Jobs Staying in Rusk, Wisconsin

For 54 years, Artisans served as more than just an apparel company. It was an important source of jobs for Rusk County in northern Wisconsin.

But nothing lasts forever, and when the owners—Gordon and Bev Dukerschein—were ready to retire the community faced the prospect of losing the business and its 72 jobs.

Now, thanks to a loan from the Wisconsin Economic Development Corporation (WEDC), the company will remain in business…as an ESOP.

“Without WEDC’s loan, Rusk County was facing the potential risk of losing a major employer,” said Michael Wright, chairman and CEO of the company. “ESOPs are one of the few structures that allow employees, especially in rural areas, to participate fully in the generation of wealth that can sustain communities.”

It is a situation that plays out all over the nation as Baby Boomers consider retiring from the businesses they have owned, in some cases for many years.

And it is a situation for which ESOPs are ideally suited.

The business owner finds a seller who knows and cares about the businesses—more than any outsider ever could.

Customers experience a smooth transition and ongoing service from the same people they have dealt with in the past.

The community gets an owner that cares about keeping jobs right where they are.

And the employees—who often helped build the business—get to share in the rewards.

“Our employees now have the chance to secure a future in the community they love and support,” said Charlie O’Mahoney, president of Artisans.

What’s not to like about that?

Getting it Right

By Shawn Moody, Founder, Moody’s Collision Centers

In 1977, I started Moody’s Body Shop at the age of 17. I was a small business owner, taxpayer, and mortgage holder before I was old enough to vote. Fortunately, I found my passion young!

When the “junkyard” adjacent to Moody’s came up for sale in 1988, we jumped at the chance to acquire its 35 acres of land. Our goal was to clean up the mess and market the property for future development.

But we found out we were equally passionate about the “junk” business, and over the next four years we transformed what could have been a Superfund site into one of the leading auto recyclers in America.

Our efforts were noticed. In 1994, the Automotive Recyclers Association gave us their highest award, for Environmental and Operational Excellence. We were one of only six recyclers in the country to be so honored.

In 1998, a newly formed company named LKQ Corp. began acquiring leading auto recyclers, and they came knocking on our door. So did the Ford Motor Co., which also decided to get into the auto recycling business.

After an intense courtship from both companies, we decided to go with LKQ Corp. We sold them our auto recycling business, and leased them the land and buildings. We also retained Moody’s, which was a single shop that we had grown to 10,000 square foot facility with 10 co-workers.

I stayed with LKQ Corp. for about 18 months, working on a business improvement team. We went all over the country, working with newly acquired sites. I would recruit former owners like myself and we would spend three or four days analyzing their operations and developing a business plan to improve operations and systems, all while integrating LKQ’s best practices.

When I returned to Moody’s, we were focused on growing the collision repair business with the capital and experience we had gained from the LKQ deal.

But as Moody’s grew, the aftermath of our transaction settled in: I realized that while the sale to LKQ was a financial windfall for me and my family, it didn’t provide the same financial benefits to the co-workers who had helped build such a high performing company.

In 2002, I was standing in the lobby of Sebago Technics awaiting a set of blueprints, when I noticed a photo on the wall. The photo captured Sebago’s co-workers, and in the corner it had the inscription “Employee Owned.”

It struck me this could be a way to structure Moody’s so that all our co-workers would have an opportunity to build equity through their hard work and dedication.

I reached out to Walt and Ellen Stinson, the founders of Sebago, and they helped guide us through the complex process of starting an ESOP. The first few years I contributed stock to our co-workers and began the journey of transitioning ownership to them.

Since then, we have grown the company, together. In 2001 we had 10 co-workers in one location. Today, we have 170 co-worker owners and 11 locations. Our ESOP trust holds 34 percent ownership and is worth more than $8 million. The stock has appreciated an average of 18 percent per year since the ESOP’s inception in 2003.

The development of our ESOP, and our overall success, is due to a lot of help from a lot of wonderful people within the ESOP community, such as Rob Edwards (retired Steiker, Fisher, Edwards), Donna Isherwood (Angell Pension), Brady Phinney (Atlantic Management), Michael Keeling (ESOP Association), and especially the hard work and dedication of each and every co-worker owner at Moody’s.

When we sold our first company, I didn’t fully realize the positive impact we could have on our co-workers lives.

It’s gratifying to be able to learn from life’s experiences. It’s gratifying to have another opportunity to “get it right.” And now we know the right way to redistribute wealth—the capitalist way that enables people to earn it!

ESOPs: A Truly American Invention

The ESOP model we know is unique, and exists only in the United States. Perhaps that is no accident, since concepts that are intrinsic to employee ownership—such as economic fairness, and providing business opportunities for those who will work for them—have been evident in American economic thinking since before the Revolutionary War.

Here are some lessons from the nation’s early history that continue to relate to ESOPs and employee ownership today.

Broad Support

As professors Joseph Blasi and Douglas Kruse point out in The Citizen’s Share, one of the American government’s earliest legislative actions was providing a tax break to help rebuild New England’s cod fishing industry, which had been decimated by the Revolutionary War.

But, there was a catch: The federal assistance would be available only if employees shared in the profits.

Three Revolutionary leaders agreed on this financial assistance and the requirement that employees share in the benefits: George Washington, Thomas Jefferson, and Alexander Hamilton.

Jefferson and Hamilton were political adversaries who held very different views on the nation’s economy. Yet the fundamental concept of economic fairness—one central to the Revolution itself—was powerful enough to cause them to join forces.

That tradition continues today: Pro-ESOP legislation before Congress is sponsored by Democrats, Republicans, and Independents. And thought leaders representing the left, right, and center all have publicly stated their support for employee ownership and ESOPs.

Lending Capital

Where Washington, Hamilton, and Jefferson used the nation’s money to support employee ownership, Ben Franklin used his own.

Franklin was the elder statesmen among Revolutionary leaders, and by the time the war had started he had already launched and sold his successful printing business. But Franklin didn’t start out as a successful business leader. Like many young men of his day, Franklin learned his trade by serving as an apprentice—which was akin to signing an utterly lopsided non-compete agreement.

The apprentice learned his master’s trade, and was given food, lodging, and clothing. In exchange, though, he signed a contract pledging to keep his master’s trade secrets and to work for up to seven years without pay. The master could even control the apprentice’s non-work hours. For example, in one contract of the colonial era, the apprentice was not allowed to buy or sell goods without his master’s permission, and was not allowed to marry until the apprenticeship had ended.

Once an apprentice had served his term, he could work as a journeyman at any shop where he could land a job. But he still had an uphill battle to becoming an owner. A huge obstacle—then, as it is now—was a lack of capital. This was especially true for the printing business in Franklin’s day because the necessary printing equipment had to be imported from England.

Saving money on a journeyman’s salary could be challenging, but Franklin relied on his keen intellect, diligent work ethic, and frugal lifestyle to get ahead.

But even these were not enough: In the end, Franklin was able to open his own shop at an early age because others helped him obtain the seed money he needed.

As Franklin became more successful, he in turn helped his employees set up their own businesses. In 1733, he sent one of his journeyman employees to the city of Charleston, South Carolina, which needed a printer. Franklin paid the upfront capital costs for the business, buying the expensive press and type. He also paid one third of the expenses. He took one third of the profits for six years, at which point the journeyman could purchase the equipment and run his own business.

The first time he tried this arrangement, it did not start well. The employee he sent to Charleston was not a good accountant, making it difficult for Franklin to keep tabs on the business. When the employee died, his wife took over. She provided Franklin with accurate and timely payments and accounting, and managed the business successfully. At the end of the term, she purchased the printing house from Franklin and installed her son in the business.

Despite the early troubles with this first agreement, Franklin went on to establish his best workmen in similar arrangements. As with his first effort, he incurred the upfront costs and enabled his employees to operate the business, earn a share of the profits, and eventually own the operation. “Most of them did well,” he wrote in his autobiography, “being enabled at the end of our term, six years, to purchase the types of me and go on working for themselves.”

Franklin’s actions are clearly similar to those of current day owners who enable their employees to buy the business. As in Franklin’s day, most employees lack the resources to make the upfront investment in a business. Today’s owners who start a leveraged ESOP are following Franklin’s lead, providing the capital needed to help employees buy the business, and enabling them to pay off the loan through their future efforts.

Gradual Retirement

In yet another way, Franklin resembled an owner who sells to an ESOP.

At the age of 41, Franklin retired from the daily operations of his printing business and turned it over to his new partner, David Hall, who had been his employee for four years. For 18 years Hall ran the shop, earned a share of the profits, and gave Franklin his share. At the end of that time, Hall purchased the business outright, with the money he made running Franklin’s operation.

Like many modern-day owners, Franklin transitioned out of the business over time. Like many good ESOP companies, he had a succession plan in place. And, as he had done before, Franklin gave one of his employees—not an outsider—the chance to be a business owner.

Falling in Love with Business Again

In a commentary for CNBC, Former New Hampshire Senator John Sununu penned a strong endorsement of employee ownership generally, and ESOPs specifically.

“Ownership in a business gives workers a physical stake in their company, allowing them to benefit directly from their own efforts, and particularly from improvements in competitiveness and performance,” Sununu wrote.

Sununu distinguishes between forms of compensation that don’t truly provide ownership, and those that offer a genuine piece of the pie.

“Ownership is not profit-sharing or bonuses,” he writes. “It’s a true stake in success, and employee stock ownership plans (ESOPs) stand out as a unique model that deliver benefits for both businesses and employees.”

Sununu cites recent research showing how ESOPs have fared well in tough economic times, and have often outperformed conventionally-owned businesses.

Americans used to be proud of their businesses, he states. And adds that: “ESOPs just might be enough to make Americans fall in love with business all over again.”

ESOPs: Key to Keeping Jobs in New York City?

Add New York City to the list of places that believe ESOPs can be an invaluable tool for keeping businesses running—and employees employed. (A previous blog post focused on efforts to tap ESOPs to keep businesses running in North Carolina.)

A report from the office of Letitia James, the Public Advocate for the City of New York, estimates that—every year—the city loses 114 businesses that each have sales of more than $1 million.

The reason those businesses close: The owner retires.

The annual cost to the local community: 2,220 lost jobs.

James knows now what the ESOP community has known for some time—that ESOPs can offer retiring business owners a great potential buyer for their mature companies.

And ESOP Association President J. Michael Keeling—who attended a panel discussion on ESOPs immediately following the press conference on James’ report—ensured everyone in attendance knew about the latest research that shows ESOPs outperform conventionally-owned companies at retaining jobs.

Benefits such as these must not have been lost on James, who wants to push for expanded efforts to establish ESOPs in the Big Apple. Her report states: “New York City should encourage business owners nearing retirement to consider transitioning to employee ownership.”

James is encouraging the city to provide education and support for business owners who are considering retirement. She wants the New York City Small Business Services to create a Succession Planning Unit that will reach out to businesses whose owners are nearing retirement age, and educate them about succession planning and services.

She further suggests that this unit perform basic feasibility analyses that would help businesses identify their best succession options—including employee ownership.

While being aware of ESOPs is a key first step, James also understands that creating an ESOP can take work—and money. So she wants the City to help business owners find funding to launch an ESOP.

The report states: “The city should also create a program that would provide financing for business owners that wish to transition to employee ownership. As more Baby Boomers reach retirement-age, these transitions will become an even more important job retention strategy.”

To help manage the costs associated with becoming employee owned, James wants one of two things to happen: New York State to renew funding for its Employee Ownership Assistance loan program, or the New York City Economic Development Corporation to create a program that would provide financing for companies that transition to employee ownership.

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Letitia James, NYC Public Advocate

ESOPs: The Answer for Retaining Jobs?

The state of North Carolina could be facing massive job losses in the near future. And encouraging retiring business owners to sell to an ESOP—rather than closing up shop—might be an especially effective way to stop that potential job hemorrhage, according to a new report from the North Carolina Justice Center, an anti-poverty group.

According to the report (Down Home Capital: How Converting Businesses into Employee-Owned Enterprises Can Save Jobs and Empower Communities), the potential for business-closure job loss is particularly dire in North Carolina, and the possible benefits of encouraging ESOPs may be especially well suited to that state.

But the coming storm of retiring business owners—referred to by some as the Silver Tsunami—is something all states will face. So, encouraging the transition to ESOPs might help other states retain more jobs as well.

Job Losses Caused By Business Closures

Since 2000, 2.2 million jobs in North Carolina were lost due to business closures. In any given year, more than 25 percent of job losses occur because businesses decide to close their doors.

These types of job losses “have seriously hampered North Carolina’s economic recovery,” the Justice Center report states. Since 2010, the number of jobs lost in the state due to business closures is larger than the net job gains made in the state during the same period. Conditions in the state are ripe for those losses to continue.

“A huge share of the jobs lost to business closure happen in relatively mature enterprises. North Carolina is particularly reliant on older businesses,” the report found, noting that the percentage of the state’s businesses that are 15 years or older is twice the national average.

These mature, viable companies are a tremendous source of value—and jobs—to the communities in which they are located. And if these businesses close, it can be a tremendous hardship—especially for communities that are economically challenged, or have few available employment options to replace the shuttered companies.

The Perfect, Rural Storm

Patrick McHugh, the author of the study, says many of the states’ most economically challenged areas sit right in the cross hairs of this coming trend.

Many of these areas are rural, have a high density of individuals approaching retirement age, and are particularly dependent on mature companies as sources of employment.

And because these regions are less populated and less affluent, they may struggle to provide an adequate pool of local buyers for retiring business owners. And local buyers—including employees—are key to boosting the financial health of these areas, the report finds.

Buyers from outside the local area are more far likely to move the business—even to reap only modest, short term gains—the report states. By contrast: “When firms are locally owned, the profits are more likely to be spent or reinvested locally, keeping that capital flowing and creating opportunities within a community.”

The report states that: “All other things being equal, communities with more local business ownership tend to achieve faster economic growth than areas where comparatively few of the firms are locally owned.”

Some of the regions poised to suffer most from the coming Silver Tsunami also are ones that have been economically depressed for multiple generations, says McHugh.

Better Than No Option

Some argue that owners who sell to an ESOP may be leaving money on the table. But in some of the less affluent regions of North Carolina, ESOPs can provide an opportunity to find a buyer where few, or even none, might otherwise exist.

What’s more, a business sold to the current employees will have an easier time transitioning than one sold to an outsider, who must take the time to understand the customer base, employees, suppliers, and more, McHugh says.

Perhaps most importantly, programs that help keep existing jobs—rather than investing valuable resources in luring outside businesses to create new ones—are inherently more efficient. “It is often more cost-effective to save what already exists than to bring in something new,” the report states.

The report found that North Carolina’s traditional job creation efforts are far more costly than comparable efforts of the Ohio Employee Ownership Center. The result, the report states: “Compared to the traditional economic development incentive programs, expanding employee ownership is an incredible bargain.”

A Penny Saved

The report makes note of the potential benefit to sellers of using the 1042 rollover, which allows owners of C Corporations who sell stock to an ESOP to defer capital gains from the sale, in certain conditions.

The 1042 rollover became a source of controversy last fall, when the Joint Committee on Taxation determined that applying it to S Corporations would cost the United States treasury more than $7 billion in lost revenue over a 10-year span.

Does the potential for ESOPs to cost-effectively save jobs in places where they are needed most—like the areas in North Carolina identified by the report—provide an argument for expanding the 1042 roll over? For the moment, McHugh steers clear of conversations about tax deductions. He is more interested today in programs that might help business owners pay the cost of initial inquiries that help them see if an ESOP is right for them.

But, he adds, if a tax incentive were the reason that business owners were prompted to sell to an ESOP—and retain to jobs in areas where they are needed most—that would be a positive outcome he would welcome.

A Recipe for Political Agreement

Today, there are plenty of issues that divide the United States, and few that can serve to unite those same states.

The ESOP model of employee ownership is one of those rare issues that frequently provides common ground for potential adversaries. And it has done so for decades.

A key reason for this mutual agreement is that research shows ESOPs benefit employees and businesses alike. So, unlike measures that promote one at the expense of the other, ESOPs draw support from business and employee advocates; from groups with conservative and liberal ideologies—and everything in between.

As our nation grows more polarized, and as its citizens and representatives grow farther apart, ESOPs increasingly are drawing together groups that traditionally would be at odds.

 

Chamber and CAP

The U.S. Chamber of Commerce—which traditionally holds a conservative view on public policy—recently endorsed ESOPs as one option its members can use to “offer quality retirement benefits to their workers.”

The Center for American Progress—which holds a more liberal view—began endorsing ESOPs in the past two years as a means of addressing growing wealth inequality. In one report, the organization states:

“Employee ownership can be a powerful tool to ensure that workers at all levels are able to share in the gains of a company’s collective performance. Research shows that employee ownership typically provides a host of benefits—not just for workers but also for businesses and investors. If these programs were to grow throughout the economy, they could promote broad-based wealth creation, thereby fostering sustainable economic growth and reducing inequality.”

As a result, the Chamber and CAP offer remarkably similar calls to action:

Encourage ESOPs—promote the benefits of ESOPs and protect them from frivolous litigation and excessive regulation.” –U.S. Chamber of Commerce

“Increase tax incentives for the formation of employee stock-ownership plans, or ESOPs.” –Center for American Progress

 

Congressional Commonalities

The long-running bipartisan support for ESOPs was evident most recently in two identical pro-ESOP bills introduced in the last Congress.

In the House, HR 2096 was sponsored by 59 Republicans and 36 Democrats. In the Senate, S 1212 was sponsored by 17 Republicans, 15 Democrats, and 2 Independents.

Democrats and Republicans alike on both tax committees—the Ways and Means in the House, and the Finance Committee in the Senate—supported the bill.

Moderates also endorse ESOPs. The Third Way, a self-professed centrist organization, recently published a paper endorsing ESOPs. The paper also pointed out that ESOPs enjoy broad support from all sides.

The paper cites the Republican Party platform, which states:

“We therefore endorse employee stock ownership plans that enable workers to become capitalists, expand the realm of private property, and energize the free enterprise economy.”

The paper also notes that the Democratic Party platform endorsed profit sharing plans, and that Secretary Hillary Clinton “expressed strong support for the idea of employee stock ownership as another example of profit sharing.”

 

Rare Agreement

One of the two independents who sponsored S 1212 was Senator Bernie Sanders, an ardent supporter of average pay workers and a legislator known for his liberal public policy agenda.

Senator Sanders and President Ronald Reagan—who espoused conservative ideals—would have been hard pressed to find issues on which they agreed. But both agreed on the value of ESOPs.

Ronald Reagan was the staunchest presidential supporter of ESOPs our county has seen, helping to draw attention to ESOPs and spur legislation that promoted and protected them. And Senator Sanders began his bid for the White House by once again voicing his support for ESOPs, including sponsoring S 1212.

 

Moving Forward

The ESOP model of employee ownership possesses a rare power to unite us. And that power is needed today.

Perhaps instead of focusing so much energy on issues where our nation—and our members of Congress—are destined to disagree, resulting in rancorous debates, we should start by spending a little time focusing on areas where we agree. ESOPs offer a perfect opportunity to build agreement.