Friendly takeover: employee-owned businesses
With 10,000 Americans turning 65 every day, what’s being referred to as a “silver tsunami” is expected to take place over the next eight years.
Seventy percent of the businesses in this country are owned by people over the age of 55 and most of them don’t have a succession plan. The five owners of Bill Few Associates, all in or nearing their 60s, didn’t want that to happen.
They knew they were fortunate to acquire founder Bill Few’s stake in the wealth management firm 20 years ago. Rather than selling to a third party, the five owners sold the business to their employees through an Employee Stock Ownership Plan (ESOP) in June 2021.
Mike Kauffelt, co-CIO and part owner, equates it to elderly parents selling their house to their children. “Our decision to sell was really to keep the firm intact,” he said.
They knew selling to a larger company could mean layoffs for many of the firm’s 35 employees. “It’s hard to protect everybody’s job unless you basically sell to yourselves.”
Bill Few Associates opened its Washington Road office in 2007. “It’s just been a pleasure to be part of Mt. Lebanon. We’re very proud of that office. And the ESOP will probably sustain that commitment to the community for quite a while,” Kauffelt said.
Bill Few Associates is one of an estimated 5,000 ESOPs nationwide.
ESOPs fall under a 1974 act of Congress, allowing companies to take out a loan to buy a company from previous owners, then divide the ownership among employees. Since profits of fully employee-owned businesses are generally tax exempt, the owner gets paid full fair market value, the business is now tax free and the tax savings can be used to pay off the loan. “There’s nothing else in the tax code like this and nobody knows about it,” said Pennsylvania Center for Employee Ownership (PaCEO) Executive Director/CEO Kevin McPhillips.
That’s part of the reason there aren’t more employee-owned businesses. The PaCEO is trying to change that. Its mission is to raise awareness about employee ownership. The nonprofit is made up primarily of volunteers; many are current and former CEOs with experience with various kinds of employee ownership.
“The things that drive the decision to do employee ownership are usually things like interest in legacy and a recognition that they didn’t get there by themselves,” said McPhillips. “I want to feel really good about what I’ve done for so many people and it’s those people that will choose employee ownership.”
When PaCEO started in 2016, Pennsylvania was 23rd in new employee-owned businesses. In the last five years, Pennsylvania’s standing has risen to second in the nation, behind California, which has three times the population.
There are currently more than 300 partially or fully employee-owned companies in Pennsylvania, including Thermo Twin Windows, Nicklas Supply and Joy Cone. Two large convenience store chains in Pennsylvania, Sheetz and WAWA, are partial ESOPs.
According to a study by the National Center for Employee Ownership, average wages in employee-owned businesses are 33 percent higher than in non-employee-owned businesses. Employee owners have two-and-a-half to four times more wealth than non-employee owners, according to a Rutgers University study, and employee-owned businesses are 8 to 12 percent more productive.
Employee ownership also has a major impact on worker retention. According to McPhillips, most of the major engineering firms in Philadelphia are employee owned, in an effort to retain good employees.
The benefits to a community are threefold. “What we see on a regular basis is job growth,” said McPhillips. “They prosper, they grow, they hire more people and all of that creates community wealth. More people are spending money in a community and supporting that community.”
According to McPhillips, PaCEO is increasingly seeing younger business owners, maybe in their 50s or even their 40s, doing a partial ESOP, allowing them to take some money off the table and watch the business grow. Then, they sell more at a higher share price, watch it grow again, and when they’re ready to retire, they sell the final portion at an even higher share price.
“What we’re trying to do is improve communities and change lives for the better. We’ve got some challenges in this nation and it’s going to take special kinds of thinking to address those and make this place a better place for our children and our grandchildren,” said McPhillips.
For more information, visit PaCEO at www.ownershippennsylvania.org or email email@example.com