Employee ownership can boost workplace benefits and collaboration
William Flynn started Franklin Street marketing 32 years ago and had a number of partners over the years. In 2015, when he started thinking about retiring, he transitioned the firm to an Employee Stock Ownership Plan (ESOP) where, instead of selling to a new buyer or closing shop, he turned the firm into an employee-owned business.
"This structure keeps jobs and engages the employees," Flynn says.
Franklin Street, a Richmond-based, nationwide brand innovation firm serving health and wellness companies, has about 20 employees, and Flynn works part time. He studied ESOP structures over two years and met with consultants to learn and crunch numbers. An ESOP seemed the best way for him to become semiretired while continuing the business he had worked so hard to develop.
An ESOP is a tax-qualified employee benefit plan that gives employees beneficial ownership, according to the Washington, D.C.-based ESOP Association. Company assets are held in a trust so that as the company increases in value, the stock of the ESOP, including employees' shares, also increases in value. For each year of employment, the company can make a contribution to the individual's ESOP account. Company performance is also a factor in determining the value of the stock.
Franklin Street, like most ESOP companies, is privately owned. The per-share value of the company stock is determined by an appraisal performed annually by an independent valuation firm.
ESOPs have been around for more than 30 years. Data provided by the National Center for Employee Ownership, a nonprofit providing resources on ESOPs and ownership culture, shows 315 ESOP businesses in Virginia. Fifteen are in metro Richmond, including law firms, tech companies, consultants and wealth management companies.
The Publix supermarket chain, based in Florida and making forays into Virginia, is the largest employee-owned company in the United States. Publix employees, from cashiers to corporate executives, benefit from a stock ownership plan that contributes Publix stock to associates each year at no cost to them. Employees may also purchase additional shares of the stock.
"Publix has a very unique corporate culture," says Kim Reynolds, media and community relations manager for Publix. "Our common stock is not traded on any public exchange. Our philosophy of employee ownership goes back to Publix's very beginning. George Jenkins, Publix's late founder, believed in profit sharing and employee ownership. From the start, he wanted his associates to have a stake in the company. But in the midst of the Great Depression in 1933, his associates were hardly in a position to buy stock."
Jenkins gave each associate a $2 a week raise, using that money to pay for shares of stock. That philosophy of employee ownership and profit sharing continued when Publix started its profit-sharing plan in 1951 and the employee stock ownership plan in 1974. The retirement plans were merged in 1999.
Matthew Honeycutt, manager of the Publix Super Market in Mechanicsville, says, "Working for an employee-owned company gives me a strong sense of ownership so that when I walk into work every day, I want to do my very best. ... Employee ownership allows me to build up my team and creates a culture of associates that are dedicated to serving our customers for the long run."
An advantage for ESOP employees is that their accounts can become quite significant compared with other types of employee benefit plans. There are also tax benefits for the companies.
William Hollowell, executive vice president of Century Construction Co. Inc., a 30-person general contractor in Richmond, says employee ownership creates a positive, team-focused culture.
"Employees who are owners feel a greater level of commitment, are more focused on serving customers and understand that they will directly benefit from the company's success," he says.
Century has been an ESOP since the late 1970s. "Companies must be profitable to continue to succeed over time," Hollowell cautions. "But this is especially true of ESOP companies. Nothing works if you don't make money. Founding owners must also commit money to employee retirement accounts that they might otherwise choose to keep for themselves."
Flynn cautions that ESOPs are not beneficial for short-term employees, and they are not necessarily democracies. Advisors warned him that shares do go up and down based on volatility in the company; the value of the plan is the potential of long-term growth for each employee.