🔒Spinnaker Trust the latest to expand its ESOP practice

Maine's pace of Employee Stock Ownership Plan deals has been dizzying in the past year.

Nearly a dozen Maine companies announced plans last year to convert to ESOP ownership, in which employees take on the financial load of owning the company while carving out an equity stake for the individual stakeholders. With Maine's aging demographics — the nation's highest median age, 43.8 — many owners have chosen the ESOP route over options like selling to a third-party owner or passing the company along to a family member (if a family member is indeed interested).

Wealth management firms, financial advisors, accounting firms, lawyers and related businesses are continuing to see business from the surge toward ESOPs.

Most recently, Spinnaker Trust, a non-depository trust company in Portland that manages $1.2 billion in client funds, expanded its ESOP practice by bringing on Christopher Whitney from Transamerica. Spinnaker, which serves as a trustee in ESOP conversions, has seen an increase in business.

“A lot of Maine companies go the ESOP route. They want to keep the business here. They may be a major employer in town. They have a sense of devotion to employees,” says Jeannine Pendergast, who heads up the ESOP practice at Spinnaker. “They may have an option to sell to a third party for more money — they could sell the business and walk away. But with an ESOP, they're selling to employees and the management team stays the same.”

A variety of motivations

Over the past year, ESOPs have been a frequent topic of coverage and conversation.

A common theme among companies that converted to an ESOP structure within the past year was the desire to provide long-term stability while keeping current management in place.

• Wick Johnson, who had been sole owner of Kennebec Technologies in Augusta, told Mainebiz in December 2015 that when the company converted to employee ownership he received some cash up front, but also, in effect, served as a lender. For the company's 65 employees and the future of the company, he felt an ESOP was the best course of action. “I did not want to sell the company [outright]. Local ownership goes away,” he told Mainebiz.

• Landry/French Construction, which converted to an ESOP in May 2016, said options included selling to another company or selling to an existing employee. In the end, the Scarborough construction firm opted for ESOP structure.

• At Mainely Tubs, Jim Van Fleet bought the Scarborough retailer in 1993 when it was in 700 square feet, built it to a $10.5 million in sales in 2016 and 39 employees. Working with Machias Savings Bank, Spinnaker Trust and BerryDunn, Van Fleet, 68, was able to do a 100% ESOP conversion. “[An ESOP] allows an owner to give back and it costs employees nothing,” Van Fleet told Mainebiz in December.

• Wright-Ryan Construction, which became an ESOP in October 2016, cited the labor shortage in the construction industry as one motivation for converting to an ESOP. In an interview with Mainebiz in November, President John Ryan cited the need for “long-term sustainability, preserving the culture and rewarding the team that got us here.” He added: “We needed a realistic ownership transition plan.”

• VIA Agency, a Portland advertising agency, also cited the “competitive edge” provided by employee ownership, CEO Leeann Leahy said in a statement last year.

• In Topsham, Morningstar Stone and Tile took a 10-year approach to the ESOP, with employees starting out with a 30% ownership stake, the company announced in November.

• Clark Insurance said in January it is now 100% employee owned, completing a process started in 1992. Until January, part of the company had been owned by Gorham Savings Bank, which acquired the stake as part of a merger. Clark President Jeff Shaw said completing the ESOP conversion “allows Clark the ability to remain locally owned by its employees/owners,” which is significant given the number of mergers within the industry.

At a Mainebiz panel discussion held last year at Bowdoin College, ESOP specialist Susan Scherbel of Bellview Associates, cautioned that employee stock ownership would not work for certain companies. Companies carrying a significant debt load, for instance. She also warned that companies wanting to convert to an ESOP structure have to be soundly managed with stable earnings.

Recently, Scherbel tells Mainebiz that she continues to get calls and inquiries about the ESOP process.

“It's even more than last year, as more people hear about it,” Scherbel says.

Maine's older population creates a ready source of businesses that may be ripe for an ownership transition. The state also has a challenging tax structure for companies, combined with inherently high operating costs, including energy expenses, Scherbel says.

“But a lot of people don't like the alternative of a third-party sale,” she says. “They want to leave a legacy.”

The surge in ESOPs is helping keep a range of businesses busy, including accounting firms, law firms, valuation firms, trust companies and various third-party administrators.

Nationwide through 2014, there were 6,717 ESOPs, with total assets of $1.3 billion and 14 million employees, according to the National Center for Employee Ownership. Of those, 22% were in the manufacturing sector.

The number of ESOPs nationwide has actually dropped from 8,874 in 2002, though the trade group says that is because Congress, the IRS and the ESOP community itself started cracking down on “dubiously legitimate plans” established to take advantage of the then-recent S-corporation ESOP-related law. The Department of Labor and other entities now take a more proactive role in policing ESOP violations.

Through 2014, the trade group listed 25 ESOPs in Maine, with a 6,609 employees, though that number has apparently grown significantly since then.

What's ahead

Looking ahead, Scherbel says banks are increasingly stepping in to help with financing, which can help spur the ESOP process. Her firm, Ellsworth-based Bellview Associates, is seeing a wide variety of companies taking an interest in ESOPs, including those in the service and distribution industries.

“They tend to be labor-, not capital-intensive. Their capital goes home at night,” she says.

Steven Tenney, a wealth management advisor at UBS Family Wealth Management Partners, has also seen a continued interest in ESOPs.

“Interestingly, it seemed as if the pace was slowing down over the last six months. However just in the last month I have had multiple inquiries regarding ESOPs,” says Tenney. “Owners are still attracted to the 'soft' benefits of selling to employees as well as the economics. At the same time, owners are becoming more educated regarding their options and how design choices can impact the possibility or likelihood of a Department of Labor audit.”

Pendergast at Spinnaker says the ESOP structure continues to hold an appeal.

“The management team stays the same. The governance and thought process changes. There's more structure, though. You have a board of directors,” she says.

Outside parties monitor the progress of the ESOP to ensure that it has being run properly. In cases where there are concerns, an appointed trustee can investigate with the management team or, in some cases, the board.

“Having independent board members sometimes scares people,” Pendergast says. “Yet once they're in place, they ask, 'Why didn't we do that earlier?'”