ABRC-ESOP

I have evidence to support the statement, “Many professional advisors without ESOP expertise will lean towards business transition alternatives that allow them to share their expertise and receive compensation for it.”

I recently met with a prospective client who shared a memo from their attorney discouraging ESOPs. After describing several “viable” exit alternatives, here is what the memo had to say about the ESOP:

“…although the ESOP is an option, it is likely not a very good option for the corporation at this time. The administrative expense and ongoing responsibility significantly outweighs the benefit to you in accomplishing your desired return. You will not only fail to achieve your desired goal…but you will likely look back and wish you had never set up the ESOP.”

I think this is a classic illustration of how business advisors approach the ESOP concept and might explain why there are still so few of them.

Even if professional advisors are aware of the benefits of ESOPs, they may feel that they will be unable to assist their clients with the implementation of an ESOP. Since a major goal of a professional advisor is to share their expertise and receive compensation for it, they are likely to look for other business transition alternatives where they can utilize their expertise. As a result, there are situations where an ESOP might be a great fit but is not seriously considered. I am not questioning the integrity of these very competent professionals; rather, I am identifying a legitimate barrier to increasing the ESOP growth rate.
(Aaron Juckett)

The American ESOP cconcept intall by companies like ABRC is gaining intertest by other countries. Below is an excerpt from an article posted in http://www.arabianbusiness.com/. It first discusses the success of ESOPs in the U.S and then goes on to discuss the advantages of creating the ESOP opportunity in UAE.

Staff ownership could boost profits
Lynne Roberts on Thursday, 27 March 2008

Gulf firms could boost profits, increase staff loyalty and survive for longer by giving employees a financial stake in their business, a group of experts said on Wednesday.

Companies with Employee Stock Ownership Plans enjoy a range of benefits, including increased staff loyalty and improved corporate financial transactions, according to research revealed ahead of a seminar on the issue next month.

A study of ESOP firms found sales, employment and profitablity was around 2.4% higher than companies without the scheme. 82% of companies said revenue increased after applying ESOPs, while 72% indicated they saw an increase in profitability.

Employee Stock Ownership Plans are currently estimated to hold more than half a trillion dollars in assets, and cover over 10 million workers in the US alone.

Stock ownership by employees in the Gulf region is rare, however, where around 70% of privately held companies are family owned and run largely by expatriate management.

Click Link to see complete article http://www.arabianbusiness.com/514852-staff-ownership-could-boost-profits

Senior management of Hannibal Industries Inc., led by President Blanton Bartlett, today announced the purchase of the company from Mitsui & Co. (U.S.A.), Inc. (Mitsui USA) through the formation of an Employee Stock Ownership Plan (ESOP). Financial considerations of the transaction were not disclosed.
Hannibal Industries Inc., founded in 1985, has become a premier manufacturer of carbon steel tubing to customers throughout the Western United States. In 2000 the company added a Material Handling division in addition to its Steel Tube division, enabling it to quickly become the largest manufacturer of storage racks and provider of warehouse solutions west of the Rocky Mountains.
“Our team is very excited about the purchase, and enthusiastic about the opportunities ahead,” Bartlett said. “We are grateful to Mitsui USA for its support over the years and delighted that our colleagues, who’ve been so instrumental in Hannibal’s strong performance, will be able to build on the company’s success as owners.”
As for the future, Bartlett said, “Our plan is to concentrate on the two current lines of business and grow through the addition of new product lines and expansion into other areas of the country. Our company is well positioned to implement both current and future business strategies.”
The executive team responsible for the success of the Vernon, CA-based Hannibal under Mitsui USA’s ownership will continue to run the company.
Speaking on behalf of the senior management team, Bartlett added that, “We are gratified that we are able to provide the opportunity of ownership to the employees. Our staff has been one of the primary reasons for our success and we look forward to continuing to improve the value that we offer our employees as well as our customers.”
About Hannibal Industries, Inc.
Hannibal manufactures steel tube and material handling products. The Company is a value added metal fabricator offering custom carbon steel tubing products to original equipment manufacturers (“OEMs”), distributors and retailers in residential construction, automotive, general manufacturing, exercise equipment and other markets. Hannibal is also a leading designer and manufacturer of a wide range of racking products for distribution and retail customers.

A recent article in the Wall Street Journal titled "Sale Gives PR Firm the Benefits of Becoming Employee-Owned" Sale Gives PR Firm the Benefits of Becoming Employee-Owned caught my eye. It seems the owner of a 17-person firm wanted to sell his company to his employees. The owner had decided an ESOP was the best way to go, until he learned the cost of the installation, which was upwards of $100,000!

The kind of fees discussed in the article is quite exorbitant. This might explain why there were 120 new ESOP plans installed in 2007. Most ESOP providers are not interested in providing services to smaller companies or are interested in doing so only at big-company fee rates. The small business segment is under-served for several reasons, but the main reason is this: Most firms do not specialize in doing just ESOPs. Since ESOPs are just a minor portion of their total business, doing a smaller company ESOP is not cost-effective for them. They are unable (or unwilling) to scale their fee to the size of the company.

Can a small company afford an ESOP? Yes, if you work with an ESOP consulting firm that focuses 100% on ESOPs, whose pricing structure is scaled to fit the number of employees, and one that charges a flat project fee (not hourly) so there are no surprises. Doing it this way helps ensure you pay only a fraction of the $100,000 quoted in the article.

In response to recent news articles concerning Employee Stock Ownership Plans (ESOPs), Evan L. Rhodes, president of American Business Resource Corporation, and a nationally recognized ESOP expert, comments on ESOPs in general and S-Corporation ESOPs in particular.

Employee Stock Ownership Plans (ESOPs) have been in the news lately as a financial strategy to take a company from public to private. An ESOP is a type of employee retirement benefit plan designed to invest primarily in employer stock. To establish an ESOP, a firm sets up a trust and makes tax-deductible contributions to it. Employee Stock Ownership Plans have been around since the 70's and have been well-regarded as a solution for large, public companies. Many small business owners are unaware that Congress reformed ESOPs in 1998 to enable small, privately owned companies to qualify for it.

Evan Rhodes, president of American Business Resource Corporation, and a nationally recognized ESOP expert, points out some of the things that S-Corporation ESOPs can do:

- Increase cash flow. In 1998, Congress took steps to radically reform ESOPs: they decided to include S-Corporations as a type of company that could be sold to an ESOP. Additionally, they provided that if the business was sold to an ESOP, the company would be exempt from all income tax on its profits. The money the owner used to pay in taxes may now be used to partially or fully fund the sale of the business to the ESOP. Not only does this create a market for smaller companies, it also funds the transaction through tax savings and provides retirement benefits to employees.

- Attract and retain employees. Generation-X'ers don't work for just a paycheck; they want an equity stake in something they are helping to build. With an ESOP, all employees and especially key employees, have adequate incentive to growthe business. Their beneficial interest in the ESOP is calculated based on their salaries as a percentage of overall payroll. The higher their salary the more beneficial interest they get in the ESOP. The better the business does, the higher the ESOP value becomes. These employees can potentially make more off the ESOP than their 401(k). In fact, many employees have been known to retire as millionaires simply by having an ESOP in place.

- Transfer a business. The S-ESOP is an excep­tional way to transfer business interests to future gener­ations, especially in situations in which the business interest has cash flow and is expected to appreciate substantially in value. The transaction is structured as a sale. Since an ESOP is a retirement plan, the company no longer pays most state or federal income taxes, greatly increasing cash flow for the company while offering an excellent exit strategy for the owner and an excellent reason for family members and employees to remain with the company.
Mr. Rhodes cautions that ESOPs are not for everyone:

- The ESOP program is not currently available to professional associations or professional corporations.

- The S-ESOP should only be considered by business owners who have a profitable business, have more than tenemployees, want to keep the business going, and keenly understand the difference between ownership and control.

- In the last several years, there has been a steady increase of businesses forming as, or converting to, an L.L.C.structure. While this structure is called a corporation, its legal structure is closer to that of a partnership. Since there is no issuance of stock in an L.L.C., you cannot directly install an ESOP in an L.L.C. For those with a 'C' Corporation and other entity structure such as an L.L.C., the business can be converted to an 'S,' but only after proper tax and legal planning.

Mr. Rhodes concludes, "When properly designed, the S-Corp ESOP can help lower taxes, increase cash flow, motivate employees and best of all, fund the owner's exit while creating a competitive advantage using monies previously used to pay taxes."

To interview Evan Rhodes about Employee Stock Ownership Plans, call (480) 556-9928 ext. 111.

Evan L. Rhodes is owner and president of American Business Resource Corporation (http://www.abrc-esop.com/), a company based in Scottsdale, Ariz. that focuses 100% on helping private companies design and implement Employee Stock Ownership Plans.

Employee Stock Ownership Plans (ESOPs) have been in the news lately as a financial strategy to take a company from public to private. An ESOP is a type of employee retirement benefit plan designed to invest primarily in employer stock. To establish an ESOP, a firm sets up a trust and makes tax-deductible contributions to it. Employee Stock Ownership Plans have been around since the 70’s and have been well-regarded as a solution for large, public companies. Many small business owners are unaware that Congress reformed ESOPs in 1998 to enable small, privately owned companies to qualify for it.