Employee-owned companies in Idaho make their case

Better motivation. Higher retention. More money for retirement. Employee ownership brings many benefits. Why isn't it growing?

adutton@idahostatesman.comAugust 27, 2013 

  • A TIP FOR OWNERS

    Darwin Roy, president of Clima-Tech, and Stuart Boylan, vice president of business development for Pacific Steel, say one key to setting up an employee stock-ownership plan is to choose the right advisers.

    There is an industry built around ESOPs that includes lawyers, trustees and appraisers. They ensure legal compliance, value the shares each year and make decisions on behalf of the ESOP participants.

    Boylan stresses that ESOP companies shouldn't use just any attorney or financial adviser. Pick one who specializes in ESOPs, because they are "very, very complicated to administer."

    Roy says some advisers are "paranoid about rules and regulations" while others rely more on common sense. He prefers the latter.

  • ESOP's

    The number of companies owned by employee shareholders in Idaho is unknown. The Idaho Secretary of State, which oversees business filings, does not collect information on employee stock-ownership plans. Here are some ESOPs headquartered in Idaho:

    Agri-Service Inc., a farm equipment dealership in Twin Falls.

    Alexander Clark Printing, a printing company in Boise.

    Clear Springs Foods Inc., a food company in Buhl.

    Clima-Tech Corp., a commercial HVAC company in Boise.

    D. L. Evans Bank, based in Burley.

    Diamond Line Delivery Systems Inc., a trucking/delivery company in Meridian.

    Idaho Pacific Lumber Co., a lumber wholesaler in Boise.

    Impact Sales Inc., a food broker in Boise.

    Teton Machine Co., a manufacturer in Payette.

    The Ace Co. Inc., a manufacturer in Boise.

    Webb Landscape Inc., a landscape company in Bellevue.

    WinCo Foods, a supermarket chain in Boise.

    Sources: The ESOP Association; Employee-Owned S Corporations of America

When people talk about what sets WinCo Foods apart from its competitors in the grocery industry, the company's employee stock-ownership plan isn't usually the first thing they mention. But the company and others with the relatively little-used ESOP structure say it's key to their success.

An estimated 11,000 U.S. companies are employee-owned through ESOPs, which are legal structures offering ownership shares whose value can grow over time and are generally used for retirement income. The number in Idaho is unknown, though 12 businesses based in the state belong to national trade associations for employee-owned companies (see box on Page 17).

ESOPS DEFINED

The structure was created in the 1970s and can take two main forms with different tax structures. The intent of an ESOP is to give workers a personal stake in how business is done, making employees more diligent, efficient and accountable.

An ESOP also gives them a reason to stay with the company. If all goes well, an ESOP can pay out exponentially more than a retirement savings account or 401(k), and the employee "buys" shares with hours worked instead of with part of a paycheck. WinCo boasts a lower-than-average turnover rate among its 15,000 employees, partly because of its ESOP, according to spokesman Mike Read. Some of WinCo's longtime ESOP members have retirement accounts now worth more than $1 million.

The value of each ESOP share is determined once a year by an independent appraiser.

RISKS: YOU CAN LOSE IT ALL

Read and others acknowledge that if a company goes belly up, employees lose everything they have in its ESOP. But advocates stress the rarity of that scenario. They also point to underfunded public pensions and recession-torn 401(k) plans as evidence that ESOPs aren't the only retirement plans that carry risk.

The plans also have some legally mandated risk-aversion rules. By the time employees hit retirement age, they can move up to half of their ESOP value into other investments.

A LITTLE-KNOWN PLAN

Clima-Tech — an HVAC company based in Southeast Boise near the airport, and founded in 1988 — wasn't always an ESOP company. Like many others, it created an ESOP when its longtime owners decided to sell.

In 2008, Darwin Roy, the president, began looking for options to sell the company he'd co-founded when his other main partner decided she wanted to be bought out. He listed Clima-Tech with some merger-and-acquisition firms but didn't like any of the people who wanted to buy it.

That's when he learned of the ESOP structure - something that, despite his decades in business, he'd never heard of. It sounded perfect.

Clima-Tech used a common tactic, borrowing money from a bank and lending the money to the ESOP trust so that the trust could buy the company.

Roy, who's in his mid-60s, still owns 30 percent of Clima-Tech and continues to work there, but he'll sell those remaining shares to the trust next year and retire completely.

Clima-Tech has about 50 employee owners who own the other 70 percent of the company. Mike Scott, a journeyman electrician, joined the company about six years ago and has about $40,000 in ESOP shares. Like employees at other ESOPs, Scott has been receiving shares in the company as he puts in hours, not as a benefit that is deducted from his paycheck. Employee owners can also buy additional shares in an ESOP company or invest their money separately in a retirement fund.

Scott calls the ESOP "a pretty neat deal."

TAX REFORM WORRIES

Pacific Steel and Recycling, based in Montana, employs dozens of owners in the Treasure Valley at its Boise and Nampa locations. For some of the people who own the company, a day's work brings the satisfaction of crushing a car and adding to a retirement account at the same time.

The company is taking part in a national push by ESOPs to persuade members of Congress not to mess with the plans as they craft tax-reform legislation. A group of ESOPs is lobbying to preserve the S corporation ESOP structure - a tax structure that allows a company to avoid paying corporate taxes. "It's a wonderful vehicle of ownership," says Stuart Boylan, vice president of business development for Pacific Steel.

His company's ESOP shares were worth about $15 each in the mid-1980s. They're now worth just under $900, he says.

Pacific Steel also offers a 401(k) match on top of an ESOP, though some ESOP companies with Idaho employees do not.

ARDENT FANS

Lumber broker Idaho Pacific Lumber Co. started in 1979, has about 50 employees and is basically a middleman for lumber mills and building contractors. The company converted to an ESOP in 1998, when the president at the time wanted to retire.

Joe Rafferty, who's now a member of Idaho Pacific's board of directors, helped the company put together its ESOP. He is director of ownership strategies at Private Capital Corp. in the San Francisco area.

Rafferty might be one of the biggest fans of ESOPs in the country. He discovered them in 1991 and "was convinced I was on the cusp of something that was going to change America."

As it happened, he wasn't. The number of ESOPs has not really changed since then.

WHY ESOPS HAVEN'T SPREAD

Idaho ESOP owners say that's probably due to a mix of factors such as limited awareness of ESOPs, worry about high administrative expenses and fears stemming from the collapse of ESOPs at United Airlines and Enron.

And there is the law. Some of Idaho's most common structures for businesses - partnerships and most professional corporations - cannot legally use ESOPs, according to the National Center for Employee Ownership.

As for the costs, a simple ESOP for a small company can cost upward of $40,000 to set up, the center says. Some companies have found that cost to be cheaper, though, than selling the company to an outsider instead of to employees.

Rafferty also attributes the lack of growth in ESOPs to retiring owners not doing enough preparation for an ESOP sale. Preparation "takes attention and effort, and most of the time they're not really thinking about their departure ... until they're 65."

He also cites how common it is for large companies to offer to buy small, successful ones.

But he believes that if an ESOP is done right, it can make hard-working employees rich and give those workers a reason to put in sweat equity.

Audrey Dutton: 377-6448

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