ESOPs forge company legacies

For Daniel Goldstein, the benefits of ESOP (Employee Stock Ownership Plan) business operations go far beyond employees having an ownership stake in the company for which they work. As the president and chief executive officer of Cedar Rapids-based Folience sees it, ESOPs are just as much about keeping companies under local control and securing a […]

For Daniel Goldstein, the benefits of ESOP (Employee Stock Ownership Plan) business operations go far beyond employees having an ownership stake in the company for which they work. As the president and chief executive officer of Cedar Rapids-based Folience sees it, ESOPs are just as much about keeping companies under local control and securing a profitable future for workers in their retirement years. Folience, a holding company, owns The Gazette in Cedar Rapids as well as a group of smaller weekly papers, but has also diversified its portfolio with the purchase of two trailer manufacturers – Cimarron Trailers of Chickasha, Oklahoma, in November 2018 and TravAlum in Manhattan, Kansas, in February 2022 – and Life Line Emergency Vehicles in Sumner in July 2017.

The formula has proven successful. Folience launched its ESOP in 1986 and transitioned to full ESOP operation in 2012. Weathering the hardships of economic uncertainty, Folience declared its largest ESOP valuation in company history in 2020, and in May, the company was declared the ESOP Association’s 2022 National Employee-Owned Company of the Year in a ceremony held in Washington, D.C. Mr. Goldstein has become a passionate ESOP advocate, extolling the virtues of ESOPs as a speaker at regional and national conferences. And in a ceremony Sept. 28 celebrating Folience’s award at Life Line’s manufacturing facility, attended by numerous local and state officials and Life Line employees, he stressed the importance of ESOPs in maintaining continuity of company operations, particularly in times of ownership transition. “Across Iowa’s 99 counties, and across counties throughout America, there are many companies like Life Line which provide good-paying jobs to their employees and are literally the lifeline for keeping the community going,” he said. “For some of these businesses, there is an imminent threat to their continuity – something called the ‘Silver Tsunami.’ As the Baby Boomer generation heads toward retirement, there are estimated to be 2.9 million companies across the U.S. which will need to transition ownership. In Iowa alone, that is estimated to be 28,900 businesses. “Typically these transitions happen by passing the company to heirs, selling the company to private equity or a strategic buyer, or simply closing the company,” he added. “There is another path – converting some of these businesses to employee-owned businesses. Employee ownership is local ownership. Employee ownership overcomes income and wealth inequality gaps. Employee ownership keeps jobs in the community.” Iowa Economic Development Authority Director Debi Durham also attended Folience’s celebration at Life Line and offered effusive praise for the company’s overall success, noting Life Line’s significance in Sumner’s economic picture. “Through employee ownership, you are investing not only in your business, but also in the people in your community,” she said. “Looking around, I see an even bigger Iowa success story unfolding here – a story of relationships, a story of reinvention and a story of hometown pride. I see two locally-owned legacy companies that not only adapted, but innovated through a changing landscape, and they are ensuring a strong future through employee ownership.” Ms. Durham focused on Life Line’s decision to join Folience as a milestone in both companies’ histories. “Folience describes itself as a family tree,” she said. “The company's philosophy, that partnership is powerful and ownership is the engagement that provides its competitive edge, has drawn national attention, from coverage in the New York Times to (Mr. Goldstein’s) testimony before Congress. … When the time came for Life Line to change hands, the Leicher family could have sold the company to private equity investors, at the risk of breaking up the business. Instead, the family's decision to join forces with employee-owned Folience kept Life Line and its 180-plus jobs in this community.  “It is your mission to ensure your businesses, workers and communities stay strong. ESOPs are so much more than just tax plans. They are transition plans that create a sense of ownership for employees, economic peace of mind for communities, and an economy of innovation for the state by nurturing the kinds of businesses that invest back into their people.”

ESOPs by the numbers

Congress enacted the first of a series of tax measures designed to encourage ESOPs in 1974. The Employee Retirement Income Security Act (ERISA) established a formal legal framework for ESOPs. The act was the first piece of legislation to grant special status to the instruments, as well as the first to use the term ESOP. ESOPs have been continually supported by legislative measures, at both the state and federal levels.  On a local level, the Iowa Economic Development Authority helps Iowa business owners complete the first step of setting up an ESOP – a feasibility study conducted by an independent financial professional. The IEDA reimburses 50% (not to exceed $25,000) of the cost incurred to obtain the study. Reimbursement is dispersed in two stages, with half released upon conclusion of the feasibility study and the remaining half after successful formation of the ESOP. In addition, Iowa offers a 50% reduction from state income taxes for the net gain from the sale of stock to an ESOP. As a result of these measures, the number of ESOP companies continues to grow, in Iowa and across the United States. According to the National Association for Employee Ownership, 239 new ESOPs were created in 2019, the last year for which data is available, covering nearly 47,000 participants. In total, there are an estimated 6,482 ESOPs in the United States, with total assets of over $1.6 trillion and more than 13.9 million individual participants. There were $89.3 billion total ESOP account contributions in 2018, and $137.7 billion in ESOP benefits were paid. There are 144 privately-held ESOPs in Iowa, according to the NCEO, covering 27,391 state residents. Top privately-held ESOP companies, by industry, include manufacturing (21%); professional, science and technology services (21%); construction (15%); and finance, insurance and real estate (12%).

Best candidates for ESOP formation

Matt Fett, vice president of Des Moines-based BCC Advisers, advises companies considering a transition to ESOP ownership and provides annual business valuations for existing ESOPs. There are a few factors that can inform companies as to whether they’re a good candidate for ESOP formation, he said. “Typically when an ESOP is set up, it's set up for the right reasons,” Mr. Fett said. “The owner has grown the business and wants to reward the employees, and the best way for them to do that is to allow the employees to have ownership of the company, so they would sell it to the trust and so the future gains of the company accrue to the employees.” Situations like Life Line’s are also a common inflection point for ESOP transitions, he said. “If there’s a manufacturing plant that’s the only (major) employer in town, by selling to an ESOP they're able to keep that employment base within the small community,” he said. “Whereas an outside company, if they were to come in and buy it, they might close down the plant and move operations somewhere else.” An economic study conducted from 2009-13 emphasized the financial advantages of ESOPs, particularly during economic downturns, Mr. Fett said. According to that study, employee-owned businesses had a lower default rate and stayed in business longer when compared to privately-owned middle market firms. In addition, he said, there’s often a different mindset for employees of ESOP firms “really looking after the company” to ensure their ownership stake is protected and profitable. Overall, Mr. Fett said, companies with fewer than 20 employees may have difficulty forming ESOPs due to the costs of launching and maintaining the ESOP framework, but for companies with the right set of factors, it can be an appealing option for their future. “Typically, if they're exploring an ESOP, they want to make sure their employees are taken care of after the transition, but there are ways that the owner can benefit as well,” he said. “There's synthetic equity on the back end that can motivate them to continue to grow the company. And we talk through a lot of concerns about the cost of an ESOP transaction versus going to a private sale, and how they’re pretty comparable.” Iowa, in particular, has a thriving ESOP culture, and a national legacy as well – Cedar Rapids-based Van Meter was named national ESOP Company of the Year in 2011. “Communication is key to the success of an ESOP,” Mr. Fett added. “A lot of ESOPs that we see in Iowa spend a lot of time and energy on ESOP committees, to really help employees understand the benefits and drive the ownership culture. And I think Iowa having two National ESOP of the Year recipients says a lot about how ESOPs in Iowa embrace that culture.”