BUSINESS RETENTION THROUGH EMPLOYEE OWNERSHIP

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1 BUSINESS RETENTION THROUGH EMPLOYEE OWNERSHIP Resources for economic development agencies The National Center for Employee Ownership Franklin St., 8th Floor, Oakland, CA 94612

2 Why start an employee ownership initiative now? 1. Business retention Educating business owners about transition options is crucial to creating and retaining jobs. Over the next 10 years, baby boomer business owners will be retiring in record numbers. More than twice as many closely held companies will be for sale during this time than has normally been the case. Many successful businesses will fail to find a buyer or be sold to an out-of-state firm, often resulting in job loss. Over half of the owners of these companies have no business transition plan. For many, employee stock ownership plans (ESOPs) are an attractive alternative to selling to an out-of-state buyer or liquidating. Unfortunately, few understand how they work or even know about them. 2. Creating quality jobs In the wake of the Great Recession, creating quality jobs is a national priority. The recent recession brought attention to the fact that in the U.S. real wages have remained stagnant for decades. Individuals who own stock, on the other hand, have increased their wealth significantly in the same period. Employee ownership bridges this gap, creating quality jobs where employees build assets on top of their income. By grounding wealth with the people who are driving the company s success, employee ownership offers an economic solution that has been equally supported by both parties.

3 From an owner s perspective Aging baby boomer and business owner Ken Tator had several options when he wanted to cash out a portion of his largest financial asset: KTA-Tator, the Findlay, Pennsylvania business his father started in He looked into financial buyers. He looked into strategic buyers and he encouraged us to look at any other options, said Daniel Adley, who was chief operating officer. Mr. Adley took him up on the offer, researching whether the employees could buy KTA-Tator, which helps state highway departments and industrial companies select and inspect paint that must withstand exposure to harsh environments. What he discovered was a host of compelling tax reasons for both Mr. Tator and KTA-Tator s employees for forming an employee stock ownership plan, or ESOP, to acquire the company. Just as important, while another type of buyer may have eliminated jobs or moved the company elsewhere, the ESOP meant KTA-Tator s jobs currently 240 would stay put. Those are all in jeopardy if you sell to a strategic buyer, Mr. Adley said. The ESOP acquired 70 percent of the firm from Mr. Tator in December 2010 and is scheduled to require the remaining 30 percent next year. Any concerns at the time of the employee buyout have been alleviated by what s happened to their KTA-Tator shares since then. The value has increased nearly 180 percent, according to Mr. Adley, who is now CEO. We ve outperformed the market substantially, he said. Excerpt from ESOPs attractive to baby boomer business owners, an article by Len Boselovic first published in the Pittsburgh Post-Gazette on April 13, 2014.

4 Employee ownership benefits local businesses, employees, and communities, and is one of the most cost-effective economic development tools available.

5 The economic power of employee ownership The most common form of employee ownership in the U.S. is the employee stock ownership plan (ESOP), which allows employees to gain an ownership interest in the companies where they work without contributing their own money. Business owners sell some or all of their shares to an ESOP trust, which owns those shares on behalf of employees. With an ESOP, there are significant federal tax incentives for sellers and for the business. An ESOP is funded by deductible corporate contributions to the trust and is the only way a company can use pretax future corporate earnings to buy shares from an owner. Depending on the type of corporation, sellers can defer taxation on the gain, and the business may also receive numerous tax benefits. For example, a 100% ESOPowned S corporation pays no federal corporate income tax. Create jobs: Over a 10-year period, ESOPs have 25% higher job growth than comparable companies without an ESOP. 5 % 2higher job growth Create more stable companies: Productivity, revenues, and sales increase 2% 5% in the year an the ESOP is adopted. Additionally, employee-owners were 4 times less likely to be laid off during the last recession. Enhance employee retirement readiness: Employees accumulate 2.5 times the retirement assets as employees in other plans, and they receive 5% 12% more in wages which they can spend locally. Retain businesses: ESOP companies are onequarter more likely to stay in business.

6 Current state initiatives Connecticut ESOPs can help keep companies and the jobs they provide in local communities. ESOPs are more than just an employee benefit plan, they are a transition plan for business owners and a growth strategy for communities. -Iowa Governor Terry Branstad (R) In 2014, State Senators Donald Williams and Martin Looney cosponsored a bill titled An Act Establishing an Employee Ownership Program to Promote Business Retention and Growth. The bill requires the state s economic development commissioner, working with the labor commissioner, to establish an employee ownership education program for businesses. Iowa In , Iowa Governor Terry Branstad included employee ownership as part of his platform, introducing two bills to promote the creation of more ESOPs. In 2013, the Iowa legislature passed a bill appropriating $500,000 per year to help defray part of the cost of assessments to determine if an ESOP is an appropriate strategy for the business owner, the company, and the employees. The fund will be administered by the Iowa Economic Development Authority with the help of local ESOP experts, including service providers and representatives from ESOP companies. Indiana Simply put, when employees have an ownership stake in their company, they will not ship their own jobs to China, they will be more productive, and they will earn a better living. -U.S. Senator Bernie Sanders (I-VT) Indiana s ESOP Initiative (IEI) was created in 2007 by State Treasurer Richard Mourdock to promote and encourage the formation of new ESOP companies in Indiana. A major feature of the initiative is the Linked Deposit Program, which offers employee-owned firms a reduced interest rate on an ESOP loan from a qualified financial institution in return for the state depositing an equivalent amount in the financial institution at a rate that is below current market rates. Oregon In 2013, the Oregon Business Development Department partnered with the NCEO to develop an employee ownership program for economic developers. To launch the program, the agency offered two events: (1) a session at the Oregon Economic Development Agency conference in Hood River, and (2) a more in-depth training on ESOPs for economic developers from across the state. Following the events, Business Oregon established a website on business transitions, including information about employee ownership. Business Oregon, with NCEO technical assistance, will respond to businesses that seek further information about employee ownership.

7 Ohio State employee ownership centers Housed at Kent State University, the Ohio Employee Ownership Center (OEOC) is a nonprofit that provides services to Ohio businesses interested in exploring employee ownership. The OEOC is funded by grants from public and private agencies and foundations, program income, and fee-for-service work. Since its founding in 1987, the OEOC has assisted employees in buying all or part of 92 companies, creating 15,000 employee-owners, at a cost in state funding of $772 per job created or retained. California The NCEO recently launched the State Centers Project, an initiative to create employee ownership centers in states throughout the U.S. The California Center for Employee Ownership was started in 2012 as a pilot for the project, and in 2013, the California Center held its first event, the Conference on Business Succession and Employee Ownership at Fresno State University. For more information, see the California Center for Employee Ownership website ( Colorado The Rocky Mountain Employee Ownership Center (RMEOC) is a Denver-based non-profit established in 2009 whose mission is to promote the employee-ownership model as an important business option in our nation s system of free enterprise, and as a path to greater commercial vitality, employment opportunity and economic security for all Americans. The RMEOC held its first conference, the Community Wealth-Building Conference on Creating the New Economy, in September of Vermont For me, the rewards of working at Web Industries because it s 100% employee-owned go far beyond my healthy ESOP account. Web has created an environment where responsibilities are shared and individuals are valued, making Web a great place to work. On any given day, one would be hard pressed to find an employee-owner at Web who isn t happy to work here. I, for one, look forward to coming to work every day and to working with my fellow owners at Web. -Veronica Ortiz, Process Analyst, Web Industries in Hartford, Connecticut In 2001, U.S. Senator Bernie Sanders (who was a member of the House of Representatives at the time) secured federal funding to create the Vermont Employee Ownership Center (VEOC). Since forming, the VEOC has provided direct assistance to representatives of nearly 200 Vermont businesses, ranging in size from only a few employees to several hundred.

8 About the National Center for Employee Ownership The NCEO is a nonprofit membership and research organization that was founded in 1981 to provide the most objective and reliable information possible on employee ownership at the most affordable price possible. Today, we have over 3,000 members, ranging from employee ownership companies to consultants to academics. We are the main publisher in the field, with over 50 titles ranging from issue briefs to books. We conduct dozens of Webinars yearly and also hold in-person meetings around the U.S., plus a large annual conference. We provide training, speaking, and introductory consulting, conduct surveys and other research, and have extensive contacts with the press, where we are regularly quoted. We are supported almost entirely through membership fees and our activities, but we do accept donations, which are tax-deductible (we are qualified as a 501(c)(3) nonprofit charitable organization). For more information contact us today at or outreach@nceo.org, or visit for employee ownership videos, infographics, maps, and more.