MERGERS & ACQUISITIONS
n March , Truckee-based Mountain Hardware and Sports was up against the toughest test of its 43-year record of no layoffs . As the economy was going into a deep freeze , company president Doug Wright sent a letter to his staff on March 17 . “ It essentially said , ‘ I ’ m going to do everything in my power to keep you guys 100 percent healthy and safe and financially whole ,’” says Wright . “ They know I ’ m serious about that .”
He could make that commitment in part because of who owns the business : an employee stock ownership plan , or ESOP . In 2000 , its three founding owners were in their early 50s and thinking about their exit strategies , and none of their children wanted to take over .
So a financial adviser suggested a way to keep their legacy going : a gradual sale to company employees . In 2001 , the owners loaned money to the ESOP — which is a trust , a separate legal entity run on behalf of the employees — to buy about half the company shares . In turn , the ESOP distributed those shares to employees who ’ d been with the company long enough to qualify . ( Mountain Hardware employees begin receiving stock after 1,000 hours of service and become fully vested after six years .)
By 2013 , the ESOP had bought out the founders completely .
Employee ownership is part of why the company prioritizes keeping staff . Wright says the company had enough money in reserve in late March to keep going for a few months , which it used to retain employees . The company has a governance structure much like that of any other — as president , he reports to a board and is responsible for performance . What makes the business unique is who owns it . “ I don ’ t have a shareholder ( who ’ s ) saying , ‘ Look , if I don ’ t get a 15 percent return every year in the form of a dividend or something , I ’ m going to be disappointed ,’” says Wright .
So in March , when the governor recommended that those older than 65 stay at home , Mountain Hardware furloughed its five older staff who were affected but paid their salaries . “ That ’ s the beauty of the ESOP — our staff is supportive of that ,” says Wright .
Thirty-two companies in the Capital Region have such ESOPs , according to the most recent available data from The ESOP Association , a national group that advocates for employee ownership . ESOPs let employees own a piece of the company and are a way for the wave of
“ I don ’ t have a shareholder ( who ’ s ) saying , ‘ Look , if I don ’ t get a 15 percent return every year in the form of a dividend or something , I ’ m going to be disappointed .’”
DOUG WRIGHT President , Mountain Hardware and Sports
retiring CEOs to leave a legacy for their employees and keep their companies under local control . Research indicates that employee ownership can transform company culture for the good and improve profit margins . But the effects of an ESOP sale on the final price and extra transaction costs mean they ’ re not the right choice for every seller . And at least one worker-advocacy group contends they can sometimes put employees at financial risk .
ESOPs are essentially retirement plans , though most companies with an ESOP also offer a secondary plan like a 401 ( k ), according to one survey . Owners sell their shares , or a portion of them , to the ESOP , which holds them on behalf of workers . Usually , the company or the ESOP gets a bank loan to finance the sale . In other cases , selling owners make the loan themselves , deferring their payout on the sale . In the years after the transaction , the company uses part of its profits to pay back the loan and distributes remaining profits to the ESOP in the form of stock , which , in turn , is paid into employees ’ accounts . When workers leave or retire , they can cash out those shares .
‘ What ’ s most important to us ?’
Many local economies are about to see thousands of leader years of experience evaporate as baby-boomer owners retire . By 2030 , all boomers will be at least 65 . That generation owns nearly half of the country ’ s privately held businesses with employees , according to an estimate based on the 2012 Census Survey of Business Owners and Self-Employed Persons by Project Equity , a nonprofit that promotes employee ownership .
Many retiring leaders don ’ t have an exit strategy . A 2019 survey by the Wilmington Trust , a financial advisory firm , found that just 55 percent of boomer owners have a formal business succession plan . In this economy , many of those companies could shutter if they don ’ t find a buyer .
Stephen Bender is one of the exiting boomers . About 15 years ago , he was in his mid-50s and starting to strategize how to pass on ownership as the second-generation CEO of Bender Insurance Solutions in Roseville . ( He ’ s also a member of Comstock ’ s Editorial Advisory Board .)
A new generation was coming up through the company , with three of his daughters and a nephew working there . Maggie Bender-Johnson joined the business in 2005 and worked her way
62 comstocksmag . com | November 2020