The question of whether a business is a good fit for an employee stock ownership plan (ESOP) gets a lot of attention, but ESOP companies share another story worth telling. It’s about how transitioning to an ESOP can support many different types of businesses’ ongoing success.
Different industries and individual companies have their own challenges, whether or not they are employee-owned. And nuances like professional licensing, franchise agreements, distributorships, and union environments can all add extra complexity to an ESOP sale.
But that doesn’t mean that a complex business can’t succeed in an ESOP sale, or thrive as an employee-owned business. It just means that the experienced guidance of a true ESOP expert can make the transition a smoother one.
These successful employee-owned companies help demonstrate the variety of business types that can continue to thrive after the sale.
Supermarket and Grocery Store ESOPs
Some of the largest and longest established ESOPs in the U.S. are supermarket chains, including Publix and several others that employ hundreds of thousands of people. Employee ownership is a great cultural fit for many grocery businesses, fostering a self-starter attitude that can promote excellent customer service and an all-around positive work and shopping environment.
Founded in 1963, this Baton Rouge, Louisiana, grocery chain was in its third generation of family ownership when leadership opted to become an ESOP. Many family businesses experience challenges in third or subsequent generations, as the involved family members may start to have varying levels of interest in the business.
When Hi Nabor’s senior management opted to sell to an ESOP, the sale provided liquidity for the family members who were selling. The ESOP also offered the option to remain involved in the business, for those who wanted to. That’s distinctly different from the typical experience of selling the company outright to an uninvolved third party.
The Hi-Nabor ESOP helps support and maintain the business’s local legacy within the communities it serves, sustaining employment and increasing wealth potential for the company’s 135 employee-owners.
This formerly family-owned group of stores in southeastern Wisconsin became an ESOP in 2017. The ESOP sale enabled the sellers to transition the ownership of the company to employees while continuing to actively lead while setting the business up for a successful future.
Highly competitive, low-margin supermarket businesses often require leadership to seek out every competitive advantage they can. An ESOP sale provided the right vehicle for growth for Fox Brothers Piggly Wiggly, enabling the company to acquire additional stores. As a franchisee, it was also imperative to work closely with and get approval from franchisor Piggly Wiggly Midwest.
Employee-Owned Engineering Businesses
Engineering companies are often founded by close-knit teams of specialists who toil for decades to establish trust and a reputation for excellence. That integrity can be at risk when a business is sold, but an ESOP offers a way to maintain cultural continuity that a third-party buyer may not understand or care about.
The tax benefits of an ESOP can give these companies a competitive cash flow advantage. This can help them thrive after the sale, as the seller’s long-term succession plans start the leadership transition process.
Just as a grocery franchisee may need advice to navigate a smooth ESOP sale, engineering firms in highly regulated industries or under licensing agreements may need extra guidance. This is to ensure ongoing regulatory compliance, and secure approvals and updated agreements from partner companies or customers.
These situations can be highly specific, and ownership rules related to licensures can vary by state. That’s why it’s essential to seek the advice of a trusted expert to ensure a smooth transition and to access all of an ESOP’s business advantages.
MSA’s focus on community and sustainable development is an ideal vision and values match for employee ownership. Leadership of the engineering firm, based in Baraboo, Wisconsin, made the decision to sell to an ESOP in 2016 and completed the transaction in 2017. The company points to the stakeholder values of shared employee ownership and membership of the communities where employees live that add greater meaning to their community development project work.
Tormach, Inc. grew from a partnership into an innovative leader in CNC (computer numerical control) machining, with about 40 employees. Providers of engineered compact CNC machines, tooling, products, and services, Tormach specializes in helping inventors, boutique manufacturers, small entrepreneurs, educators, and others turn their innovative concepts into reality.
The tax advantages of an ESOP can help smaller, entrepreneurial companies access cash flow that can make them more agile and responsive to opportunities. And Tormach’s value of helpfulness is well suited to the ownership culture of an ESOP. Tormach credits employee ownership with keeping the company on its trajectory for success by empowering employee leadership.
Employee-Owned Construction Companies
Construction companies are often multi-generational family businesses, and as subsequent generations take over leadership — or choose not to — employee ownership can make for a stabilizing exit strategy. For a variety of reasons ranging from low EBITDA multiples to a tight-knit employee culture, construction companies may not be attractive to third-party buyers.
That’s where an ESOP sale offers an opportunity for the business owner to realize fair market value for the business, to control their exit, and to leave a legacy for the company’s employees.
Founded in 1956, Iowa-based Woodruff Construction completed its ESOP sale in 2020. According to the company, the transition to employee ownership supports the company’s mission of building the future for employees, their families, clients, and communities.
Company leadership cited stability and ownership stakes as important for carrying the company into the future, and the qualified retirement plan as a way to reward employees’ loyalty.
Spanning three generations and in business more than 90 years, Farmington, Missouri-based Brockmiller Construction created an ESOP for its office employees in 2018. This full-service construction and contracting company put a controlled succession plan in place after the ownership transition.
Brockmiller also employs union carpenters, laborers, and iron workers on its work sites; in this case, union employees receive benefits through their union benefit programs, and they are not included in the company’s ESOP.
Accounting for labor unions in an ESOP plan is one complexity construction companies can face. As with other business nuances like licensing and franchises, this points to a need for sound guidance and proper planning. Unions can and have successfully negotiated employee ownership into contract agreements.
What Makes a Company a Good Candidate for an ESOP?
The qualities that make for a successful ESOP have little to do with specific industries, and much more to do with leadership qualities and overall business success.
Get the details and explore whether an ESOP is the right exit strategy and qualified retirement plan for your business with our tip sheet, Is An ESOP Right for Your Company? You’ll get an overview of alternatives for your business transition and a better understanding of what it takes to succeed when selling your business to an ESOP. Just click the link to request your tip sheet.