Progressive Grocer Independent

AUG 2016

Issue link:

Contents of this Issue


Page 36 of 43

August 2016 | Defining the Independent Market | 37 Steps to Setting Up an ESOP 1. Determine Whether You're Ready to Sell For independent retailers, this can be a fairly simple process, but the primary operators still need to ensure that all owners are on board with the idea. 2. Conduct a Feasibility Study This can be a full-blown analysis conducted by an outside consultant that includes market surveys, management interviews and detailed financial pro- jections, or it can be a careful business plan performed in-house. All analysis must look at whether cash flow is adequate for the ESOP's intended purpose, determine whether payroll is adequate for participants to make ESOP contribu- tions deductible, and estimate the repurchase obligation and how the company will handle it. 3. Conduct a Valuation If the value is too low, it's not worth it, or if the price of shares is too high, the company may not be able to afford it. The appraiser will look at cash flow, prof- its, market conditions, assets, comparable company values, goodwill and overall economic factors. 4. Hire an ESOP Attorney Once the first three steps determine whether an ESOP is viable, a plan must be drafted and submitted to the IRS. 5. Obtain Funding for the Plan The ESOP can borrow money from banks (or from other private parties) or from ongoing company contributions aside from loan repayments. A third source can be from existing benefit plans like profit sharing. Or employees can contribute to the plan through wage or benefit concessions. 6. Establish a Process to Operate the Plan A trustee must be chosen to oversee the plan; in private companies, it can be someone either from inside or outside the company. An ESOP committee, usually made up of management, directs the trustee. A plan also must be developed to communicate to employees how an ESOP works, to get them invested as owners. Source: National Center for Employee Ownership posted a video on the employee web- site portal, and encouraged employees to watch it and discuss the plan with family members. An ESOP can be molded into al- most anything the owners want, from selling as little as 5 percent of the business to selling 100 percent of the company's stock to the trust. Newport Avenue Market decided to sell the whole business to the ESOP trust and hire a trustee to oversee it, although Johnson and her father remain in charge of the company. While companies have a lot of control over how to set up an ESOP, legally, some minimums need to be met for employees to participate. It has to be open to all employees who are 21 or older, have worked for the company for at least one year and work at least 1,000 hours per year. e companies can choose to be more generous with their own requirements for who can participate. For Newport Avenue Market, em- ployees will see the statements from the trust this summer on how much has been deposited into their ac- count. In general, it takes about three years for the investment to build and become large enough for employees to see the advantages of working for an ESOP company, Schoeder says. Benefits A key benefit of an ESOP is that employees feel more invested in the company and begin to act like the owners they are. In Newport Avenue Market's case, the store always was open with financials, sharing daily financials as well as quarterly department and total store budgets and sales. e only change was in how bonuses are determined, in that they became less discretionary and more specific, with written criteria to qualify for the bonus. Employees aren't demanding more access to financials, but Johnson has noticed that they're paying more attention to how even the smallest decisions can affect the company, such as having too much inventory in the back room or treating the equipment with more care. To get the most out of an ESOP for both employees and the larger community, you must keep preaching the message, Johnson adds. "You can't let up on the messaging, so it is in ev- erything we do, including responding to customers via email," she says. Taking the step to become an employee-owned company is often attractive to independent retailers that really value their staffs, but Johnson cautions that retailers should really investigate the option. "It's scary enough to think about selling your business, and if we sell our business to Joe Schmo down the street, we have a pretty good sense of how that's going to go," she says. "But selling to an ESOP, especially if you are one store or five stores, that is even scarier. It requires effort on your part. is exit strategy isn't for everyone. It's for the people that truly have a passion for not only what they do, but the people that do it with them, meaning employees and their community." PGI

Articles in this issue

Archives of this issue

view archives of Progressive Grocer Independent - AUG 2016