Specialty Food Magazine is the leading publication for retailers, manufacturers and foodservice professionals in the specialty food trade. It provides news, trends and business-building insights that help readers keep their businesses competitive.
Issue link: https://www.e-digitaleditions.com/i/567722
More and more, from craft beer brew- ers to supermarket chains, specialty food business decision-makers are turning to employee stock ownership plans, known as ESOPs, to help engage employees beyond just punching the clock. Businesses like New Belgium Brewing Co., Litehouse Foods, Bob's Red Mill, and some 7,000 oth- ers around the country all have some form of employee ownership program in place. Let's not mince words—the majority of plans are created because owners want liquidity as they near retirement age. Under an employee stock ownership structure, stock contributions are tax deductible, sup- plying companies with a new cash f low through shares issued to the ESOP. That doesn't mean all employee own- ership plans are created purely for the love of money, though it helps. Many employee stock plans are made because company owners want to share ownership and profits with employees they've come to view as an extended family of sorts. They want the businesses and value systems they've devel- oped over time with loyal staff—what they view as their legacies—to continue. In fact, businesses whose owners decide to create a stock ownership plan to benefit employees account for about 25 percent of all ESOPs, says Corey Rosen, co-founder of the National Center for Employee Ownership. How It Works Employee ownership shifts its shape, taking different forms, with businesses operating under hybrid models, but there are some basics to know. ESOPs are like employee benefit plans, similar to profit-sharing plans. A company sets up a trust fund and contrib- utes new shares of its own stock or cash to buy existing shares. The ESOP can also bor- row money to buy shares, with the company making cash contributions to the plan for loan repayment. Businesses can elect for staff to buy stock directly or give it as a bonus. Employees can obtain stock through a prof- it-sharing plan or receive stock options. Workers can also become owners through cooperatives, with all employees having equal votes. Then, when a worker leaves the company, she is paid for her stock. The business is required to buy it back at fair market value, unless there is a public market for the shares. Private companies are also required to have annual, independent valua- tions to determine share prices. To the company's benefit, in C corpo- rations (those taxed separately from their owners), once the ESOP owns 30 percent of all shares in the company, the seller can reinvest the proceeds of the sale in other securities and defer any tax on the gain. And in S corporations (those taxed through the owner), the percentage of ownership held by the ESOP is not subject to income tax at the federal level, and often the state level as well. A Smart Move—with Limitations When you look at the numbers, an ESOP can be an attractive alternative to your run- of-the-mill corporate structure. Virtually unknown until 1974, it is now the most common form of employee ownership in the United States, covering more than 14 million workers. The NCEO's Rosen says companies operating with employee stock ownership programs have significantly lower turnover than more traditional private busi- nesses; their rates of layoff are between a quarter and a third lower than other compa- nies; they grow 2.5 percent faster annually; and ESOPs generate more than twice the total retirement assets. So they provide a good deal for employees, and are smart for owners concerned with the long-term suc- cess of a healthy business. Coborn's, an employee-owned retail- er with more than 120 locations across the Midwest, has experienced nothing but growth over the years, says Rebecca Kurowski, the company's communications manager. "Our profits continue to grow year after year, even through this last reces- sion," Kurowski says. "The challenge is finding enough right-fit employees for our attitude of continuous improvement. Right now we have more than 300 openings across the company." The same can't be said for a f lounder- ing enterprise. It is difficult for an unprof- itable company to create an ESOP. The money used by the business to buy out an owner is a nonproductive expense, so if there are no profits, it is hard to fund an ESOP. Also, if the business has poor employee-management relations, it will be an uphill battle. Either way, it's rarely a good vehicle to save a troubled company. Some critics contend that ESOPs are too risky because they increase the con- centration of retirement assets into a single security, the company stock, and employees depend on that same company for their paychecks and retirement plans. Yet, the NCEO maintains that such companies are more likely to have a secondary retirement plan, even separate benefit plans, than other businesses are to have even just one plan. Mature ESOPs often diversify some assets FALL 2015 27 Companies operating with ESOPs have signifcantly lower turnover than more traditional private businesses; their rates of layof are between a quarter and a third lower than other companies; and they grow 2.5 percent faster annually.