MORE COMPANIES MOVE TO EMPLOYEE OWNERSHIP
The graying of the baby boom generation is leading to an increase in the number of privately held companies transitioning to ownership by workers, according to banks that specializes in setting up employee stock ownership plans and advocacy organizations.
Greg Facchiano, vice president of government relations and public affairs for The ESOP Association, a Washington, D.C.-based advocacy group, said employee ownership is being driven “by the silver tsunami” of baby boomers looking to sell the businesses they have built so they can retire.
“We feel like there has been a surge, an increase in ESOP activity because that generation is looking for a succession plan,” Facchiano said. Baby boomers own 34,400 all privately-owned companies in Connecticut, half of all the companies in that sector, according to data from The ESOP Association.
There were 45 Connecticut businesses that are employee owned in 2019, the latest data made available to the National Center For Employee Ownership. A total 43,259 workers for those companies are employee owners.
Doug Dell, who manages KeyBank’s nationwide ESOP conversion business, said since 2019 “we’re seeing a real uptick in interest” in switching to employee ownership.
“More than half of privately-held firms in the U.S., or 2.9 million businesses are owned by baby boomers,” Dell said.
Some of these business owners either don’t have children or have family members with no interest in taking over the company, he said. Some business owners have other reasons for converting their companies to employee ownership, according to Dell.
“It’s good for owner who are interested in preserving the legacy of their company and keeping it in the community,” he said. “They don’t want to see their business swallowed up by a larger entity.”
Facchiano said converting a privately held business to employee ownership “helps protect the economic interests of the community the business is located in, not just employee interests.”
The largest portion of Connecticut’s ESOPs, 27 percent, are manufacturers, Dell said. Professional services companies make the next largest portion of ESOPs in the state, he said, about 20 percent.
Downes Construction is one of those Connecticut-owned companies.
The New Britain-based company converted to an ESOP in May 2020, said David Patrick, who is president of the business. Downes Construction specializes in the construction of public buildings, like schools and public safety complexes.
Patrick said the owners of Downes Construction, when it was privately held, “were sole proprietors and neither of them had any family members who wanted to get into the business.”
“We took a look at selling the company outright and then at selling it to a select group of executives,” he said. “What it ultimately came down to was they wanted their 88-year-old company to remain in the city and they wanted to reward members of the company. We had some unique owners in that this was a transaction that wasn’t all about money.”
Downes Construction employs 60 people and Patrick said some of them “have been here with us for a very long time.”
When the company first made the transition to employee ownership, Patrick said many employees didn’t understand how the ESOP worked.
“Now people are starting to get it,” he said.
Dell said ESOPs “are a very powerful tool” in both recruiting and retaining employees. A study by the Employee Ownership Foundation determined that turnover at employee owned companies is three times lower than at conventionally owned businesses.
“This is a way for employees to build wealth outside of what comes in their paycheck,” he said. “You’re essentially setting up a retirement program that they don’t pay for. It’s a way of rewarding your employees.”
When the an employee-owner retires or leaves the company, the ESOP is required to buy back the worker’s shares, according to Dell.
There is usually a sixyear period before someone who works at an employee owned company is fully vested in the plan, he said.
To start the process of converting a business from private ownership to an ESOP, a separate tax-exempt entity, typically a trust, must be set up and a trustee must be selected to oversee it
Once a trustee is selected to oversee the trust, the bank that is involved in the conversion process loans the money to company, which then loans the money to the ESOP trust. The trust then uses that money to buy the shares.