Not a day goes by that there isn’t news about a large company acquiring or merging with a rival. Like any other business, trucking companies are often put up for sale when the owner reaches retirement age or decides to cash out and move on to another venture.
When word comes down the ladder, many employees are left scrambling, knowing staff cuts are likely on the way, while others brace for a change to their work schedule or job duties.
There is another option, though. An employee stock ownership plan, or ESOP, offers an alternative to traditional mergers and acquisitions. An ESOP is, at its core, a retirement plan — a qualified retirement plan with non-discriminatory, tax-deferred growth.
Some experts consider ESOPs to be a “silver bullet” (a simple, almost magical solution to a complicated problem) for trucking companies.
“It’s a different approach to succession plans,” said Jeremy Garrett, managing director at Lazear Capital, during a webinar presented by the Truckload Carriers Association in January. Lazear Capital specializes in sell-side transactions with a focus on ESOPs for companies across the U.S.
Garrett says that overall, 50% of business owners want to transition within the next five years, and 75% within the next 10. These transitions often mean selling to a rival carrier. For those wanting to maintain their legacy, an ESOP could be a better option.
An ESOP gives workers ownership interest in a company in the form of stock shares. They also provide tax benefits for the selling shareholder and participants. ESOPs are also used as a corporate finance strategy to align the interests of employees with the shareholders.
Because they cause minimum disruption to a company’s operations, ESOPs generally have a positive impact on employees.
“All the employees of a company will be owners after the company is sold to an ESOP,” Garrett explained. In an ESOP, a trustee acts as a plan fiduciary, and employees cash in their plan upon retirement.
ESOPs allow for the free flow of cash, according to Garrett. Shareholders can sell tax-free by eliminating the taxes on capital gains and ordinary income. The ESOP uses its tax-free cash flows to pay off sellers faster and fund company growth, which in turn allows them to make acquisitions. There are currently more than 6,500 ESOPs in the U.S., representing more than 1.5 million employees. ESOPs can also allow company management to realize significant economic benefits without any personal investments.
In addition, ESOPs can help a company attract and retain talent, in part because of the large retirement savings plan and job security for valued employees. Garrett noted that ESOPs attract and retain key employees at a 4:1 ratio compared to non-ESOP competitor — and employees ages 28-34 have a 53% longer median job tenure and 33% higher income with wages. There’s also a 2.2 times greater asset in retirement plans.
Jeff Jamerino, former president and CEO of Superior Electric Great Lakes Co., has experienced the benefits of an ESOP first-hand.
“Had our previous owner sold to a competitor, most of us wouldn’t be here,” said Jamerino, who now provides post-closing ESOP advisor services.
“(Employees) realized, ‘This is our company now,’” he explained. “Down through the ranks, people realized what they had. It had a significant impact on them and their families. Retention was at almost 100% outside of retirement.
“What we found was, because of increased cash flow, we were able to increase employee benefits in all areas,” he continued.
According to Garrett, there is a direct correlation between employee ownership and enterprise strength: Studies show that broad-based employee ownership combined with active programs to engage employees result in more stable enterprises.
Unlike an outside buyer, whose taxation of gain usually ranges from 25% to 35%, an ESOP’s taxation of gain is only 0% to 25%. There is a 4% to 5% increase the year an ESOP is adopted, with ESOP companies only half as likely to disappear compared to non-ESOP firms. There is also a lower rate of default, Garrett shared.
“It makes a huge difference in how you operate a company. Once we paid off our debt, we were able to put money back into the company,” Jamerino said, adding that his company was able to turn around and make its own acquisitions.
Since ESOPs are essentially retirement plans, how do they compare to 401(k)s?
In a typical 401(k), employee usually contribute their own money to a plan and the employer provides some matching funds. The employee’s retirement funds are invested in stocks, bonds, and mutual funds. These investments are usually at the mercy of the state of the market, going up and down with it.
However, Garrett said, in his experience, most companies that have a 401(k) plan before selling through an ESOP keep the 401(k) option.
“It’s a good diversification for the employees,” he said. “They can continue investing in the broader market and, at the same time, they get a secondary benefit, which is the ESOP.”
In an ESOP, the employees contribute nothing; instead, upon retirement they are granted all of the shares they hold in a company. The primary asset held by the retirement plan is stock in the company where the employee works.
Opting for an ESOP also offers tax incentives over selling to a third party. Companies that are 100% owned by an ESOP will no longer pay federal or state income tax. That alone greatly increases the cash flow to pay sellers more quickly and fund growth.
Garrett gave the example of a trucking company with an enterprise value of $100 million. If the company is sold to a third party, $22 million in taxes will have to be paid. With an ESOP, on the other hand, no taxes will be owed. Plus, when sold, the ESOP buyer pays the closing costs.
Can a company be too small to take advantage of an ESOP? According to Garrett, a company typically needs to have more than 20 employees and be valued at more than $5 million — otherwise, “there’s just not the scale in the company to have the ESOP in place,” he explained.
For companies meeting the size and value criteria, however, an ESOP could very well be a fabled “silver bullet” when it’s time to sell.
This article originally appeared in the March/April 2023 edition of Truckload Authority, the official publication of the Truckload Carriers Association.
Joseph Price has been a journalist for almost two decades. He began in community media in 2005 and has since worked at media outlets in Virginia and Arkansas. He is also a commercial drone pilot and video editor. He hosts a weekly community radio show focused on goth, metal and industrial music that airs Wednesday evenings at 6 p.m. at www.kuhsradio.org.
