Some leading employee-owned Cedar Rapids companies applaud a legislative proposal to encourage the sale of Iowa companies to their employees when the owners are ready to cash out.
The Iowa Economic Development Authority wants the state to offer incentives to Iowa owners for selling part or all of a company to an ESOP, or employee stock ownership plan.
In small rural towns particularly, it’s hard for owners to find a buyer, said Iowa Economic Development Authority director Debi Durham. Large, out-of-state corporate buyers are often motivated to slash costs and consolidate operations, which may mean layoffs and closing Iowa businesses, she said.
“It’s a political feel-good,” Durham said. “How could you be against transforming an ownership that could leave the state to owners who are employees and live in the local community?”
Two of Cedar Rapids’ best-known ESOP companies see merit in the idea.
Employees at Van Meter Inc., a 100 percent employee-owned Cedar Rapids-based distributor of power supply and control equipment, feel secure in their jobs and good about their retirements. The company didn’t lay off employees during the recession and viewed it as an opportunity to wrest market share from rivals who were pulling back.
“We have a totally different culture here,” said Van Meter power transmission specialist John Naxera. “Everybody’s positive. Nobody’s afraid to go talk to anybody about anything.”
Employees said their ESOP’s value has grown much faster than the S&P 500. Some said they greatly prefer being part of an ESOP because employee ownership promotes long-term thinking, while Wall Street-traded companies tend to focus mainly on short-term returns.
Van Meter President Barry Boyer said the company began an ESOP in the early 1990s and became 100 percent employee-owned on Jan. 1, 2005. The ESOP Association awarded Van Meter its National ESOP Company of the Year award for 2011.
“The ESOP has been a very powerful motivator for us,” Boyer said, adding that it also stimulates innovation.
Key to making Van Meter’s ESOP work is an open-book format that lets all employee-owners understand how they affect value in the company’s stock, Boyer said. The company’s employee-led ESOP Committee spreads the gospel that every $5,000 that employees can help the company save will move up the company’s share price by about 2 cents.
It leads to the kind of thinking that employee Steve Zieser noticed recently. A vendor had arrived to fit employees for new steel-toed shoes in the central distribution center, where Zieser works. Another employee thought the shoes seemed expensive, found comparable shoes at a lower price online and told a manager, so the company could renegotiate.
CarePro Health Services in Cedar Rapids, like Van Meter, proudly proclaims its 100 percent employee ownership on its exterior sign. The company provides products and services that enable people to live independently as they cope with symptoms of aging and illness.
CarePro went to 100 percent ESOP ownership in 2004, when founder and board Chairman Ray Buser decided to retire and other investors were ready to cash out.
CarePro has grown from 230 to 275 employees in the past five years, said Chief Financial Officer Gary Kaufman, president-elect of the Iowa-Nebraska Chapter of the ESOP Association, which provided input on the legislative proposal.
“Those extra jobs wouldn’t be in the community had our previous owners sold it to a national company,” Kaufman said.
Kaufman supports the ESOP incentive legislation.
“That’s the most stable thing for the state of Iowa, if you could sell (a company in ownership transition) to the employees,” he said.
Chuck Leibold is senior director of wealth management for Bankers Trust in Cedar Rapids and one of the ESOP specialists who’ve been advising the state on the House bill.
“One of the reasons we need to create incentives for the seller to create ESOPs is that ESOPs usually are not strategic buyers that can cut costs by coming in and consolidating operations and closing plants,” Leibold said.
“Anyone who’s worked in the ESOP area has seen situations where ESOPs could have been an effective tool for transitioning the company and instead the owner just sold to the highest bidder,” Leibold said, “but I’ve seen instances where the seller chose the ESOP just to keep the jobs in their hometown.”
Leibold said many owners decide to sell their Iowa companies or shares in them to retire or diversify their assets. Original owners of a company would often prefer to sell to their employees to preserve their legacy and reward loyal employees who helped them build the business, Leibold said.
Owners are often surprised, though, when they find out how much it can cost for a feasibility study on creation of an ESOP and to set it up, Leibold said. Professional services can easily total $25,000 to $100,000, but they are often lower than the cost of services to put the company on the market and help sell it, Leibold said.
Forgivable state loans could help owners overcome the sticker shock, Leibold said, and the tax benefits could help offset any difference in price that an ESOP could pay vs. an outside buyer.
ESOP companies recognize the risk of employee-owners having all their retirement in company stock, Leibold said, so they typically offer 401(k) or other retirement plans in conjunction with an ESOP.Unprofitable or marginally profitable companies usually can’t be converted to ESOPs, Leibold said. The process essentially involves borrowing against future profits to pay the previous owner. Companies with a dubious profit outlook would have difficulty getting a loan, he said.