ESOPs are a way to sell a company internally to employees. ESOPs enjoy several valuable tax benefits, including the possibility for a selling shareholder to defer capital gains tax on sale of shares to an ESOP and the ability of a 100-percent ESOP-owned company to operate tax-free as an S-corporation.
Moreover, ESOPs allow an entrepreneur to control the destiny and preserve the legacy of a company and to provide significant wealth creation opportunity for employees. Monaco Jr. believed the success of Unicast was in good part because of the people who worked there every day. He thought that the dedication of the employees ensured the long-term success of the company.
His personal hero was his father, a laborer at Westinghouse, who died in his 50s, leaving his widow, Monaco Jr's mother, with only a small pension. Monaco Jr. had always intended that the people who worked for him would have more opportunity and reward for years of loyal service.
VALUE, FLEXIBILITY, TAX BENEFITS
He learned about ESOPs not long after arriving at Unicast. He believed for a long time that this would be his preferred liquidity and succession strategy, assuming he could get fair value for his ownership. Unicast established the ESOP as a retirement plan in 2001, initially funding small contributions of company stock. The ESOP remained a small shareholder for many years yet developed significant cash resources through company profit distributions.
Meanwhile, Unicast received offers from both private equity and strategic acquirers. While these offers provided a price benchmark and the promise of mostly cash at a closing, Monaco believed the outside proposals did not offer the combination of benefits that the ESOP could: fair market value in the sale, flexibility in structure, the ability to retain governance control, a variety of tax benefits and control over the timing of his involvement and retirement with Unicast.
In 2012, Monaco and other company shareholders sold all of the remaining outstanding company stock to the ESOP. The transaction was funded through the cash that had accumulated in the ESOP, a loan from M&T Bank and notes issued to the selling shareholders. Unicast now operates as a 100-percent ESOP company and pays no current federal or state income taxes. Unicast has prospered since the ESOP transaction, paying down a good part of the transaction debt over the ensuing years.
As the baby boomer generation continues to move toward retirement, many other business owners find themselves in a situation similar to Monaco's. According to Forbes magazine, almost 70 percent of domestic companies with employees in America are owned by people 65 or older. But retirement often has a different meaning for baby boomers, as many seek to reduce the scale and intensity of involvement in their companies without fully leaving on a specific date. ESOPs provide the opportunity for entrepreneurs such as Monaco to continue to work in their companies without fully leaving on a specific date. ESOPs provide the opportunity for entrepreneurs such as Monaco to continue to work in their companies without reporting to outside corporate masters and while achieving liquidity and scaling back day-to-day responsibilities.
ESOPs were created with the passage of the Employee Retirement Income Security Act of 1974. Some of the best-known ESOPs include Wawa Inc., based in Delaware County, and W.L. Gore & Associates (maker of Gore-Tex), based in Wilmington, Del. The National Center for Employee Ownership reports that there are about 7,000 ESOP companies nationally, covering about 10 million employees – about 11 percent of the nongovernmental U.S. workforce.
NO UP-FRONT COST TO EMPLOYEES
The ESOP creates a market for the company's shareholders. ESOPs can buy all or a portion of a firm's stock in one or more transactions and use funds from a bank or another third party to do so. Further, the ownership in the business is transferred to employees over time at no up-front cost to them. However, the employees' stock is owned by a trust and held for their benefit until such time as they leave the company.
"We have been fortunate at Unicast, " Monaco Jr. said. "I think my dad would have liked the idea of employee ownership, and it makes me proud that our employees today and in the future will benefit from the company's success."
John Kintzer is a senior vice president with SES Advisors Inc., Allentown, which is focused on creating and maintaining successful and sustainable business transitions to employee ownership. Unicast is a client of SES Advisors Inc. If you would like to speak to Kintzer, please email firstname.lastname@example.org.
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SOURCE SES Advisors, Inc.