A Tale of Two ESOPs
An employee stock ownership plan (ESOP) is a benefit program in which employees acquire ownership of the company they work for by receiving shares of stock in it, typically with the help of bank loans that fund the ESOP. When employees retire or leave for other reasons, the company buys back their shares at current value. Significant tax breaks make ESOPs attractive to owners looking for an exit strategy that will compensate them and enhance their employees’ financial security at the same time.
According to the National Center for Employee Ownership, 14 million employees are covered by about 6,700 such plans. Two of them within the printing industry are the ESOPs that were set up by Hopkins Printing, in Columbus, Ohio, and The Standard Group, in Reading, Pa. Both are good deals, made in good conscience, with results that more than validate the good intentions.
Hopkins Printing turned to an ESOP in 2007 when the sale of the company to a well-known printing industry consolidator failed to close because of differences over 401(k) and insurance provisions. This made the owning family members realize “they couldn’t just deal with taking the money and running,” says Jim Hopkins, founder and CEO.
“I don’t know how people sell their businesses and take the money and run,” sympathizes Scott Vaughn, CEO of The Standard Group, who finalized an ESOP on behalf of his 200 employees in 2017. The result, he says, is that “I’m the only employee in my company at this point - everybody else is an owner.”
That’s a bit of a humorous exaggeration: the front-office structure at both companies remains intact and, for the employees, acquiring ownership of stock is a gradual, accumulative process that hinges on vesting and the repayment of bank loans.
After more than 10 years of participation, Hopkins Printing employees have achieved two-thirds ownership of their shares. Vaughn, who says he has at least 10 more years of work ahead of him, plans on stretching out his compensation from the ESOP so that his employees won’t have to undergo “years of hell” because of excessive leverage.
Both sellers take a long view of the mutual benefits that employee ownership can provide. By pursuing this route, says Hopkins, his company preserves the family name and legacy and maintains its ties to the printing community. Employees get a supplemental nest egg for retirement and the pride that comes with being part of a company they have a personal stake in.
Vaughn says one of the things that an ESOP helps him avoid is having to deal with buyers who want to acquire his accounts, but “dump the employees.” He believes that by strengthening job security through ownership, he’ll be able to “build a home for the best of the best of our industry:” a stable environment “where they’ll be safe” and where talented people will want to come and work.
Because they’re financially complex undertakings that are subject to federal tax and retirement plan laws, ESOPs won’t work as succession options for every printing company. Hopkins and Vaughn urge anyone thinking along these lines to begin by finding a qualified advisor.
They also point out that in order for an ESOP to work, the company culture must be receptive to it. As Vaughn puts it, building such a culture through openness and encouragement sets the stage for a change of ownership that the ESOP “will get over the finish line.”