ESOPs Q&A

Written by Tom Dunn

Josh Zeidman is a Managing Director at Lazear Capital Partners (LCP), out of Columbus, Ohio in the firm’s Mergers & Acquisitions and Employee Stock Ownership Plans (ESOP) practices. He has closed several Tree Care ESOP transactions personally and his firm has handled multiple other ESOP transactions in the Tree Care industry. 

Prior to joining LCP, Josh served as a Senior Manager at KPMG where he was responsible for leading one of the firm’s largest financial services clients and helping clients navigate complex business transactions.  

Josh completed his Masters of Accountancy at the Farmer School of Business at Miami University, where he graduated Cum Laude. He also holds his Certified Public Accountant license. Josh can be reached at (614-902-3250) [email protected]

We had the opportunity to ask Josh about his take on the benefits and significance of ESOP’s in the tree care industry. 

How have ESOP’s evolved since you started in the business and what are some of the more recent trends? 

The tree-care industry is primed for employee ownership! The strong culture and commitment to people create sustainable companies in this industry and can generate significant wealth for business owners and employees. Preserving the legacy and passing the future financial benefits to the employees is a significant value proposition for many of today’s business owners. Additionally, the tax benefits offered to the seller and to the company are unlike any other exit strategy offered to a business owner, creating significant tax benefits not offered through any other exit strategy. The idea of selling the company to the employees via an Employee Stock Ownership Plan (ESOP) is almost always a win-win for both the business owner and the employees.

With increasing corporate tax rates and near-term economic uncertainty, employee ownership will continue to thrive. It’s created for sustainable long-term value creation. Unlike a private equity or competitor roll-up, in an ESOP, the management typically remains intact, preserving the continued vision of the company without “squeezing” operational costs out of the organization.

Can ESOP’s work for lower valued companies or is there a minimum threshold that is typically needed to consider starting an ESOP? 

There is no hard rule about how large or small a company has to be in order to be a successful ESOP. There is an old saying where “if you have seen one ESOP, you have seen one ESOP.” Every ESOP is created individually, catering to the needs of the owners and the employees. According to the National Center for Employee Ownership (NCEO) “there are a handful of ESOPs with under 10 employees, and a larger number between 10 and 20, but in most cases at least 15 employees is a reasonable starting point”.

We encourage any business owner to sit down with an ESOP financial advisor to understand the feasibility of creating employee ownership. At Lazear Capital, we start with understanding the goals of the owner and consider over 70 different data points when preparing a Feasibility Analysis for prospective clients.

How do you address owners that may have an unrealistic opinion of the value of the company? 

As advisors, our firm takes a holistic approach to understanding a company’s value proposition. This involves a deep understanding of a client’s projections, capital expenditure needs, and understanding value of similar companies. We share this knowledge with business owners as a part of a detailed Feasibility Analysis prior to engagement of an ESOP transaction.

What type of tree care company ownership structures have you seen it work successfully for? 

We see a lot of success with employee ownership in the tree care industry. As mentioned above, every ESOP is created differently, catering to the needs and goals of the business. In the tree care industry, owners have found significant tax advantages for the business owner and the company in selling to an ESOP. When structured appropriately, a seller can defer the capital gains tax associated with their sale. Additionally, the ESOP Company can eliminate federal and most state income taxes post-closing, significantly increasing company cash flow to finance the buyout, invest in equipment, talent, and grow. Additionally, and this is important in the tree care industry, I see a lot of success when the Company’s capital expenditure needs (maintenance and growth) are properly considered and validated during the feasibility analysis process.

What are the typical startup costs and considerations? 

Startup costs and considerations vary depending on the size and complexity of the transaction. The startup costs are comparable to a third-party sale. Ongoing, there are several compliance costs that should be considered as part of a company’s ESOP Feasibility Analysis. Business owners are encouraged to reach out to a sell-side financial advisor to fully understand all the considerations involved in an ESOP transaction. An ESOP transaction does involve multiple parties, including a trustee, a bank, a third-party administrator, and counsel.

Is there evidence that ESOP’s increase worker productivity and therefore bring in higher valuations when a business is sold? 

Absolutely. There is clear evidence that once sold to an ESOP, the Company subsequently sees a direct increase in worker productivity. A 2020 study conducted by the Rutgers School of Management and Labor Relations and the Employee Ownership Foundation found that employee-owned companies outperformed non-employee-owned companies in job retention, pay, and workplace health safety throughout the COVID-19 pandemic. The study found that ESOP companies were 3 to 4 times more likely to retain staff, less likely to make pay cuts (26.9% vs. 57.3%), and more likely to take protective measures against the spread of COVID-19 (98.3% vs. 88.9%). Additionally, a 2018 study by the NCEO found ESOP participants have more than twice the average retirement savings balance of Americans nationally.

Lastly, many employee-owned companies do not pay federal or state income taxes. This significantly increases cash flow for the organization, which in turn can be used to fund future growth initiatives. This, along with statistically proven increased productivity, all drives future financial success and higher valuations in the future.

If you need further assistance with any of the core components of your business, please reach out to a member of our ArboRisk team. We have many resources that can help you with this, in addition to our Thrive Risk Management Program, which can provide one-on-one help to take your business to new heights.

Q&A with Work Comp Loss Control Specialist

Written by Eric Petersen, CIC

One of my favorite things about the tree care industry is meeting people who have dedicated their lives to bettering the industry. Recently I had the chance to speak with MIchael Schrand, Senior Risk Management Consultant for ICW Group Insurance Company and was encouraged to hear all of the things their work comp company is doing for the tree care industry. Michael and his team work daily to help minimize jobsite hazards and reduce accidents. 

Our conversation was so powerful, I wanted to reconnect with him for a short Q&A session so I could share some of his expert insight with our readers. Check out the rest of this article to hear his perspective on safety within the tree care industry. 

Q – What is the most common cause of injury that you’ve seen within the tree care industry?  

A – Since I can’t really decide on the most common cause of injuries, I’ll give you three… 

1. Lack of planning and execution when creating a safety culture. Many times a company’s safety culture is created on its own, versus intentionally being created by the leadership team. 
2. Not having the expertise and/or training to recognize the potential hazards that you come across daily. 
3. Employee selection is problematic. We all know the challenges the current labor force has, but hiring just to fill a spot on your team will cause problems and result in more injuries. 

Q – Is there a common theme with all the severe injuries that you’ve seen within the tree care industry? 

A – When we see serious injuries, they usually either come from a lack of training and/or experience or from not having the proper equipment. Unfortunately, many tree care operations don’t see safety culture as an important enough part of a successful business and don’t focus on it. 

Q – What are 3 things that all tree care companies should make sure they do to prevent/minimize injuries within their company? 

A – The top 3 things that I recommend tree care companies focus on to prevent/minimize injuries would be:

1. Maintain your equipment.
2. Implement planning and training around your safety efforts.
3. Eliminate climbing if possible. 

Q – In your opinion, what is the most important component to have a culture of safety within a tree care company? 

A – Safety is a people business and unfortunately, accidents are a people program.  Safety must start within a person. A safety culture is created initially by the leadership individuals and then supported by every person throughout the organization. This combines with the DNA of the overall company operations and will have a direct affect on the success of the company.  

If you ever had doubts that you are not doing everything you can to get your employees home safe each night, reach out to a member of the ArboRisk team today and discuss how becoming an insurance client will help you achieve your safety goals or enroll in our Thrive Safety Package to get one-on-one help.