Equity: The Ancillary Stock Alternative;

 

The new tax law poses real problems for a company owner who wants to offer his key people an opportunity to accumulate capital, but who is reluctant, on the one hand, to give up equity in the business or, on the other, to commit to expenses beyond what the company can afford. A number of owners have been experimenting with an approach that may offer a way out of the dilemma. It involves giving executives stock or stock options in ancillary ventures, without making them shareholders in the principal business.

A case in point is Northwood Carwash Systems Inc., a more than $2-million distributor of car-wash equipment, located in Mount Pleasant, Mich. Until last year, the 11-year-old company had a relatively conventional compensation program. The vice-president, for example, was paid a competitive salary, plus a substantial bonus based on his performance; a sales representative received a base salary of $15,000, plus commissions, plus a bonus. Then, last year, founder Gary D. Nowicki, 40, began looking for ways to tie his key people more closely to the business.

A defined benefit pension plan was too extravagant, he felt. "If profits were down, how were we going to pay for it?" And Nowicki had reservations about sharing equity, most of which had to do with control. Then it dawned on him: what if he let employees become part owners in car washes he would build? Instead of receiving their bonuses in take-home cash, they could put the money into income-producing ventures.

The first such deal came together last September, when a key employee used his $15,000 bonus to buy a one-third interest in a new car wash in Rogers City, Mich. Nowicki and a sales rep (now an employee of Northwood) put up the other two-thirds. An additional $140,000 was borrowed from a bank to pay for the equipment; they lease the land and building with an option to buy. Nowicki expects the car wash, organized as an S corporation, to begin generating income by the end of the year. "And in 15 years, the three of us will own the land and the buiding," he says. Meanwhile, Nowicki is thinking about offering equity in a second car wash to five or six employees, including the two who participated in the first deal.