Friends:

This is the first issue of the Vermont Employee Owner News, which will become a regular publication of the Vermont Employee Ownership Center. We invite your suggestions and submissions for new articles and photos of employee ownership in action!

Sincerely,

 
Jon Crystal
Executive Director

Employee-Owned Company Profile:
Resource Systems Group


    Resource Systems Group (RSG) was founded in 1986 by three Dartmouth College professors who provided a solid foundation for the company's work in transportation planning, environmental consulting and market research.  RSG has grown steadily, and now has over 50 employees in four locations: its headquarters in White River Junction and three satellite offices in Burlington, Chicago and Nashua, New Hampshire.  This past May, RSG was presented with the 2007 Deane C. Davis Outstanding Vermont Business Award.  Like the 2006 winner, King Arthur Flour Company, RSG is majority-owned by its employees through an Employee Stock Ownership Plan (ESOP).  71% of company stock is currently ESOP-owned, and there is a plan for the ESOP to purchase the remaining stock in 2009.

    The decision to put an ESOP into place was made in 1994 by the founders who were attracted by the possibility of sharing equity with the employees who had helped make the company successful, while also establishing a long-term mechanism for ownership transfer. They were clear that they didn't want to have to end up selling the business to outside interests - which they feared would move it out of state - but rather wanted to assure business continuity and job security. A further attraction of this approach was that it allowed ample time for these key people to continue working at the company.

    According to Colin High, one of the founders, "We saw the ESOP as a good way of enhancing team spirit and enthusiasm for the company - and retaining people.  What tends to happen in businesses like ours is that good people who don't feel they have a stake can easily leave.  We wanted to create a good reason for people to stay.  Secondarily, it has been a way of transferring ownership from the founders to the next generation in the company."  Another common occurrence in consulting firms is that jitteriness about a possible sale of the company can lead people to leave.  "The ESOP removes a lot of the angst about the transfer of ownership," and creates a mechanism for an orderly and ongoing transfer of ownership as employees come and go.  RSG's ESOP has been a great success, in High's eyes.

    How do employees feel about the ESOP and its role at RSG?  Erica Wygonik, a Senior Associate in the transportation division, reports that RSG is a good place to work, where new hires "are assumed to be smart and competent, and are given the resources and flexibility they need to do the job."  Colleagues are constantly learning from each other, and information is shared freely throughout the organization.  "Every month, we hear about the company's performance and review current projects."  All of this has helped create a great sense of camaraderie at RSG.  Because of the ESOP, employees know that the company's culture is more likely to last - and that all employees will benefit from their shared success.  "Employee ownership colors the whole culture," says Wygonik.

Technical Issues:

The ESOP Transaction -  Not Too Expensive for You!

By Stephen P. Magowan , Partner
     Steiker, Fisher, Edwards and Greenapple

    Is an ESOP transaction too expensive for you?  A common concern expressed by business owners is that the ESOP transaction is too costly - - there are legal and accounting fees; there are the costs of setting up the plan, of executing a transaction analysis study, if desired (also called a feasibility study), and of engaging an independent bank trustee (if an internal trustee is not used); and there is the cost of the appraiser engaged by the trustee to perform the valuation study.  All this adds up, certainly.  But is it more costly to do a transaction with an ESOP than it is to do a transaction with a third party buyer?  A close look reveals that frequently the answer to that question is a resounding no. 

     Sale to a Third Party
    
    Let's assume your business is worth $5 million and you are ready to transition out of your business.  Let's also assume that your business is a corporation, and that it has been profitable for some time, but there is no obvious buyer for your business.  Because of this, you engage a business broker to help you find the right buyer.  After a few months, there is good news  - - a buyer has emerged.  The buyer does not have a lot of experience in your field, but can see the value of your business.  So you decide to sell.  What's all this going to cost you?

    As a transactional lawyer I have worked on many deals similar to this, and I can say that your legal fees will start from the moment of negotiating the contract with the business broker, to negotiating a letter of intent with the buyer, to negotiating the contract, to following up with post-closing matters.  The legal fees will come in  somewhere between $30,000 and $70,000 depending on how heavily negotiated the transaction is.  You will also have accountant fees in connection with the due diligence.  In addition, if you were to speak with any business person who has sold their business, you would learn that once the letter of intent process began, you would not be able to focus on your business. 

    Plus there are other expenses.  The typical business broker fee is 5% - - that adds another $250,000 cost to the transaction.  This brings your costs to over $300,000.

The buyer's side also has costs, probably in the $50,000 to $70,000 range.  While you do not pay those costs, they certainly affect the pricing of the deal.  Also, the buyer will want to acquire assets, not stock.  If you have always been an S Corporation, this is probably not a problem, though there may be depreciation recapture.  If your business is a C Corporation, or has been a C Corporation for any extended period, you will pay a double tax.  Expect to take home less than forty cents on the dollar.  Finally, what happens to you, the business owner, after the transaction?  In our example the buyer does not know your business.  He or she will want you to stay on.  After years of being your own boss, can you work for someone else?

     Comparison to an ESOP

    If you do a pre-transaction financial study and engage a bank trustee, an ESOP transaction is likely to cost you from $120,000 to $150,000, though it is possible to have a deal done cheaper.  In addition, the ESOP transaction involves only the purchase of stock and your gain will all be capital gains.  If your corporation was a C Corporation, your gain from the sale of stock can also be deferred, perhaps permanently, under Code §1042.  Finally, you can on in the business as CEO, President or Chief Bottle Washer.  The ESOP can be an integral part of your program to transfer the reins of business to the next level of management.

    Should you do an ESOP?
    
    The question of whether to do an ESOP should not be based on cost alone by any means.  The point of this article is that the idea that the ESOP transaction is too expensive is largely a myth.  You should not write off the ESOP possibility because of your concerns over costs.  It may be that the ESOP transaction will not only be less expensive for you, but also provide other tax advantages to you as well.  Finally, let's not forget that ESOP companies root jobs in their communities.

Working Together:
The ESOP Committee at Gardeners' Supply

    Getting the most benefit when introducing employee ownership in a company often has to do with communication and education. One of the most common approaches is the use of an employee committee to function in part as an intermediary between management and employees, and as an interpreter of what it means to be employee-owned. There is often confusion about the role and function of such a committee, especially in newly employee-owned companies. In this article we briefly look at some of the key practices and lessons learned by the ESOP Committee at Gardeners' Supply Company in Burlington.

    Gardeners Supply took its first step down this path in 1987, and has learned much about what works and what doesn't over the years. Staff member Sherry Ceresa is a member of their ESOP Committee, which now serves as a general resource for staff members as well as an advocate for all things related to employee-ownership. That committee has 11 members who apply to be selected. Sherry offers the following advice for newly forming ESOP committees:

·    Make sure the committee membership is well-rounded and generally representative
·    Avoid having a majority of the committee being top level managers to keep more of a staff focus
·    Have a clear mission, and communicate it to all employees
·    Get yourselves educated - learn all aspects of ESOPs and employee-ownership to you'll be better prepared to respond to questions

    One new and unique feature about the approach at Gardeners Supply is the addition of two "fast-track" positions on the committee: these are 3-6 month short term memberships to allow interested employees a chance to see what it would be like to be a regular committee member.

    Sherry encourages those involved with or forming these committees to position and view themselves as resources for all employees. This can involve personal and print communication, as well as use of online or intranet resources. She and other committee members are always thinking of ways to bring the ESOP to the forefront for staff,  such as finding fun events to add visibility, so that the ultimate goal of making sure people are comfortable with ESOP details isn't a burden.