STRATEGIES - MAY 5-11, 2006
Selling company? Employees can buy it
By Renee McGaw
Denver Business Journal
|KATHLEEN LAVINE - BUSSINESS JOURNAL
Ron Lint, CEO of ATI capital Group of Colorado in Estes Park, advocates for employee stock ownership plans.
When Gerald H. Phipps died in 1993, he left
behind a will that gifted his Denver-based
general contracting company 10 its employees.
Today, 102 employees of Gerald H. Phipps Inc.
all own a piece of the company through an
employee stock ownership plan, or ESOP.
Phipps' foresight is rare. In coming years, a
slew of private Colorado companies likely will
change hands, as post World War II entrepreneurs
retire or die. Unless the business owner
has an heir willing to run the business, most will
be sold to an individual or another company.
Ron lint, CEO of ATI Capital Group of Colorado,
an Estes Park-based business consulting
firm, said most companies are overlooking a
third choice: ESOPs.
"Colorado is an under-ESOP 'ed state," Lint
said. "Most companies, at $25 million and
under. are too small to attract M&A interest. So
how do you transition?"
He's assembling a team to offer what he said Is
the state's first turnkey approach to ESOPs. The
groups he's working with include three Colorado
law firms. including Davis & Associates;
two CPA firms; and three banks, including Vectra
Bank Colorado. Other potential participants
either declined to be named, citing the early
nature of the project, or couldn't be reached.
The start-to-finish service will handle all
aspects of the deal for a single fee, disclosed up
front. based on the complexity of the transaction.
lint said his team-based approach can
slash the entire process to roughly 90 days; it
typically takes about a year.
Lint sees a large untapped market. There
are only 12 ESOPs operating In Colorado, out
of about 11,000 nationwide. according to the
Washington, D.C.-based ESOP Association.
Besides Phipps, they include Denver-based
architectural and engineering consultant SA
Mire, Inc.; Westminster-based Alpine Lumber
Co.; Hazen Research, a metallurgical and mining
research company in Golden ; New Belgium
Brewing Co. in Fort Collins; and others.
But Lint estimated about 2,000 Front Range
businesses would qualify for an ESOP. based on
their size, profitability and other factors.
"Business succession is a big problem in the
United States", he said. "There are so few ways
to do it effectively."
ESOPs are what Lint, who has been doing
them for the past 20 years, calls "the ultimate
exit strategy" for private business owners.
"The company can deduct 100 percent of
the principal and interest on the loan to purchase
the stock, " Lint said. -That creates almost
enough cash flow to pay the bank back for the
money you borrowed to do it."
A leveraged ESOP works like this:The company
establishes an ESOP. A bank or other lender
lends money to the ESOP, which buys company
stock from the selling owner. The company
makes annual tax-deductible contributions to
the ESOP. which repays the loan.
The seller, meanwhile, can legally defer capital
gains tax under Section 1042 of the Internal
Revenue Code of 1986, which allows sellers to
ESOPs to roll over the proceeds tax-free as long
as they invest them in qualified U.S. stocks.
Capital gains lax then would be deferred until
those stocks were sold - but Lint said that with
a properly structured plan, capital gains tax can
be avoided permanently .
But many companies, wary of the complexity,
avoid leveraged ESOPs. And they do have some
downsides. For one thing. the tax benefit is
wasted if the company isn't profitable. because
an unprofitable company wouldn't pay income
tax in any case.
The employee stake also leaves the company
with "repurchase liability" - that is, the company
is obligated to buy back an employee's
stock when he or she leaves the company or
dies, a financial hit that can come unexpectedly.
Lint said this can be managed by funding
a repurchase liability account for eventual stock
A leveraged ESOP also creates a perceived
decrease in the company's value, at least until
the ESOP loan is repaid. To balance this, Lint
said It's useful to build relationships with banks
ahead of time, educating them about the
accounting peculiarities of ESOPs.
The increased debt load can be a problem in a
sudden economic downturn, as well, though Lint
said a leveraged M&A deal carries the same risk.
Adolphe Cyr, a financial services professional
at MassMutual Financial Group who's working
with Lint, said most ESOPs are created by attorneys,
who may have little experience in them
and are unable to provide a comprehensive
"There's no one to herd the cats" Cyr said.
Lint moved to Colorado about two years ago
from Dallas, where he worked as a business
appraiser and financial consultant. Although he
says he's handled about 200 ESOPs around the
country, he's never done one in Colorado.
Among his previous clients is Locke Supply
Co., an Oklahoma City, Okla.-based wholesale
supplier of plumbing, heating. air conditioning
and electrical equipment. The 800-employee
company went to an ESOP in 2000, after founder
Don Locke died.
"We were able to talk his wife Into allowing us
to go out and secure the financing to buy 67 percent
of the company from her for about $23.5
million," said Jack Anderson, the company's
chief financial officer.
The tax benefits were one factor in deciding to
go to an ESOP, but "It wasn't the primary factor,"
Anderson said. "We felt that with Don's death
there would be a lot of people coming to Mrs.
Locke and wanting her to sell stock to them.
We felt it was in the best interest of Locke Supply
to keep the management intact The tax benefits
allowed us to do what we did to finance
the 67 percent. If we had had to buy the 67
percent and then pay income tax on that, I
don't know if we would have been able to
Although leveraged ESOPs can be complicated,
"it was easier, probably, with
Ron's expertise and with the team he had
assembled, to get it done," Anderson said.
~ I had been in public accounting for 20
years. but I had never really been exposed
to an ESOP company, so it helped me to
have his expertise."
Anderson's advice for companies considering
an ESOP: Plan ahead for the repurchase
"The main thing is you've got to provide
for the repurchase liability later on, after
people start retiring," Anderson said. "You
can't wait until people start retiring to think
about that; you've got 10 do it on an ongoing basis."
Kurt Klandrud, a senior vice president
at Gerald H. Phipps - whose ESOP wasn't
handled by Lint -agreed.
"That's one of the things that our board
and trustees Is very mindful of," Klandrud
said. "We obviously have the repurchase
obligation. We have funded our plan every
year since 1993. We haven't had to borrow
or leverage the company to pay any of the
He knows his company's smooth transition
"There was a lot of foresight" in PhIpps'
setting up an ESOP transition plan in 1977,
years before his death. "It's a huge benefit
to the people who are involved in it now,"
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