Diversified Insurance puts itself in employees’ hands
ESOP set up to save jobs and reward workers
Jim McCormack and Raymond “Skip” Hansen, both young insurance salesmen who had been friends since junior high school, decided to form their own agency and strike out on their own 35 years ago.
Their agency would become Diversified Insurance Solutions, which now employs about 70 people in Brookfield.
McCormack, now 67 and the primary stockholder, faced a decision as he thought about retirement and the company’s future.
The trend in the industry has been for national and international insurance brokers and private equity firms to buy regional and local brokers, and Diversified Insurance had received several offers.
However, selling the company would come at a price: 30% to 40% of its employees would lose their jobs when the buyer consolidated administrative functions.
“We just decided it wasn’t right for our associates and it wasn’t right for our clients,” McCormick said.
After meeting with one potential buyer, Christian Lie, the company’s chief executive officer, and Karl Cumblad, its chief financial officer, asked if McCormack would consider selling the company to its employees. The idea appealed to McCormack. It would keep the company independent and reward the employees who would take it into the future.
“They are the ones who do the work,” McCormack said, “and they are the ones who deserve any future success.”
In December, Diversified Insurance was sold to its employees through an employee stock ownership plan, or ESOP.
Diversified Insurance joined Paper Machinery Corp. in Milwaukee and Eder Flag Co. in Oak Creek, both of which were sold to their employees last year. Electronic Theatre Controls Inc. in Middleton also set up an ESOP last year.
Other Wisconsin companies with ESOPs include Robert W. Baird & Co. in Milwaukee, Boldt Co. in Appleton, Schreiber Foods in Green Bay, and Sentry Equipment Corp. in Oconomowoc.
In all, there were 178 Wisconsin companies that had employee stock ownership plans of some type as of 2014, according to National Center for Employee Ownership. The plans had 189,163 people participating in the plans.
Nationally, there were 6,717 companies, including 565 public companies, that had ESOPs and 14 million participants that year.
Companies in manufacturing, professional services, finance, insurance, real estate and construction were the most likely to set up ESOPs.
The number of companies interested in setting up ESOPs has increased in the past two years as the baby boom generation gets ready to retire, said Mike Young, a senior business consultant with ESOP Partners in Appleton.
“If they want to protect the company’s legacy and reward the employees who helped build the business,” Young said, “an ESOP is likely the best way to do that.”
Diversified Insurance fit the profile.
In 1982, when they started the agency, McCormack focused on selling health insurance, and Hansen focused on property and casualty insurance.
Hansen later sold his stake in the agency to McCormack and is now semi-retired, working a few days a week while staying busy with interests that include beekeeping and making maple syrup.
Diversified Insurance was one of the first local agencies to focus on wellness programs for employers. It also has expanded into handling payroll and human resources for employers.
Its clients tend to have 35 to 300 employees.
By remaining locally owned, Diversified Insurance’s should have a competitive advantage, because most of its clients also tend to be locally owned, said Cumblad.
Setting up the ESOP itself was a somewhat complex process.
The company first hired ESOP Partners to do a feasibility study. It also worked with Tim Stewart, a lawyer with DeWitt Ross & Stevens S.C., who has expertise in ESOPs.
Diversified then had to hire a trustee to negotiate the purchase price.
For its ESOP, the company first bought the shareholders’ stock, financing the purchase by giving them a note that will be paid with interest over 13 years, Cumblad said.
The company than sold the shares to the trust for the employee stock ownership plan. The trust in turn financed that purchase by giving the company a 30-year note.
No money changed hands, but the trust will have to pay off the note from McCormack and the other stockholders over the next 13 years from Diversified Insurance’s profits.
Think of an ESOP as the people’s version of private equity — albeit without the steep fees.
The company’s employees will receive shares in Diversified Insurance as the debt is paid off. The shares, which will be allocated based on compensation, vest over six years.
The ESOP itself is a qualified retirement plan, similar to a 401(k), in which an employee’s stake in the company is held until he or she retires or leaves the company.
The shares are taxed when sold, though they can be rolled into an individual retirement account. They can’t be sold before the age of 59-1⁄2 without paying a 10% penalty.
Diversified Insurance also will continue to offer a 401(k) plan. That matters, because having retirement savings invested in one company would be unwise and even a bit reckless.
However, if the deal works out, an employee’s stake in Diversified Insurance could make for a more comfortable retirement.
“They’ve been given a portion of the company at no cost to them,” McCormack said.
The ESOP will help Diversified Insurance attract talented people. And studies have shown that companies with ESOPs on average tend to outperform other companies.
It will take time, though, for the employees’ stake in the company to increase in value.
“It’s not quite real yet,” Cumblad said.
But the company’s employees have seen what has happened when competitors in the Milwaukee area were bought.
They also appreciate what McCormack did.
“He had a choice to make, and he made a choice to their benefit,” Cumblad said. “That’s not lost on them.”
“They are the ones who do the work, and they are the ones who deserve any future success.”
JIM MCCORMACK DIVERSIFIED INSURANCE SOLUTIONS CO-FOUNDER