Jim McCormack and Raymond "Skip" Hansen, both young insurance salesmen who had been friends since junior high school, decided to form their own agency and strike out on their own 35 years ago. Their agency would become Diversified Insurance Solutions, which now employs about 70 people in Brookfield.
McCormack, now 67 and the primary stockholder, faced a decision as he thought about retirement and the company's future. The trend in the industry has been for national and international insurance brokers and private equity firms to buy regional and local brokers, and Diversified Insurance had received several offers. However, selling the company would come at a price: 30% to 40% of its employees would lose their jobs when the buyer consolidated administrative functions. "We just decided it wasn't right for our associates and it wasn't right for our clients," McCormick said.
After meeting with one potential buyer, the company's chief executive officer, and Karl Cumblad, its chief financial officer, asked if McCormack would consider selling the company to its employees. The idea appealed to McCormack. It would keep the company independent and reward the employees who would take it into the future. "They are the ones who do the work," McCormack said, "and they are the ones who deserve any future success." In December, Diversified Insurance was sold to its employees through an employee stock ownership plan (ESOP).
In 1982, when they started the agency, McCormack focused on selling health insurance, and Hansen focused on property and casualty insurance. Hansen later sold his stake in the agency to McCormack and is now semi-retired, working a few days a week while staying busy with interests that include beekeeping and making maple syrup.
Diversified Insurance was one of the first local agencies to focus on wellness programs for employers. It also has expanded into handling payroll and human resources for employers. By remaining locally owned, Diversified Insurance's should have a competitive advantage, because most of its clients also tend to be locally owned, said Cumblad.
Setting up the ESOP itself was a somewhat complex process. After completing feasibility study, Diversified hired a trustee to negotiate the purchase price. For its ESOP, the company first bought the shareholder's stock, financing the purchase by giving them a note that will be paid with interest over 13 years, Cumblad said. The company than sold the shares to the trust for the employee stock ownership plan. The trust in turn financed that purchase by giving the company a 30-year note. No money changed hands at the closing, but the trust will have to pay off the note from McCormack and the other stockholders over the next 13 years from Diversified Insurance's profits.
Think of an ESOP as the people's version of private equity — albeit without the steep fees.
The ESOP itself is a qualified retirement plan, similar to a 401(k), in which an employee's stake in the company is held until he or she retires or leaves the company. The shares are taxed when sold, though they can be rolled into an individual retirement account. They can't be sold before the age of 59-½ without paying a 10% penalty.
Diversified Insurance also will continue to offer a 401(k) plan. That matters, because having retirement savings invested in one company would be unwise and even a bit reckless. However, if the deal works out, an employee's stake in Diversified Insurance could make for a more comfortable retirement. "They've been given a portion of the company at no cost to them," McCormack said.
The ESOP will help Diversified Insurance attract talented people. And studies have shown that companies with ESOPs on average tend to outperform other companies. It will take time, though, for the employees' stake in the company to increase in value. "It's not quite real yet," Cumblad said. But the company's employees have seen what has happened when competitors in the Milwaukee area were bought.
They also appreciate what McCormack did. "He had a choice to make, and he made a choice to their benefit," Cumblad said. "That's not lost on them."