An Employee Stock Ownership Plan (ESOP) is a type of employee benefit plan that is formed by business owners who sell some or all of their shares to a trust. The trust then holds the shares in retirement accounts for employees. In short, the employees’ accounts hold stock and allow every employee to become part owner of the company.According to the National Center for Employee Ownership (NCEO), the most recent data indicates that more than 6,600 ESOP plans exist, covering more than 14 million people. Two UniCarriers Americas (UCA) authorized dealers, Sunbelt Material Handling and Ogden Forklifts, operate as ESOPs and are reaping the benefits for not only their companies, but for their employees.
In 2014, Hank Ogden, chairman and former president of Ogden Forklifts, Inc., sold 100 percent of the company when he made the switch to an ESOP. ESOP law states companies can keep up to 50 percent of the company. ESOPs are funded in different ways, but typically by a leveraged or unleveraged buyout. Ogden states there were multiple phases during the selling process, but the first and second phases of funding the ESOP were through a mix of 20 percent cash and 40 percent bank loan. The remaining 40 percent was funded with a subordinated note.
Matt Maddock, president of Sunbelt, said the reason to convert to an ESOP stemmed from the founders wanting to establish a succession plan. Co-founders, Warren Cornil and Bill Rowan, were looking for opportunities to exit the company. They sold 55 percent of the company to the newly-incorporated ESOP and the remaining 45 percent is currently split among the board of directors. The ESOP was purchased in 2012 through a loan, with 33 percent borrowed from a bank and 22 percent through personal funding. After only seven years running an ESOP, the company has paid off the loan and has no debt to the ESOP.
According to esopinfo.org, shares must be allocated according to relative pay or by some formula that results in a more equal pay distribution. Most of the time, employees accumulate more shares based on tenure and compensation. Both Ogden Forklifts and Sunbelt Material Handling hold a 12-month (or one-year) vesting period, which is the amount of time an employee must work before they are eligible to participate. And both Ogden and Sunbelt offer two entry points, one in January and July.
“The ESOP’s shares are allocated to each employee’s account based on earnings. It’s fair and equal based on performance,” said Ogden. “Each employee is encouraged to act like an owner. If you want to help grow the company and you are company-minded, you can be rewarded over time.”
Companies looking to offer ownership through an ESOP can benefit in many ways. One of the major advantages of companies who offer ESOPs is the tax benefits. Companies may be able to avoid paying federal and state income taxes on the ESOP portion of the business. Sunbelt, a mid-market size company, pays no income taxes and pays 50 percent less taxes than it did prior to the ESOP. And since Ogden is 100 percent ESOP, the company pays no federal taxes.
For the employee, there are multiple advantages. Maddock emphasizes that employees have a significant retirement plan just by going to work each and every day. And unlike a traditional 401k, employees receive the ESOP shares with no out-of-pocket contribution.
Employees are able to share the rewards when the company is performing well. When the stock value increases or decreases, so does the value of employees’ accounts. According to Ogden, the dealership’s 2019 evaluation rose to more than $10 per share, the highest it has been since the ESOP’s inception. “Employees are starting to understand the positive impact their contributions have on the company,” Ogden states.
“Our workforce has a sense of ownership, and we experience a company-increased profitability because of it. We have highly-engaged employees across the board that know if we can produce more and spend less, all of us are more profitable,” said Maddock. “We’ve seen great results, and we are seeing a positive impact on the bottom line.”
While the benefits of an ESOP outweigh the disadvantages, Maddock states the initial costs for setup and annual fees can be costly. Sunbelt currently pays $30,000-$40,000 per year on auditing and evaluation costs, while Ogden spends around $15,000 each year to maintain the ESOP.
“The upfront cost to set up the ESOP was roughly $100,000,” said Ogden. “It’s an expensive venture if you want to do it correctly and you don’t want to leave yourself exposed to any auditing problems.”
Another challenge is educating employees on what an ESOP is, and how it works can be perceived differently among employees. “There’s a learning curve for all involved in the ESOP, and as one of the leaders of Sunbelt, I have to understand how our specific plan works and correctly relay this information to our employees,” said Maddock. “Sometimes, the perception can be that the employees own the shares of the company, but in reality, they just control them when they leave or retire.”
If an employee is terminated or chooses to leave the company, he or she is eligible to receive the vested portion of the plan. An ESOP can have a three-year cliff or a two-to-six-year graded vesting schedule. Ogden and Sunbelt both utilize a graded schedule and employees are totally vested after six years. Employees under the age 59 ½ who choose to withdraw assets into a non-retirement account are taxed and owe a 10 percent penalty. They also have the option to roll over the assets to another retirement account or be paid in installments over a five-year period without penalty.
But even these small challenges are well worth the benefits. “Overall, it’s a win-win to convert to an ESOP. Current ownership will have an established exit strategy, and while doing so, are able to reward their employees,” said Maddock.
To encourage employees even further, Ogden states he set aside 20 percent of the stock with a management incentive group, and two sales employees are currently offered this. If they meet the objectives in the five-year timeline, they can earn the additional shares. If sales goals are not met, the shares will then be allocated elsewhere.
“I set the management incentive group up because both employees had the potential to grow, and I wanted to retain them by offering them an incentive other than the commission they earn and showcase the value they bring to the company,” Ogden said.
Maddock and Ogden both believe that companies should look further into ESOPs for many reasons. “I think it’s a great succession plan, as well as a benefit retention plan for employees. An advantage from my perspective is that when I leave, my shares will go back into the company, and people who want to sit in my chair will have the opportunity to have an even stronger voice within the company,” said Maddock.
“It’s one of the top three best decisions I’ve made in the 56 years of being in business. I wanted to have a positive effect on my employees and for them to understand that through the ESOP, they’d have more opportunity and ownership, and I know I’ve accomplished that,” concludes Ogden.
Companies can experience many benefits converting to an ESOP like establishing a succession plan, enjoying tax benefits, providing a retirement plan for employees, increasing productivity and engagement through company-wide ownership and more. For other dealers who want to learn more about converting parts or all of their businesses to an ESOP, speak to a consultant who specializes in ESOPs before making any decisions.
 The information provided herein is for illustrative and informational purposes only. UniCarriers Americas Corporation makes no representations or warranties as to costs, benefits, or the legal and/or tax effects implications of an ESOP or the information contained herein. Any dealer or other party considering an ESOP or other legal or tax changes to its business should retain and consult qualified legal and tax advice from a licensed professional.