Riverside firm helps businesses become employee owned

The practice of employees owning a majority of company stock has been around for years in different forms, but such a program can be expensive and complicated. 

Any company that contacts Marcus Piquet is likely on the verge of making a major change in its business model.

Piquet is a principal with American ESOP Advisors LLC in Riverside, which assists privately owned businesses that want to convert to employee ownership, particularly employee-owned stock plans.

A certified public accountant who no longer practices accounting, Piquet has worked for American ESOP Advisors for the past 13 years, helping businesses make the transition to employee ownership, then advising them once their program is in place.

Implementing an employee stock ownership plan can be a good long-term move for owners and employees, provided that a company is large enough and that it generates enough profit every year, Piquet said.

If nothing else, stock ownership plans for employees can pay off better than most retirement plans, including 401-K’s, Piquet said.

“It’s not always a good fit, and we do tell some businesses not to do it, but an ESOP can be a positive thing,” Piquet said. “Employees usually work harder when they have an ownership stake in the company, which makes for a more efficient operation. It’s also a better work environment.”

At the same time, ownership can raise money, reduce their taxes and ultimately hand over their businesses to their employees, who presumably know how the company should be operated.

“From the owner’s perspective, an ESOP can be a great exit strategy,” Piquet said. “It’s also a great way to raise money quickly. There’s an old saying that the problem with capitalism is there aren’t enough capitalists, that not enough people own things. An ESOP can help solve that problem.”

Employee-owned companies have been in existence for years in various forms, but ESOP’s got started in 1974, with the passage of the Employee Retirement Income Security Act.

U.S. Senator Russell Long, a Democrat from Louisiana, led the battle to pass that legislation after lawmakers raised concerns that some people weren’t saving enough money for retirement. Long, who served in the Senate for nearly 40 years, called the passage of that act his greatest accomplishment.

There are several ways to achieve employee ownership, including stock options, allowing employees to buy stock directly or buying stock through a profit sharing plan. But ESOP’s have become the most popular way to set up an employee-owned company, said Loren Rodgers, executive director of the National Center for Employee Ownership in San Francisco.

About 11,000 such companies are operating today in the United States, up from an estimated 3,000 during the early 1980s, according to Rodgers.

“It’s true that they got started because people weren’t saving for retirement, but there were also some people who were trying to make their businesses more efficient and more competitive,” Rodgers said. “It was also thought that they would also help close the gap between the haves and the have-nots, which was getting wider when the ESOP program got started. They would also give people more job security.”

In a standard ESOP, a company establishes a trust fund and contributes into it either new shares of its own stock or cash that is used to buy existing shares. Conversely, the ESOP can borrow money to buy new or existing shares, with the company ultimately responsible for paying back the loan, according to the center for employee ownership.

Shares in the trust are placed in the accounts of individual employees, with most full-time employees 21 years old or older participating in the plan.

Employees become vested as they gain seniority. By law, all employees are required to be fully vested in three to six years.

Workers receive their stock when they leave the company, with ownership required by law to buy back the stock at a fair market price. The vesting process provides for a more stable workforce, because most people choose to stay with the company until they are fully vested.

There are several reasons why companies form ESOP’s: to purchase the shares of a departing owner, to borrow money at a lower after-tax cost or to create a benefit for its employees.

About two-thirds of the ESOP’s formed in the United States are intended to deal with a departing owner, Rodgers said.

There are also multiple tax benefits associated with forming an ESOP, including tax-deductible cash and stock contributions, and the fact that employees pay no tax on contributions they make to an ESOP, according to the center for employee ownership.

Firms like American ESOP Advisors look for medium to large companies that are consistently profitable when looking for employee ownership candidates.

“If you average out profitable over five years, that might not be good enough,” Rodgers said. “They’re looking for companies that are profitable every year.”

Along with the benefits they provide ownership and labor, there is some evidence that employee-owned companies outperform regular companies: a study by Rutgers University found that companies with an employee stock ownership plan grew about 2.3 percent faster than companies without them.

Whether they grow or not, companies can undergo a cultural change after they set up an ESOP, according to an official with an Inland third-party logistics company in Chino that began offering stock to its employees in 2004.

“Not long after it started you could tell our employees started thinking more about cutting costs and keeping our overhead at a certain level,” said Maria Coronado, controller and office manager for Sunset Pacific Transportation in Chino. “From the first time it was explained to people, I think they grasped immediately that they had to stop spending money that didn’t have to be spent. They also started thinking long-term, which was good.”

Sunset Pacific went to its employee stock ownership plan when its chief executive officer wanted to raise money for his retirement. Full vestment comes after five years, and none of the company’s 27 employees are allowed to control more than 10 percent of the total stock.

Despite their benefits, some critics charge that ESOP’s, like other employee-ownership constructs, are merely ways to bail unprofitable or otherwise poorly run companies, a charge Piquet denies.

“That is absolutely not true,” Piquet said. “Only strong companies end up offering stock to their employees. In that sense [ESOP’s] a lot like a leveraged buyout.”

But there remains an obvious question: if ESOP’s are such good deals for both labor and ownership, and if they can transform the culture of a business as dramatically as many people say they can, then why are there only 11,000 of them in a country as large as the United States?

“For a lot of reasons it’s been difficult get the word out about them,” said Rodgers, whose organization provide information and holds seminars on employee stock ownership. “But I think the future is good. The last 10 years or so have been kind of flat, but we expect things to improve. There are going to be more incentives that will make it even more attractive for companies to offer stock to their employees.”