MERGERS & ACQUISITIONS
John Riina assists a customer at Mountain Hardware and Sports in Truckee . The employee-owned company added 22 employees when it opened a second store in Truckee on July 1 .
Ultimately , what kept the company from giving in to an outside acquisition was its history in the community . “ The ownership group had to dig deep and say ‘ What ’ s most important to us here ?’” says Bender-Johnson . “ If it ’ s really important for us to get stinking rich , then let ’ s just do it . But because we have an 80-plus-year legacy , to us , it was worth so much more than just money . So we were open to a lower deal .”
The company went through with it , and Bender Insurance Solutions became employee owned on Nov . 1 , 2018 .
Tallying the tradeoffs
Bender Insurance Solutions ’ story skips over one key advantage of employee ownership : huge tax breaks . Selling owners can defer or avoid paying federal capital gains taxes on the sale — the top rate is 20 percent now — if they reinvest in U . S . corporate stocks and bonds within 12 months and meet a few other conditions .
For companies that are S corporations , those for which business income or loss passes through to the shareholders ’ tax returns , the tax incentive is even bigger : The portion of the business
owned by the ESOP is completely exempt from federal income tax . So if an S corporation ESOP owns 60 percent of a company , it pays no federal tax on 60 percent of its income .
Those tax subsidies have to be weighed against the possible sales discount and extra transaction costs . But there are other downsides to consider . For example , the federal government ’ s treatment of ESOP sales has made them more of a legal risk than they need to be , according to Patrick Mirza of The ESOP Association . Other ESOP proponents agree . By law , an ESOP can ’ t pay the seller more than the company is worth . But no federal regulation precisely defines the process that an independent appraiser must use to determine fair value . Instead , the government has sued many appraisers for valuing a company too high at the time of the ESOP sale , and in at least one case sued the selling owner for choosing an appraiser who had a conflict of interest .
And the news isn ’ t all good for employees either , according to a report from the Washington , D . C . -based Pension Rights Center . Those who are laid off can cash out their shares , but ESOPs have the right to change their rules to delay making those payouts for up to five years to ease a cash crunch . That timing could spell disaster ; employees are most likely to need money immediately following a layoff . Worse , if the company is struggling , the value of employee shares is likely to be lower when they do get their payout . At RadioShack and Enron , both of which had ESOPs , workers lost most of their retirement savings in such company collapses .
Will culture help in a downturn ?
Bender-Johnson says she ’ s seeing positive effects of employee ownership on firm culture after just two years . Since it went into place , staff are more likely to identify areas where they might trim — they call it “ ESOP waste .” Bender- Johnson points to a small change : The team decided to stop making coffee toward the end of day to avoid dumping a full container of unwanted coffee . Wright has long seen that mentality at Mountain Hardware and Sports , where employees regularly check up on each other ’ s performance because they know it affects their own retirement money .
64 comstocksmag . com | November 2020