Employee ownership can be a good business model
As companies strive to remain competitive, employee-owned models consistently stand out as catalysts for positive change. Employee ownership strengthens local economies, creates a more robust job market, and improves employee engagement and retention.
At their core, employee-owned businesses embody a spirit of shared prosperity. They give workers a tangible stake in the company’s success, making them more invested in its longevity and growth.
“Employees make the company,” said Mark Nicklas, president of Nicklas Supply in Cranberry Township. “I owe my employees for all the success this company has had, and now, they’re benefiting from the success of the company.”
Nicklas Supply transitioned to a 100% employee-owned business model in 2018 when the Nicklas family wanted to leave the business. Nicklas said he convinced his family members to sell their shares within the company to its employees after learning more about the employee stock ownership plan (ESOP) model from Dan Zugell at Business Transition Advisors.
Zugell said through ESOPs, employees get a percentage of shares in the company at no cost. Affectionately called “Dan the ESOP man,” Zugell has educated numerous businesses on the benefits of ESOPs and has helped between 15 and 20 businesses make the changeover.
Business owners who transition to the ESOP model enjoy a flexible tax-advantage tool for succession. “It’s literally the most tax-advantaged way to exit a business,” Zugell said. ESOPs eliminate the taxes on profits for the portion of the business that’s owned by employees. Some companies use those tax savings to grow the business or launch new services.
“It allowed us to cash out of the company while continuing the legacy my father started in 1956,” Nicklas said. “When companies gobble up other companies, people lose their jobs. I have a real allegiance to the Nicklas family of employees, and I wanted them to retain their jobs.”
With the ESOP model in place, the employees are the beneficiaries. “What they put into it is their sweat equity, their work ethic,” Nicklas said. “As the company grows and its value increases, their share value grows.”
Kevin McPhillips, executive director of the Pennsylvania Center for Employee Ownership, said ESOPs are one of the most beneficial employee-owned models for employees and business owners.
“It’s great for owners. They get paid fair, full-market value,” he said. “It’s also great for employees because they all of a sudden have a future with savings. It creates real wealth for people.”
About 3 million American workers are part of ESOPs representing just under 6,000 companies nationwide. Of those, 300 companies in Pennsylvania are part of the ESOP model, McPhillips said, including Penn United, Nicklas Supply and FBC Chemical in Butler County.
Both McPhillips and Zugell are working toward educating companies about how employee-owned models work, busting some common myths and misconceptions in the process.
“There are a lot of myths out there,” McPhillips said. “It’s not a popular thing in the private equity world because there’s nothing in it for them. If you sell to employees, what are the investors and private equity getting out of it? Nothing.”
One of the most common misconceptions, McPhillips said, is that ESOPs and other employee-owned models are too complicated.
“Every transaction is complicated, whether it’s employee-owned or not, so that’s not a reason to forgo it as an option,” he said.
Other challenges persist, including the fact that 93% of business owners exploring exit strategies had no idea employee ownership was a possibility, McPhillips said. His organization estimates 4 million businesses are heading for exit strategies in the next eight years. “The Labor Department thinks a majority of them will go out of business,” he said. “I’m hoping that there’s a possibility for more employee-owned scenarios.”
In addition to the tax benefits for companies and the wealth-building aspect for employees, there are other benefits to ESOPs and other employee-owned structures.
“The National Center for Employee Ownership has a lot of information on the cultural benefits,” McPhillips said. “There’s also data to support that employee-owned businesses are 12% more productive than traditional businesses, and owners have four times the wealth of traditional businesses.”
Employee ownership isn’t for everyone, McPhillips said. As a U.S. Labor Department-run program, there are stringent rules to follow. Business owners interested in getting a premium for their companies instead of settling for fair market value may also not prefer the model. “Your competitors may pay a premium if they can come in and strip out departments and cut wages,” he said. “Depending on what your goals are, you could get paid more for the business. Not always, but sometimes.”
Companies interested in making the switch can expect to spend up to six months in transition, said Zugell. That time frame includes educating businesses and employees on how ESOPs work and the switch-over period from start to finish, if they decide to go that route.
Zugell said he encourages more companies to reach out to him to learn about the benefits of employee-owned business structures, particularly those with ownership planning an exit strategy.
“I preach this, it’s my motto. ESOPs should be on your list of (exit) options,” he said. “If you end up crossing it off later, that’s fine. But it should at least be on the list.”
This article first appeared in the June edition of Butler County Business Matters.
