As many Vermont business owners approach retirement, they ask themselves several questions: Who will I pass the business on to? What is a fair price? Where will the financing come from? Will your legacy (your good name) that you have built up over the years continue after the transition? What will happen to your employees when you sell?
In the past, many owners had the privilege of transitioning their life's work to one or more of their children, or perhaps a son or daughter-in-law. If that's you, you are one of the lucky ones. It appears that many "kids" now want to forge their own paths — they lack the skills and the interest in taking over the family business.
Who, then, will it be? One or more key managers or small group of key employees? A competitor — merging your work into theirs? A new, as yet unknown, buyer?
Or could you sell to your employees, at a pace controlled by you, in a way that gives all full-timers the opportunity to build a stake in the business? This is what the Pizzagalli brothers did and, since 2009, PC Construction has been 100 percent employee-owned through an Employee Stock Ownership Plan (ESOP), which is a retirement plan that owns company stock for the benefit of employees. Other employee-owned businesses in Vermont's construction industry include: Bazin Brothers Trucking of Winchester, DuBois & King of Randolph, Neil H. Daniels of Ascutney, Walker Construction of Stowe, and Red House Building of Colchester. They did it, could you?
When assessing if employee ownership will work for a business, there are a few key factors to consider:
- Management Team: Is there a strong group that can lead the company successfully into its next chapter in the absence of the current owner?
- Profitability: Is the business profitable enough to support the required debt?
- Size: Because of regulatory considerations, ESOPs are usually appropriate for companies with more than 20 employees and more than $1 million in EBITDA. Smaller companies can achieve similar goals with an employee cooperative structure.
ESOPs have significant tax advantages, both for the seller as well as for the new employee-owned business. They allow for both principal and interest payments to be made with pre-tax dollars, and sellers of C-corporations can defer capital gains taxes. As pass-through entities, S-corporations that are 100 percent owned by an ESOP also have no federal corporate income tax liability.
Employee ownership can also be a powerful tool to boost company performance. Employee-owners have a strong and direct stake in the success of their business, and national studies have shown that, on average, employee-owned companies are more productive and grow faster than their peers.
For more information, visit the Vermont Employee Ownership Center's website at www.veoc.org.
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