Reader-to-reader advice.
ESOP, Anyone?
We're a growing precision-tools and metal-parts manufacturer, and we're considering making the company employee-owned. Before we do, we need to learn the pitfalls and advantages of employee stock ownership plans and the reasons companies form them or don't.
Steve Feinstein
Owner
CMI
Attleboro, Mass.
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ESOPs have arrived . Today nearly 12 million employees hold ownership stakes in the more than 10,000 U.S. companies they work for. Detractors, who eye ESOPs as tax dodges that benefit managers more than employees, say the plans don't save jobs, increase productivity, or spread company wealth more equitably. But practitioners, such as the employee-owners of Reflexite, a maker of reflective material in Avon, Conn. (see "Collective Effort," January 1992, [Article link]), claim ESOPs do all of the above and more when employees play an active role in company decision making.
"The way you set yours up depends on why you want one in the first place," says Corey Rosen, executive director of the National Center for Employee Ownership (NCEO), a nonprofit in Oakland, Calif., that researches ESOPs. In half of all cases, owners consider ESOPs worthwhile when they plan to sell their interest to committed employees. (For a great example of that, see "Exit Capital: The Perfect Buyers," February, [Article link].) Some will form ESOPs primarily to involve and provide incentives for employees; others may do so to borrow money for the business at a lower after-tax cost. You'll get three solid viewpoints on sharing equity in "Making Employees Owners" (Managing People, December 1992, [Article link]).
Last November Success Stories, a $2-million company in Richmond, Va., that produces television programs about business, established an ESOP because one of its original partners was going into the ministry. "He didn't want to sell his share to outsiders," recalls Wayne Nystrom, the company's president and a cotrustee of the plan. "So with an associate from KPMG Peat Marwick, I decided an ESOP would accomplish his wishes -- to reward employees and to be able to live in the seminary off the interest." (In contrast with a typical leveraged buyout, explains Nystrom, in an ESOP the principal and the interest are tax-deductible operating expenses.)
For Reflexite CEO Cecil Ursprung and his 326 employee-owners, and for Nystrom and his 30 employee-owners, ESOPs are working well. Reflexite's turnover is now negligible; Success Stories reports an early uptick in the level of employee motivation and teamwork.
But such gains don't come cheaply. Insiders agree that the necessary legal, financial, and valuation work collectively costs anywhere from $12,000 to $25,000. What scares people off is an ESOP's administrative complexity, says Steven Keeler, a partner with LeClair, Ryan, Joynes, Epps & Framme, in Richmond, Va., and an adviser to Nystrom. "There are several forms that need to be filed with the IRS annually. Upkeep alone might cost you $1,000 a year."
Success Stories, however, managed to keep its total ESOP-setup costs below $5,000, which covered the drafting of about 15 legal documents, including the buy-sell agreement, a rewrite of the company's articles of incorporation, and the requisite loan paperwork. Keeler acknowledges that Nystrom was fortunate to find many good (and cheap) advisers, and says, "In the real world, a valuation alone runs between $2,500 and $5,000." His advice: don't shop for professionals on price.
To help you make stock-plan decisions, the NCEO offers its Employee Ownership Reader (510-272-9461, 1993, $25), which includes articles on assessing the feasibility of an ESOP, weighing non-ESOP employee-ownership alternatives, legal and financial considerations, and successful case studies. You can also join the NCEO ($70 annual membership) and receive a bimonthly newsletter, a resource guide to consultants and key organizations, discounts on publications and events, and phone support from its staffers.
Competitive Intelligence
As we collect data for our business plan we're seeking information on various retail companies (some are direct competitors) across a few industries, so that we may more accurately project our sales volume, product types, margins, customer base, and more. How do you secure such information -- inexpensively?
Jon Coultrup
Founder
Welcome to Romance
Sunset Beach, Calif.
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You might survey competitors' customers, read your rivals' in-house newsletters, talk with competitors' employees, do some undercover shopping, eavesdrop on courtroom proceedings, and trade marketplace secrets with competitors outside your selling zone. If you're researching the cost structure (or strategic plans) of a large publicly traded competitor, do what Jim Pierson does. Pierson, president of J. W. Pierson, a wholesaler and retailer of petroleum products in East Orange, N.J., buys a single share of a rival's stock. Graze for more tactics in George Breen and A. B. Blankenship's Do-It-Yourself Marketing Research (McGraw-Hill, 1989, $16.95) and the same authors' State of the Art Marketing Research (NTC Business Books, 800-323-4900, 1993, $44.95). And for even more ideas, cozy up to your local librarian.
Predicasts' Overview of Markets and Technology (PROMT) is a one-stop database for public and private company information and industry info as found in all print media, such as trade journals, newspapers, magazines, and industry reports. "It's on every librarian's mother list," says Bowie. Most main-branch libraries in metropolitan areas have access to PROMT, which you can surf by company name, key word, standardized-industrial-classification (SIC) code, and much more.
Ward's Business Directory of U.S. Private and Public Companies and Dun and Bradstreet's Million Dollar Directory will give you vital intelligence on competitors, such as sales figures and the names of a company's chief officers. But to put flesh on those bones, you'll need Dun's Market Identifier, a database you can search by SIC (up to eight digits), region, sales volume, number of employees, zip code, and more. "Not all private companies report, but if they do, you can find the banks they do business with," says Bowie.
