Banking & Finance  April 12, 2022

For some local companies, ESOP’s no fable

With an Employee Stock Ownership Program, said Brian Macke, director of human resources and finance at Windsor-based DaVinci Sign Systems, “everyone has skin in the game. They treat each and every task with a little more passion and enthusiasm. If we can all work together as a team, everyone’s better off in the long run.”

Added John Creighton, president of employee-owned High Plains Bank, “it allows employees who are creating value for the business to share in the creation of that value. When they retire, they benefit from having made the business more valuable.”

For the business that takes on an ESOP, they said, the benefits include massive tax savings and the assurance that the company culture will be maintained when the current owners have moved on.

Not that the idea is all that new; FirstBank, with several locations around Northern Colorado, has been employee-owned since it was established in 1963. 

Last June, Colorado became the first state to pass a law that helps cover some of the costs to convert to employee ownership when Gov. Jared Polis signed House Bill 21-1311. The measure’s major changes to Colorado tax law included $10 million annually in tax credits over the next six years to fund the professional service costs of conversions to employee ownership through an ESOP, employee-ownership trust or a worker cooperative. ESOPs can qualify for a credit equal to 50% of the conversion costs up to $50,000, while co-ops and trusts can get up to $25,000.

The Employee Ownership Office, part of the state Office of Economic Development and International Trade, helps companies convert to employee ownership. DaVinci, which started its program last Nov. 30 but made it retroactive to Jan. 1, 2021, was one of three Colorado companies in February to receive one of OEDIT’s third round of grants under the new law. The next round of grant applications opens April 4 with a deadline of May 6, and two more open grant rounds this year will be July 5-Aug. 5 and Oct. 4-Nov. 4.

With OEDIT’s help as well as that of the nonprofit Rocky Mountain Employee Ownership Center, which puts on webinars and helps with grant applications, Colorado has created a national model for how states can help move employee ownership forward.

“We’re very proud of the transition we made. It means a lot to us,” Macke said. “Our founder, John Shaw, can know the business is going to be run by employees and won’t have to worry if the company culture is going to change.”

The firm was founded as Shaw Signs in the late 1980s but took the DaVinci brand after Shaw bought out his partner in 2004.

For employees, Macke said, ownership “encourages you to make little decisions you might have overlooked before — like picking up a nail on the ground so a tire won’t pick it up.”

DaVinci has created ways to increase buy-in, including DaVinci Cares, a program that allows employees to apply for a grant from the fund to cover unexpected emergencies.

“We do follow a vesting period just like a 401(k) would,” Macke said. “Each year a new employee gets 20% ownership of their shares, and they’re fully vested after five years.

“Their shares are basically a free gift; employee owners are not required to contribute,” he said. “The shares either grow or decline in value, and they can cash out when they reach 55 and retire or leave.”

The company’s 50,000 shares of private common stock stay in a trust; when an employee leaves, based on their vesting, the company will buy them back based on the valuation of stock at that time. That value, Macke said, is based on a report by an independent evaluator who assesses factors including the company’s internal five-year growth projections

“We really don’t have much say about what the valuation is,” Macke said.

That independent evaluator is one of four people the company had to enlist when it started its ESOP, Mackey said. It also needed a trustee to oversee the fund, an ESOP attorney to oversee filings with the Internal Revenue Service and Colorado Department of Revenue, and a third-party administrator to manage the portfolio balance.

“It can be easy or a little tricky,” Macke said. To start the ESOP, he said, “some owners sell it right out, and some take out a note to finance it. We were a leveraged ESOP.”

For a company’s founders, employee ownership makes for “a great exit strategy,” Macke said, “because a founder might want to stay on board as an outside director or maintain a position in a company and go hack to earning a salary like any employee would.”

A big advantage, he said, is that “once we are an ESOP we no longer pay federal income tax. Since everybody’s an owner, when people close out their portfolios, that’s when income tax would apply.”

One of the struggles, Macke said, “is explaining the program and how it works to employees. They’ll ask, ‘If I’m an owner, don’t I have equal say?’ No, but we have an employee committee that reports to the board and makes recommendations. And any time there’s an acquisition or merger or dissolution, every employee has to vote on it. Say ABC Sign wanted to buy us out; every employee would have to vote on that. But the acquiring company will buy the employees’ shares.”

That’s what happened in 2019 when Fort Collins-based New Belgium Brewing, the fourth largest craft brewery in the United States and the first in the country to become an ESOP, was acquired by Australia’s Lion Little World Beverages, a subsidiary of Japan’s Kirin Holdings. “Kirin made everybody at New Belgium 100% vested,” Macke said.

At Flagler-based High Plains Bank, which has branches in Longmont and Keenesburg, Creighton calls its employee-ownership plan a “401(k)SOP” or “essentially a retirement plan.

“Employees contribute to their 401(k) and the bank matches that, and then we also make a discretionary contribution to the ESOP as well. 

“We match their contribution up to 6% and then we add an additional 3%, so if they put in 6% they would get 9%.”

High Plains’ ESOP currently owns 20% of the bank, Creighton said.

“Ours is about 20 years old,” he said. “My dad and my uncle didn’t know whether the next generation would retain ownership of the bank, so they wanted employees to share in any windfall if the bank was sold.”

“And for a bank, because some funds go to ESOP rather than taxes, the ESOP is able to reinvest into the bank and support the bank’s capital because we’re retaining funds within the organization. The ESOP would then buy stock from the holding company. Every time the ESOP buys stock, it increases our capital.”

A note of caution, Creighton said, is that “if you have a significant number that retire at the same time and you haven’t managed it well, you may not have the ability to pay out all your retiring employees. The company’s responsible for finding that cash. Then you either have to borrow the money or sell the business.”

Every employee is required to participate, Creighton said, “and you have to treat them equal in percentage terms. There’s also testing so that higher-paid employees are not getting a disproportionate share more than other employees.”

Creighton advised any company considering transitioning to employee ownership to follow the rules rigorously.

“Don’t get too far into it without consulting with people who actually understand how it works and all the details that go with it,” he said. “It can be very beneficial, but it’s complicated.”

With an Employee Stock Ownership Program, said Brian Macke, director of human resources and finance at Windsor-based DaVinci Sign Systems, “everyone has skin in the game. They treat each and every task with a little more passion and enthusiasm. If we can all work together as a team, everyone’s better off in the long run.”

Added John Creighton, president of employee-owned High Plains Bank, “it allows employees who are creating value for the business to share in the creation of that value. When they retire, they benefit from having made the business more valuable.”

For the business that takes on an…

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