When it comes to exit plans, ESOPs are often overlooked. Yet Larry Ryan, founder and chairman of Ryan Lawn & Tree, made the bold decision to sell the company to his employees just 11 years after its founding.
He wanted to grow the business to $100 million by 2030 by creating a team of long-term, invested employee-owners. His vision centered on enabling employees to build personal wealth while building the company.
Roy Heinbach, CFO of Ryan Lawn & Tree, says that there’s often a lack of awareness or understanding of ESOPs, as well as the perception they are complex and hard to administer. He adds that ESOPs typically do not provide 100% cash up front; the “buy out” is financed over time.
Heinbach and Mark Stuhlsatz, VP of regional operations with Ryan Lawn & Tree, will showcase the transformative potential of ESOPs during their session, “How an ESOP Can Facilitate a Business Transition and Drive Growth” on Tuesday, Nov. 4, at 9 a.m. at ELEVATE.
“This session would be ideal for someone who has always wanted to learn about an ESOP and the advantages that an ESOP can have on your business,” Heinbach says. “Even if you do not see an ESOP as your option, you will learn how your employees’ work can contribute to company value.”
Common Misconceptions
Heinbach and Stuhlsatz will help attendees gain a basic understanding of ESOPs, what is required to form or sell to an ESOP, as well as how to develop a personal financial road map for employees.
Heinbach says one common belief is that ESOPs are too complicated and risky. He says while they are more complex than a direct sale, they are not any riskier. It is also assumed that owners must sell 100% of the company all at once.
“Many companies become 100% ESOP over time through stage transactions,” he says.
Another concern is that employees run the company.
“Employees own shares through a trust, but they do not make management decisions,” Heinbach says.
Benefits of Becoming an ESOP
There are numerous benefits of becoming an ESOP, both on a business and a personal level. Heinbach notes that one of the tax advantages is that S-Corp ESOPs pay no federal income tax on the ESOP-owned portion. He notes that those tax savings equal investable cash.
This business formation also allows the owner to have a gradual exit from the business. Additionally, ESOPs help increase employee engagement and retention.
“When employees have skin in the game, performance goes up — especially when paired with open-book management and team goals,” Heinbach says.
He says when employees are provided with training and transparency, they start making better decisions because they think like owners in an ESOP. Heinbach says employees take pride in what they are building because they are owners, not just workers.
“Employees become beneficial owners; they are not just clocking in; they are building value they directly benefit from,” Heinbach says. “When the company grows in value, everyone wins!”
Some of the personal benefits of being an ESOP include creating stable, long-term job opportunities and knowing that you are truly making an impact on the lives of your associates.
“It gives employee owners the opportunity to retire very comfortably and at a reasonable age without putting in a dime of your own money,” Heinbach says. “It’s tax-deferred growth.”
When ESOPs Aren’t a Good Fit and Drawbacks to Consider
While Heinbach says there isn’t a set ideal company size for ESOPs, the economies of scale start to make sense for organizations with $2 million to $5 million in annual revenue and 50+ employees.
What matters more is that the company has a growth mindset.
ESOPs are not a good option for highly leveraged companies already carrying a debt load, businesses that are unprofitable or have high employee turnover, or those in highly cyclical or volatile industries. Heinbach says ESOPs also aren’t a good fit for owners who want full cash up without seller financing or outside debt.
“You must make sure you have the right culture to begin with,” Heinbach says. “If you are not willing to open the books up you will have a tough time building an ownership culture.”
The main drawback of ESOPs is that they are expensive to set up and require ongoing administrative fees.
It’s also important to not overlook educating your staff on personal financial planning, as 78% of workers in the U.S. are living paycheck to paycheck, and 64% percent cannot cover a $1,000 emergency expense.
“If most of your employees lack personal financial health, it creates financial stress at home and at work,” Heinbach says. “It delays retirement. It can cause higher benefit costs because employees are less healthy, which can increase insurance costs. It can create more workers’ comp claims. We believe it is incumbent upon leaders to not only ensure the company is financially healthy but to do everything in their power to ensure employees are personally financially healthy. We are excited to talk through some simple ways to help.”
Ready to learn more about ESOPs and if they’re the right fit for your organization? Register for ELEVATE and we’ll see you in Phoenix, Arizona!
