As he approached retirement age, Foss Miller knew he needed an exit strategy for the company he co-founded 35 years ago. It wasn't going to be easy.

His company, Sawbones Worldwide, presented unique circumstances. It wasn't that Sawbones makes artificial bones for medical use, which raises eyebrows. It was the company's location. It is the largest manufacturing plant, and largest employer, on Vashon Island in Washington State. 

Vashon is a small island just west of Seattle in the Puget Sound with 10,000 full-time residents. It is accessible to the mainland only by ferry. There are no chain stores on Vashon, aside from a single Subway sandwich shop. Miller describes life on Vashon as the "Norman Rockwell existence."

With 135 employees and a payroll of nearly $6 million, Sawbones is crucial to the economy of Vashion Island. K2 Skis, a sporting goods manufacturer, was originally headquartered on Vashon, but left nearly a decade ago for cheaper labor abroad. Residents still feel the sting. K2's move eventually left about 400 people jobless.

"It was a big hit to the island," Miller recalls. "Everyone was paranoid that the same thing would happen to us." But the company, which Miller co-founded in 1975, has prospered. According to Miller, it has carved for itself a niche in the medical supply field.

How to leave his company in good hands? Miller first met with venture capitalists and strategic buyers, but they couldn't promise to keep the company on the island. He then considered a management buyout, but when he ran the numbers, he realized it wasn't going to be feasible. It would be too expensive.

Eventually, he and his business partner, Denzil Miller, made their decision.

On December 10th, Miller assembled his employees in the cafeteria for their annual Christmas party. Miller took the microphone and before a crowd of hundreds of his employees and their families. He announced a decision that would change their lives forever.

Foss Miller gave his company to his employees. Using the government-sponsored ESOP, or the employee stock ownership program, Miller would segue out of his role as an executive of his company, and as of that day, he'd let his employees take full ownership of the business.

Pacific Research Laboratories, the company's official corporate title, is one of nation's largest purveyors of artificial bones. They manufacture everything from bovine pelvises to plastic skulls. Shoulders are available for rent by the week. The locals call it The Bone Factory.

Naturally, the crowd erupted in cheers when Miller announced his decision to give the company to his employees. With an ESOP, employees are guaranteed a piece of the company's equity, which functions much like a 401k retirement plan. Since company profits are essentially reinvested into the employees retirement accounts, ESOP employees can genuinely enjoy the fruits of their labor.  And as the employee grows with the company, so does his or her equity.

In addition to a number of tax advantages both employer and employee enjoy using an ESOP, what's notable is a common thread among ESOP programs: a strong company culture. The Sawbones story, which was originally reported by Vashon's local newspaper, The Beachcomber, is not as uncommon as one might think.

Michael Keeling, president of the Washington-based ESOP Association, estimates that there are currently around 10,000 ESOPs nationwide, though precise statistics are impossible because most of these companies are private, and don't open their books to the SEC.
"The ESOP is a very attractive alternative or model for existing shareholder," Keeling says. "It keeps the culture and style going versus having new owners come in, shut it down, ship the machinery overseas, and cut the jobs out. I could make the case that if you have a great culture, the ESOP can be essential in preserving that culture, and probably make it better."

Though the popularity of ESOPs has steadily declined since the 1980s when government-sponsored tax incentives were repealed, ESOPs seem to be creeping back into the spotlight. There are a couple of reasons for this.  For one, the recession has made venture capitalists a bit more conservative about their offers to small business owners like Miller.

"ESOPs have become a more appealing way for owners to cash out their equity because the downturn has lowered what most companies would fetch in a merger or acquisition," BusinessWeek noted about the recent rise in ESOPs.

Perhaps another reason for the reappearance of ESOPs is a little less quantifiable. As buzz words like "sustainability" permeates the corporate lexicon, CEOs and managers are beginning to understand that strong company culture can affect the bottom line. Low turnover rates, high productivity, and a sense of loyalty contribute to the intangible assets of a small business.

Companies such as Eileen Fisher and Publix Super Markets have announced ESOPs in the last several years, as well as Clif Bar Company, maker of the popular organic health food, which was announced in June 2010.

Clif's owners, Gary Erickson and Kit Crawford, implemented the ESOP "to recognize employees' role in helping build the business, and because it is in line with their goal to lead a sustainable business for future generations," according to a company statement.  Erickson and Crawford sold 20 percent of their family shares to employees while retaining 80 percent ownership.

"All along we wanted to create a company where we would want to work," Crawford said in a statement. "Employee ownership is one more way we could run a different kind of business: one that inspires a team of people to make the kind of delicious, nutritious food we'd like to eat, and that strives for a healthier, more sustainable world."

When the news was announced at Clif Bar, employees could barely contain their joy. "Dancing in the aisles is definitely the right way to put it," said Renée Davidson, a company employee. "It was a big surprise.  Employees had no idea it was coming. They were amazed."

ESOPs don't work for every company. But for Miller, who made his first worktable by taking his bedroom door off its hinges and laying it over two sawhorses, selling Sawbones to his employees just felt right.

"So many of the employees have worked here for many, many years," he says. "Providing them a great retirement when they leave—it just made more sense and felt better and better."