Hartford Business Journal

www.HartfordBusiness.com • April 30, 2018 • Hartford Business Journal 21 THE RAINMAKER Timing couldn't be better for employee stock ownership plans By Ken Cook W e are at the beginning of one of the greatest transfers of private wealth ever. Baby Boomers (1945-1964) are now in their mid-50s to early 70s. The wealth transfer applies to each and every Baby Boomer who founded a business, and now is considering their options for exiting that business. The companies have been the center of the owners' lives. They have been their primary source of income. In most cases, the company is the single greatest repository of net worth the owner possesses. And now, the owner has to find a way to turn their privately held business into retirement income. There are several ways to do that including restructuring the business as an employee stock ownership plan, or ESOP. An ESOP is a unique vehicle for owners to fully or partially exit their business and employees to control their own retirement. An ESOP establishes an employee-owned company and offers a flexible, tax-favorable way to exit the business, provide retirement benefits and retain and motivate employees. ESOPs are popular. In the U.S. there are approximately 11,500 ESOPs, covering about 10 million employees (about 10 percent of the workforce). For the owner, an ESOP is an attrac- tive exit strategy for several reasons. • The development of an ESOP creates an immediate market for the owner's stock, and a buyer for the owner's business. • An ESOP locks in the value of the stock sold at the sale price, eliminat- ing future valuation reductions due to ever-changing business factors. • The owner can transition the busi- ness to the employees over time if desired, thus staying actively involved in the high-level strategic decisions of the business. • There is no need to sell to a com- petitor or other third party, avoiding the sharing of confidential information. • An ESOP provides a business continuation strategy, keeping the brand name developed over years alive and well. This legacy of the business carries on with the team of employees that are in place and motivated as the new owners of the company. • A tax advantage with a leveraged ESOP is that both the loan interest and principal are tax deductible. This tax advantage can greatly increase operational cash flow. • For the family business, an ESOP can be an excellent tax beneficial succession planning tool to the next generation and key employees. For employees, an ESOP is a retire- ment plan they can get excited about. • Employees are active investors. Instead of socking away retirement money in an IRA or other passive in- vestment, the employee, each and every day, works to increase the value of their company. When that value grows, the employees' retirement funds grow. • Overall operational performance, profitability, and cash flow improve because employees are motivated to excel in their job. • An ESOP is a very attractive tool in recruiting and retaining high-level em- ployees. This is a big advantage in today's highly competitive hiring environment. However, ESOPs are not magic solu- tions. There are many considerations before heading down this road. The two biggest factors impacting the success of an ESOP are factors that impact the success of any business — the business model itself, and the leadership team. The business model needs to be sound and profitable. Without these characteristics an ESOP becomes merely an empty shell. There are no profits for funding the owner's retire- ment in the short term, or the employ- ees' retirements in the longer term. The leadership team also needs to be mature enough to understand that the employees control the company. They need to promote and empower a culture that enables employee contri- butions rather than operating with a top-down hierarchical structure. Ken Cook is the co-founder of How to Who, a program on how to build strong business relationships. HARTFORDBUSINESS.COM POLL LAST WEEK'S POLL RESULT: Do you plan to regularly use the Hartford Rail Line? NEXT WEEK'S POLL: Is having gigabit-speed internet important to you or your business? To vote, go online to hartfordbusiness.com BIZ BOOKS How to revive a 'walking dead' company culture By Jim Pawlak "The Zombie Busi- ness Cure — How to Refocus Your Company's Identity for More Authentic Communication" by Julie C. Lellis and Melissa Eggleston (Career Press, $16.99). Business-Zombie (n.) — A worker who accepts the status quo because of fear and/or lack of conviction or com- mon sense. At work, he/she hides be- hind procedures and processes; there's little respect shown for colleagues, and even less for customers. Challenges, and changes in the status quo, trigger anger. At the end of each "it is what it is" workday, the zombie moans and gets on with a shallow existence. With that definition in mind, we need only to look at recent headline-making "walking dead" examples at United Air- lines (dog placed in overhead bin and died) and Southwest Airlines (a father and toddler removed before takeoff because the toddler was "unruly" for confirmation. While these incidents captured the attention of mil- lions, there are customer-service missteps that we've all experi- enced that left us with the feeling that the com- panies involved were brain-dead. The authors are spot-on with their be- lief that business-zombies exist because of the lack of internal and external com- munication about corporate identity, values and expectations, all of which shape an organization's culture. That culture revolves around "how members of the organization relate to one an- other. Their interactions and behaviors demonstrate the values they share." In human-based, rather than walking-dead organizations, employ- ees and other stakeholders engage in up-down-sideways communication that produces questions that don't go unanswered and ideas that are evalu- ated. The openness of communication creates continuous improvement as the firm sees change as the way to improve. 64.9% No 35.1% Yes READER COMMENTS: "Absolutely! Looking forward to day trips to New Haven and Springfield. Should also be useful for business meetings in the winter." "Very concerned about the safety of the fleet. This seems to be a political 'must have' that hasn't been fully thought out, not unlike most other political initiatives in Connecticut." "Only when I plan to travel into New York City, which may be six times a year." Ken Cook Jim Pawlak Book Review

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