Many professional sales agents dream of owning their own business. At James M. Pleasants Company Inc. (JMP), the sales agents do own their own business — as do the vast majority of other JMP employees.
JMP, one of the largest HVAC sales representatives in the Southeast, operates under an Employee Stock Ownership Plan (ESOP). In other words, the very people that operate it also own it.
What is an ESOP?
An ESOP is an employee-owner program that provides a company's workforce with an ownership interest in the company. In an ESOP, a company sets up a trust fund, into which it contributes new shares of its own stock or cash to buy existing shares. Alternatively, the ESOP can borrow money to buy new or existing shares, with the company making cash contributions to the plan that enable it to repay the loan. Companies provide their employees with stock ownership, often at no cost. These shares may be allocated to employees according to any number of formulas and are typically held in an ESOP trust until the employee retires or leaves the company, at which point the company buys back the shares at their market value.
There are numerous ESOP tax incentives to the company and employees, including tax-deductible stock contributions and, in some cases, reduced or no income tax on company profits. In C corporations, once the ESOP owns 30 percent of all shares in the company, the seller can reinvest the proceeds of the sale in other securities and defer any tax on the gain. In S corporations, the percentage of ownership held by the ESOP is not subject to income tax at the federal level (and often state level as well).
Keys to ESOP Success
As is often the case, the transition of JMP into an ESOP company coincided with the retirement of an owner. When JMP founder, Jim Pleasants, decided to retire nearly 30 years ago he wantedto transfer the business into the hands of the people who helped build it, thus ensuring its future and the livelihood of its employees. At the same time he secured a buyer (or buyers) for his company.
It is important to note that JMP was a well-established and profitable company at this time. ESOPs are not a solution for a failing company, but rather a continuation plan for an already self-sustaining company that has simply reached a transitional point.
“I think the key to any successful ESOP transition is that the company is already profitable and in a strong position to remain that way,” said Jamie Edmondson, president of JMP. “Most ESOPs start off with a big loan from a bank which gives the bank ownership of the stock. In our case, because we continued to be profitable, we were able to repay that loan in a few years, at which point total ownership of the company transferred to the employees.”
There are many benefits to being part of an ESOP company, but certainly one of the most significant is the fact that it helps establish a positively charged business culture. Employees of ESOP companies have a greater sense of ownership in the company. The clients they serve are their clients, and that vested interest manifests itself down to every detail of service, including the very manner in which customers are greeted when they come through the door.
Not surprisingly, employee retention rates are higher at ESOP companies, and ESOPs also appear to increase sales, employment, and sales per employee by about 2.3 percent to 2.4 percent per year over non-ESOP companies.
ESOP plans reward employees for staying with a company long-term, often with generous retirement benefits, a fact that has not escaped JMP outside sales representative, David Casey.
Casey, who began his career with JMP over 20 years ago, has accrued savings through the company’s ESOP plan that has put him on track to retire when he wants to with financial security.
“There is no way that I could possibly have saved as much on my own as the company has put into my ESOP,” said Casey.
Is An ESOP in Your Future?
There are excellent resources both online and elsewhere to determine if going ESOP might be right for your company. One of the best places to start is the National Center for Employee Ownership (NCEO) website. The website is brimming with unbiased information on ESOP plans and relevant research, webinars, articles, and more. Another resource is The ESOP Association, which hosts an annual conference that is open to non-members and includes numerous in-depth educational seminars on all aspects of ESOP management and operation.
After some preliminary research and investigation, the next step may be to talk with a lawyer who is familiar with ESOPs. He or she can help you make the final determination if this is the right move for your company.