle…… the process required huge chunks of time and money spent with accountants and lawyers."

I plan on writing a separate post on the cost of establishing an ESOP, because the cost to establish an ESOP for a smaller company appears to be grossly overstated.

In the News: Using Analogies to Teach Business Literacy

PRIZIM Inc. (Olde Towne Gaithersburg, MD)

QA: A Homegrown Approach to Business Literacy, one in a series of ESOP articles in the Wall Street Journal, discusses how PRIZIM Inc., an environmental and sustainability consulting firm, used analogies to teach business literacy to its employees. After considering other business literacy tools, like hiring outside consultants or following the Great Game of Business, they decided to use analogies

"They began using analogies to make key points, such as "going fishing" for marketing or "bagging a trophy" for winning a new contract, and soon were brainstorming models for talking about their business in a way everyone could understand"

While the analogy concept was working, the needed to find one analogy that would apply to everyone:

"So we started to use analogies. Marketing was like going fishing, and we would talk about what kind of bait we would use to get the fish to bite, what kind of fish to catch. People understood that….When we started sorting things out, none of other models worked….The dairy farm does it better. You didn't have to kill anything. It's about the right number of people. There are different product lines: ice cream, yogurt, cheese."

The article also discusses the problems with using this approach and why the company was reorganized.

In the News: Diversification of ESOP Assets

Brookfield Engineering Laboratories Inc. (Middleboro, MA)

Manufacturer Pushes Stock Diversification, one in a series of ESOP articles in the Wall Street Journal, discusses how Middleboro, MA based Brookfield Engineering Laboratories Inc., a company with 220 employees that makes viscosity-measurement and control products, achieved a goal of having 25% of the ESOP's assets in assets other than company stock.

Although the company had been committed to the goal, as evidenced by the plan's more generous diversification provisions (than the statutory diversification requirements), they were unable to achieve adequate their goal. In fact, 20% of the employees didn't even invest in the 401(k) plan. Here are some of the steps the manufacturer took to finally achieve the goal:

• Making 25% of the contribution in the form of cash. It was invested in "three exchange-traded funds, including ones tied to long- and short-term Treasurys and the Russell 2000 stock index, representing a basket of small-company stocks"
  
• Matching 10 cents for every dollar up to the maximum annual limit
  
• Bringing in financial advisers for seminars and to develop one-on-one plans

In the News: Educating Workers about Employee Ownership

Van Meter Industrial, Inc. (Cedar Rapids, IA)

We discussed managing an Employee Culture earlier this week. How to Get Workers to Think and Act Like Owners, one in a series of ESOP articles in the Wall Street Journal, discusses how the 100% ESOP-owned Van Meter Industrial, Inc., based in Cedar Rapids, Iowa, prospered after they worked on developing an employee culture. After realizing that their employees didn't know or truly appreciate the value of being an employee owner, they decided to make an effort towards building an ownership culture:

"Instead of continuing to simply pass out stock statements once a year, company executives set out to promote the program and educate workers about ownership. An employee committee has rolled out a series of campaigns, with catchy slogans and giveaways, to raise awareness of stock ownership and to get workers thinking about what each of them as owners can do to raise the price of company stock -- and how it affects their own net worth."

Van Meter also created an employee committee to “educate people on what each of them could do to raise the stock price -- and how that affected their own net worth.” Their stock was up 78% in 2006 and employee turnover dropped from 18% to 8%, which management believes is “directly correlated to employees' engagement and commitment.” Some of the initiatives implemented include:

• Creating an employee committee
• Removing management from the education process
• Providing new ESOP participants with a special “I am in” jacket and education on the plan
• Using creative ways to describe the benefits of the ESOP such as "Work 10 (years), get five free.” They also compared the size of the company’s contribution to the ESOP as “about 9 ½ weeks of pay.”