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



Attleboro, Mass.

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


Welcome to Romance

Sunset Beach, Calif.

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.

Ward's Manufacturing U.S.A. and Service Industry U.S.A. resources go a step beyond Dun's by offering payroll and production numbers, 10 years of sales, and key ratios -- such as the number of employees, or the amount of payroll, per establishment. "You can get numbers on materials consumed by specific companies, so these are great resources for identifying emerging market opportunities," says Bowie. "They're particularly useful if you're seeking to become a supplier."

For industry news and views, Bowie suggests you cross-check information from publications such as Dun and Bradstreet Industry Norms and Standard and Poor's Industry Surveys, which give snapshots of many industries and the key ratios and figures for the major players in each. Also check the Commerce Department's U.S. Industrial Outlook 1994 for what's imminent in terms of legislation or new products in your market and what your sector's long-term prospects look like.

The costs for searching commercially available databases vary, but expect to pay $1.80 per minute and an additional $2.60 per report, depending on the database. If you're too busy to surf, you can engage a third-party information broker to juggle CD-ROMs for hourly rates ranging from $60 to $100. Some charge a flat rate for long projects. Ask your librarian first; he or she will likely be on the low end of the pricing scale. For the costs and specialties of seven such brokers and a few handy resources, see "The Scoop on 'Info Brokers" and "Fact Finders for Hire" (Sales and Marketing, December 1992, [Article link]).

Done as much info-surfing as you can stand? Then consider purchasing a copy of an invaluable resource: How to Find Information About Companies (Washington Researchers, 202-333-3499, 1994, $395 per volume) is the touchstone of company research and competitive intelligence. Volume one lists more than 9,000 information reservoirs. Companion volumes show you how to research specific aspects of even the most secretive companies. "You'll get a sense of how information is leaked," says Bowie, "so you can patch up your own holes."

International Patents

I would like advice on how to implement a low-cost strategy to defend international patents. Does it make sense to sue those responsible for small infringements every so often, to ward off hordes of potential violators?

Scott Hirsh


Pacific Digital Communications

San Francisco

Absolutely. Bringing up charges against violators is a very effective way to claim the monopoly your patents give you. "If you don't take an aggressive stand, the patent, in some cases, can be deemed ineffective," says Ross Mitchell, president of Acclimator Time, in Newton, Mass., which manufactures a jet-lag watch. However, suing violators, a lengthy and expensive proposition both fiscally and emotionally, should be further down your list of intellectual-property priorities.

Patent experts recommend that near the top of the list should be some well-thought-out choices about where you want to obtain patent coverage. That way you're likely to spend much less money, time, and energy in defense of what's yours. Not to be overly discouraging, but it costs about $10,000 to file for a Europatent, which provides coverage in the European Community countries. There are additional fees for examinations, language translations of the patent, and annuities to keep it effective; that can add up to $5,000 per country. (For comparison: if you file the paperwork yourself, you can get a domestic patent for $1,500.) Mitchell, who figures he's shelled out more than $20,000 for his patents thus far, admits he's probably overextended himself.

So be honest with yourself about the global salability of your brainchild. Mitchell recommends you read lawyer David Pressman's Patent It Yourself (Nolo Press, 800-992-6656, 1991, $39.95), which is the best roll-up-your-sleeves guide for filers who don't want to pay a ransom. Mitchell claims the book has saved him thousands of dollars.

You should first identify the regions with the greatest market potential for your product and highlight the regions and countries where the product is most likely to be competitively manufactured, advises Joseph Iandiorio, an intellectual-property lawyer in Waltham, Mass. Then zero in on those manufacturing and marketing hot spots that are most attractive to you for other practical reasons. For example, where are your joint-venture partners located? Where are your largest pockets of customers? Where can infringement be most easily detected? Best policed?

Fortunately, Acclimator Time's Mitchell, who holds a Europatent and has other patents pending in Canada, Russia, and Japan, hasn't had to drag anyone into court. But he says coming up with inexpensive strategies to fend off copycats is "always on my mind." If you have no idea what defending your patent in court entails, you might check out William G. Konold's Patent Infringement Suits: An Executive's Guide to the Litigation Process (Marcel Dekker, 800-228-1160, 1987, $99.75).

When you detect an infringer, Mitchell suggests you first write a nonthreatening but firm letter emphasizing your sole right to sell your invention or service in that country or bloc. "Depending on the situation, I might ask a violator if it wants to become a licensee," he says.

If a violator ignores your letter, you should write a cease-and-desist order with the help of a lawyer native to the perpetrator's country. Sure, the lawyer's meter will probably tick around the clock, but it's important to realize that hiring and paying local talent to defend your patent is part of the price you pay for being a global player. It's always more expensive "if you're laughed out of court the first time," says Mitchell. (You should, however, look into whether your general liability insurance will cover legal fees.

n -- Reported by Karen E. Carney