Indiana's ESOP Initiative (IEI)

Posted by Aaron Juckett, CPA, CPC, QPA, QKA on Sat, May 10, 2008
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State to help employees buy out companies discusses a new Indiana State Treasury program that will subsidize bank loans with the goal of encouraging more Indiana business to sell to an ESOP.

Taxpayers will more than recoup the program's annual cost of $500,000 a year because of the tendency of ESOP companies to stay in the state and not outsource work overseas, Mourdock said. ESOPs also help workers save for retirement and create incentive at all employment levels to make the companies succeed.

"This is one more thing we can do to help existing businesses keep those jobs," he said in an interview.

The $500,000 will be taken from the $400 million to $700 million the state typically has invested in banks.

The article also discusses the risks to the taxpayers:

Mourdock said the main risk to taxpayers is the potential for companies to fail. The most likely scenario for failure would be owners' deserting the companies shortly after the sale and leaving less-experienced managers to cope.

However, he said he is trusting banks to conduct thorough credit analysis, as they would if the subsidy weren't available.

The article notes that Baby Boomer business owners are among the most obvious candidates for an ESOP.

While the Indiana Bankers Association supports the concept, they are concerned about the length of the potential loan (the program is only available for three years instead of the seven to 10 years of a typical ESOP transaction) and the education that the bankers will need to handle the complex nature of ESOP transaction.

The article notes that more than 200 ESOP companies exist in the state, and specifically mentions Herff Jones (Indianapolis, IN) and Wood-Mizer Products Inc. (Indianapolis, IN), both discussed in 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, and Telamon Corporation (Carmel, IN), a technology company that formed an ESOP in 1999.

Indiana's ESOP Initiative (IEI)

The Indiana state website contains the following executive summary of the IEI:

Indiana's ESOP Initiative (IEI) was created by State Treasurer Richard Mourdock to promote and encourage the formation of new Employee Stock Ownership Program (ESOP) companies in Indiana.

ESOPs have a clear track record of creating wealth, encouraging entrepreneurial attitude, and increasing productivity. The key to retaining Indiana jobs is increasing productivity. As Treasurer Mourdock has often said, "one of the best reasons to help Indiana companies become employee-owned is that no group of employee-owners have ever, ever, ever, ever moved their company to Mexico or China!"

In order for the IEI to achieve its goals, Treasurer Mourdock is providing a $50 million investment through a "link-deposit" program to assist Indiana banks in funding ESOP transactions.

Treasurer Mourdock is also announcing that Credit Suisse, who is managing $150 million of Indiana's Public Employees Retirement Fund targeted for investment in Indiana, will consider on a case by case basis the purchasing of equity in an Indiana company for the purpose of completing an ESOP transaction.

In addition, Treasurer Mourdock has assembled an "ESOP toolbox" of resources and information for business owners and employees wanting to learn more about ESOPs and professional organizations that can assist with their creation. The ESOP toolbox will continually be updated with new information as it becomes available to IEI.

ESOP Linked-Deposit Program

The website also contains a description of the ESOP Linked-Deposit Program:

General Guidelines

A company must have their headquarters located in the State of Indiana, conduct a significant portion of their operations in Indiana, and employ the majority of their employees in Indiana while participating in the ESOP Linked-Deposit Program.

The Treasurer of State will NOT make any judgment on the credit quality of any applicant but will rely solely on the credit evaluation provided by the financial institution(s) providing the transactional loan. An applicant may not have an established ESOP prior to participating in the ESOP Linked-Deposit Program. (The program is for new ESOPs only.)

Investment Guidelines

At least 10% of ownership in the company must be transferred to the ESOP in the initial transaction. The maximum amount that will be available to a company participating in the ESOP Linked-Deposit Program will be $5 million. Funds will be deposited in the form of 12 month certificates of deposit (CDs) with an approved depository as defined by the Indiana Board for Depositories. The CDs will be renewed on a yearly basis for up to 3 years. a.The interest rate on the CDs will be determined by the Treasurer of State. i.The financial institution may charge the borrower up to 3.25% more than the rate received by the Treasurer of State on its CDs. b.CDs will be purchased by the Treasurer of State on the first and fourth Thursday of each month. The interest rate for new CDs may be adjusted on a quarterly basis at the discretion of the Treasurer of State's Office

Additional Requirements

1) A company must provide the following information to the IEI:

a)A complete business plan. b)Resumes of key managers and substantial evidence of their commitment to service after the ESOP Linked-Deposit Program is completed. c)A complete transition plan. d)Names and contact information of the firms that created the ESOP trust and did the financial evaluation of the company.

Limitations of ESOP Loans

1)Availability of funding. 2)The financial institution assumes all credit risk. In the event of default by the ESOP, the linked-deposit will be terminated at the maturity of the CDs being held by the lending institution.

Press Release

Here is a link to the press release:

State Treasurer Richard Mourdock Announces Launching of $50 Million Indiana's Employee Stock Ownership Program (ESOP) Initiative

Indiana's ESOP Initiative's (IEI) mission: Promoting Hoosier ESOPs, preserving Hoosier jobs

INDIANAPOLIS (May 08, 2008) – State Treasurer Richard Mourdock announced the designation of $50 million and the launch of IEI for the purpose of assisting Indiana businesses to become ESOP companies, which will preserve Hoosier jobs.

"It's not only critical that the state continues to bring new jobs to Indiana, but it's absolutely essential that Indiana keeps the jobs it currently has," asserted Treasurer Mourdock. "IEI's mission is to encourage Indiana businesses to become ESOP companies and preserve Hoosier jobs."

Treasurer Mourdock has placed the IEI within the Treasurer of State's Office and has created an "ESOP toolbox" of information regarding current Hoosier ESOP companies, organizations that provide professional services to ESOP companies, and educational materials about ESOP governance.

The $50 million designated for IEI and its mission is set up as a "linked-deposit" program through the Treasurer of State's Office. In the ESOP Linked-Deposit Program, the Treasurer of State will purchase certificates of deposit from local financial institutions at reduced rates of interest, and in turn the financial institutions will provide loans at reduced rates of interest to Indiana businesses becoming Hoosier ESOP companies. The initial rate financial institutions will be charging to Indiana businesses through the ESOP Linked-Deposit Program will be 4.25%. The State of Indiana will not be a guarantor or man any of the risk of default on loans made under this program.

"ESOP companies have a track record of creating wealth, encouraging the entrepreneurial spirit, and increasing productivity," explained Treasurer Mourdock. "Furthermore, no group of employee-owners has ever, ever, ever, ever moved their company to Mexico or China!"


  • Employee-Owned Top Small Workplaces, IEI, HR 333, and Broad-Based Equity Grants (5/16/08) - "Indiana State Treasurer Richard Mourdock has introduced a program to encourage banks to loan to ESOPs. The state will buy certificates of deposit from those institutions at reduced rates, increasing their funds available to loan. Banks then would loan these funds to new or existing Indiana ESOP companies for 4.25% (this is the current rate; it will change as interest rates change). The program will cost the state $500,000 annually, but Mourdock (himself a former ESOP participant) believes that the program will create a net increase in state revenues because ESOPs tend to keep jobs and business activity in the state."

Topics: Information Page, ESOP, employee stock ownership plan

Aaron Juckett, CPA, CPC, QPA, QKA
Written by Aaron Juckett, CPA, CPC, QPA, QKA

Aaron is President and Founder of ESOP Partners and provides implementation, administration, and consulting services to hundreds of companies. He is a member of The ESOP Association (TEA) and the National Center for Employee Ownership (NCEO).

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